Balancing the Mission Checkbook

There have been years when I hated to see the year end because of all the wonderful, joyful events that had occurred. This year, though, was pretty mixed in terms of the financial health and sustainability of Minnesota’s nonprofits. While there was a lot to celebrate for nonprofits in 2011, there were also challenges which I’ll be happy to leave behind. I can see some silver linings in these clouds, though, in new practices and trends that will lead to better financial health and capacity in 2012.

So in the spirit of year end lists, here are five goodbyes for 2011 – and hopes for 2012:

Goodbye

1. State budget impasse and shutdown: Without a doubt the low point of the year for nonprofits was the long budget battles, anxious uncertainty, and the twenty day state government shutdown. While many services were maintained by court decision, nonprofit leaders had to divert their attention to preparing, information gathering, planning, and navigating appeals and systems to survive.
   Silver lining: Nonprofit leaders learned a lot about contingency planning and budgeting which has led many organizations to begin more substantive scenario planning for 2012.
2. School funding shift: For three years, the state budget has shifted part of the funds for public schools to the next year in an accounting maneuver to close budget gaps. As of July 2011 the shift is up to 40%. The impact of this shift on charter schools is particularly difficult because of limited cash reserves and financing alternatives.
   Silver lining: Nonprofits Assistance Fund made our first significant public policy effort to provide data and analysis on the impact of the shift on charter schools. We look forward to more policy involvement in 2012.
3. Information overload: So much data, information, analysis and opinion to read, hear and see. I’ve been pretty overwhelmed this year by it all, but I can’t seem to stop myself. Between printed media (yes, I still read daily papers), online journals, broadcast and cable media, Facebook, and Twitter, I should be as well informed as humanly possible. When I found myself standing by the steps of the capital at 11 pm on June 30th, though, listening to MPR on a tablet computer and reading tweets on my phone, I realized I had fallen into the well.  I had to learn to “curate” for myself (new buzzword alert).
   Silver lining: We have amazing journalists in Minnesota through nonprofit and for-profit media outlets that make their reporting available. My hope for 2012 is that the economic models for high-quality reporting and ideas gain stability and support from all of us who rely on them.
4. Financial crises and closures: A number of nonprofits in Minnesota ran into severe financial problems in 2011 which resulted in major program contraction or closing their doors. The prolonged recession was a big contributing factor, but not the only factor.
   Silver lining: Some board members have woken up to the need to to ask better questions about both short term financial information and long term structure and sustainability. We hope in 2012 to see better financial governance that goes far beyond micromanaging budget variances.
5. Unemployment: We all know too many people who have been laid off by nonprofits, government agencies and businesses in the last three years.  It’s been a loss to have talented, experienced, committed workers sidelined and spending long months or years searching for work.
   Silver lining: There are glimmers that nonprofits are finally being recognized as employers and “job creators”.  As reported in this Nonprofit Quarterly article the nonprofit sector is generating jobs at a faster rate than the private sector. A new advocacy organization, CForward, was formed to “champion the economic role of nonprofits”. We are hopeful that a variety of incentives and policies will be adapted to support the nonprofit sector as an economic force.

My final goodbye for 2011 is to thank all of the staff, volunteers, and board members of nonprofits everywhere for your commitment and effort to help people, build community, create magic, and bring us all together. My hope for 2012 – that all of your organizations are productive, effective, satisfying – and well-funded – in 2012.

Ah, summer. A time for hammocks, reading on the porch, and leaving early every day. If only this were true. There was a time in my professional life when summers really were slower-paced, with fewer deadlines and urgent projects. I haven’t done any research on this, but it seems that the combination of technology, financial pressures, and recession-driven anxiety and uncertainty results in more demands at a faster pace year-round. Earlier this week in the StarTribune, the column Ideas come to the idle, and we are not by Christian McEwen helped me realize that the pace is not just stressful, it’s counter-productive. We all need some slack in our lives and not having it has consequences.

The same is true for organizations. One of the values of scheduling retreats and off-site meetings is to change the pace and build in some down time, but the need for slack is ongoing. In the article Organizational Slack (or Goldilocks and the Three Budgets), published in the Spring 2007 issue of Nonprofit Quarterly, Woods Bowman offers this definition of slack from management literature:

A cushion of potential resources which allow an organization to adapt to internal pressures for adjustment or to external pressures for change in policy, as well as to initiate changes in strategy with respect to the external environment.

It’s easy to think of all the times when our organizations have needed this. While we may initially think of financial resources, organizations also need a cushion of management, time and staff capacity. Recently many nonprofits in Minnesota needed this kind of slack really badly. In the six weeks or so leading up to the state shutdown, nonprofit staff and board members spent many hours (and many brain cells) developing scenarios, contingencies, communication and HR plans. Every nonprofit I talked with during that time was doing all of this on top of their already overloaded schedules. None of them had built much, if any, slack time in to their schedules or annual plans. In Woods Bowman’s definition, these organizations needed “a cushion of potential resources to adapt to external pressures”. The shutdown’s impact taxed everyone’s capacity. We at Nonprofits Assistance Fund also invested an enormous amount of time in shutdown preparation and response (read the summary of what we did here). Lots of other projects and plans were put on hold, and now the must-do list is really long. Without sufficient slack in our organizational capacity, our choices leave two options: require everyone to work unreasonable hours or take some projects off the list.

Another type of cushion, of course, is financial. Nonprofits that have operating reserves and reliable cash flow were able to prepare for and weather the shutdown with less disruption than those without. Bowman’s article delves into financial capacity as an indicator of organizational slack. Operating reserve balances seem like the obvious measure, but he emphasizes the importance of planned surpluses, capacity to borrow when appropriate and including contingency funds in the budget. Financial slack allows nonprofits to manage cash flow and budget hiccups AND to jump on new ideas, experiment with new strategies, and invest in program redesign. Financial slack also pays for  staff capacity and critical time, especially when needed surrounding the state shutdown.

The lesson I’m hoping I’ve learned is that both organizations and people need some slack all the time, not just for crises. If you’re headed into a planning cycle of any kind, think about how to build organizational slack. You know that you’ll need it.

Some choices that nonprofit leaders have to make are really tough. Others are tougher. Right now, there are many nonprofits in Minnesota that need to make some of these choices in the next few weeks because of the strong possibility of a state shutdown. In the recent post When the Worst Case Scenario is Really Soon we advised all nonprofits that rely on payments from the state to start working on cash flow contingency plans. As reports are trickling in about notices and conversations with grant and contract managers at state agencies, it’s clear that these plans will need to go beyond cash flow. That’s when questions go from tough (can we pay the staff and bills?) to tougher (can we continue to provide services in our community?).

State agencies are developing their own plans to suspend operations if necessary, and they are dealing with uncertainty just like the rest of us. Many state grant and contract managers are contacting their nonprofits contractors to alert them to possible disruptions in payments or the risk that any services provided during a shutdown may not be eligible for retroactive payment. How much impact would a state shutdown have on your organization, and what kind of plans to you need? The answer (as always) is “it depends”. This very fluid situation demands multiple versions of “what if … “

• What if … a state agency pays funds to the nonprofits from a source other than the state general fund budget, including federal funds or a designated source? A worst case state shutdown could either stop or slow down payment processing of contracts and grants – you need to create a conservative cash flow plan.
• What if … the nonprofit has a long standing state contract or grant? Even with an active contract or grant, a shutdown would stop payments for the near term, and could cause a longer payment lag due to backlogs and other disruptions. Review the contract terms, or check with the grant manager, to confirm whether or not payments are certain for services provided during a shutdown. You need a plan for cash flow delays including both immediate term and some lag time.
• What if … the nonprofit has an established contract with the state that is signed annually with a start date of July 1st or later? This situation poses more risk to the nonprofit because of uncertainty whether a new budget will include a provision allowing retroactive contracts. The budget passed in July 2005, the time of the last shutdown, included such a provision (thanks to Minnesota Council of Nonprofits). You need to take this risk into consideration as you plan – is this a cash flow delay, or a possible loss of some revenue? Could your organization absorb the reductions if you provide services without retroactive payments?
• What if … the nonprofit has a new state grant or contract that begins July 1st or later, or is waiting for a final approval or announcement for state funds? These funds are at the highest risk as long as there is not a budget in place. Be very cautious about assuming that the terms will be untouched and retroactive once a budget is in place.
• What if … your nonprofit doesn’t rely on state funds, or receives small amounts from the state? Rather than feel relieved, think about the impact a shutdown may have on your clients, other organizations with whom you partner, and other community services. You may see a ripple effect in new requests for service, higher demand, or service disruptions elsewhere. Spend a little time brainstorming how your organization might be affected and how you could respond.

The what ifs could go on and on. The only way to answer any of them, and many nonprofits have more than one state contract or grant, is to systematically review the terms, check with grant managers (while they’re still available) and consider the options. In some cases, the options may fall into three categories: tough, tougher, and toughest. The Minnesota Council of Nonprofits is communicating policy information, news, and resources through email and a page on their web site. Nonprofits Assistance Fund is working with MCN to sponsor six free Government Shutdown Emergency Briefings around the state that will include background of how we got to this point, crisis communications techniques, financial planning, and open discussion with your peers. Register through the MCN web site.

For the last six weeks or so there have been quiet conversations and meetings at nonprofits to prepare contingency plans in case of a state shutdown. As with all contingency plans, no one wanted to have to use them. Now that the May 23^rd legislative adjournment date has passed, and the governor vetoed the budget bills as expected, the likelihood is much, much higher. The conversations have moved from private conference rooms to big meetings and headlines, including Shutdown Looms in the Star Tribune, and MPR’s post Get to Know a State Shutdown. The State of Minnesota must have a budget in place by July 1^st or the money to operate the state’s activities runs out.

How concerned should you be? I think that we’re probably all concerned about the broad policy question and impact on the state. How worried should you be in your role as a nonprofit staff or board member? If you receive funds that flow from the State of Minnesota, you should be very worried. There are a lot of variables to consider and information to sort out, and it’s hard to accurately predict exactly how the state government would manage the shutdown if it happens. At the time of the shutdown in 2005 some services were declared “essential” as described in the MPR article, but don’t rely on those decisions made by a different administration. Budget Commissioner Jim Showalter has said that a shutdown this year could be “much, much more extensive.”

We are urging all nonprofits that rely on payments from the state to develop a worst case contingency plan as soon as possible, with an emphasis on one thing: CASH.

Here are our recommended steps:

1. Do you have revenue that comes to you directly from the State of Minnesota? Do you have revenue that is indirectly from the state, even if it is paid to you through another entity, such as a county, a collaborative, or partner?
2. If you do receive state funds, how much do you expect to receive in July and August? What would be the impact if you do not receive any of these payments in July and August?
3. Now is the time to update your cash flow projection or create your first one. We have two good resources, the guide to Managing Cash Flow and the cash flow template (Excel) that you’ll find in the Nonprofits Assistance Fund resource library. If you need some help developing your projection, Contact Us to talk with one of our staff.
4. Do you have internal cash accounts or reserves that could handle the cash flow gap?
5. Do you have a line of credit available that could cover the cash flow gap? Would the loss of state payments affect your ability to access your credit line? If you don’t know, find out.
6. If nonpayment would impact your agency’s ability to maintain services, meet payroll obligations, or sustain basic operations, you need a cash plan fast. To be prepared, consider managing cash flow starting now to accumulate a temporary cash cushion even if you don’t have reserves.

If the cash flow projection gives you bad news, be prepared. There may be very tough choices to make about temporary service reductions, staff furloughs, or expense reductions or delays. There may be ways to lessen the impact with advance planning. That’s what contingency planning is for. Don’t wait.

There have been many columns and editorials about the dangers of state governments using budget strategies that are no more than accounting gimmicks. Transfer reserves from one fund to another. Use bond financing for current expenses. Shift payments from one fiscal year to the next. Voila, problem solved. Bill Gates, in this TED Talk on state budgets and education funding, took a jab at these state accounting schemes by observing, “Enron would blush.” He believes that state governments should be required to follow the same accrual Generally Accepted Accounting Principles (GAAP) as businesses and nonprofits. The new governor of Connecticut, Dan Malloy, is implementing his priority campaign pledges to move the state to GAAP standards. I know this sounds incredibly uninteresting to most people, but it’s actually a huge leap. In Connecticut, for example, taking away the accounting sleight of hand of shifts and transfers will add $1.2 billion to the state’s deficit.

I find this all fascinating on a policy level, and I’m happy to talk about these kinds of questions over a glass of wine (yes, I know how to have fun).  What happens, though, when theory about state policy meets daily reality at nonprofits that deliver public services? It’s not theoretical anymore. In Minnesota we have a very real case study as a result of an accounting shift for the state public education budget. Charter schools, a type of public school, have been scrambling for two years to manage the cash flow crisis caused by one of the shifts. State aid to public schools is paid beginning in July in even amounts over the year based on the number of students enrolled and attending school.  The state started “shifting” some of the education aid payments to future years to reduce the budget hole. What had been a 10% shift, called the holdback, has been increased twice in the last two years to help address the state’s budget problems. In the 2009-2010 school year 27% of state aid was deferred to the next year. For the current school year the shift is 30% of state aid.  Because of the state’s continuing budget difficulties, the payment shift seems likely to stay in place for years to come.

Earlier this year Nonprofit Assistance Fund, Minnesota Association of Charter Schools and Charter School Partners conducted a survey of Minnesota’s charter schools to understand how charter schools responded to the funding shift, including the availability of credit, the cost of borrowing, and impact on school operations and education services.  This week we released a report on the results of the survey to bring attention to this clash of policy theory and cash flow reality.

Highlights

• Charter schools have used every tool available to them to manage their cash flow, including internal fund balance reserves, renegotiating lease terms, budget cuts, loans from commercial banks, nonprofit loan funds, outside supporters and affiliates, and sale of receivables.
• Given that traditional school districts have taxing authority and a state guarantee of any loan, districts can typically receive loans with a 1% or less interest rate. Charter schools, who do not have these financing mechanisms in place, have faced obstacles to accessing credit and must pay between 6% to as high as 23% in loan fees (includes interest, fees and legal expenses).
• A gross inequity exists between traditional school districts and charter schools as to how the holdback impacts their respected operations.
• A 30% holdback is unsustainable for many charter schools in Minnesota and unless this is addressed, solid, high-performing charters will be at risk of ongoing financial instability.

Recommendations to reduce the inequity

The report recommends three possible policy changes that could address the inequity and help resolve cash-flow gap financing issues for charter schools, including:

1. Reduce the holdback for charter schools from 30% to 15%.
2. Provide a state-backed, low-interest loan pool.
3. Improve access to private capital (market rate loans) via a state-authorized ‘written assignment’ to banks.

You can read the release and the State Education Funding Shift Has a Disparate Impact on Minnesota Charter Schools report here.

This is just one case of the impact of state accounting schemes. There are many others all over the country. The solution isn’t simply a matter of GAAP accounting. If not through accounting, Minnesota, Connecticut, and 46 other states still have a hole to fill. It’s important to remember that theory quickly becomes reality when it hits the ground.

Last month I posted this blog asking whether charity contests like Pepsi Refresh are ultimately productive for the nonprofits that participate. The cash is great when you win, but at what cost? In this Chronicle of Philanthropy article from last year, one executive director reported that he spent 75% of his time one month drumming up votes for a contest. Now we’re learning that even all that time might not be enough to win.  According to the New York Times article New Charges of Cheating Tarnish Pepsi Fund-Raising Contest for Nonprofits some contest winners used proxy voting, mass emails and other prohibited methods. I raised the question last month about whether contests help nonprofits build relationships with donors.  If the contest is won by gaming the system, then these aren’t about building support at all. It’s just about the cash.

I have a second concern about contest-style philanthropy. Is this an effective way to pick a charity? Do we care that Pepsi’s money may or may not be going to charities or projects that will have a real impact? I don’t know enough about the organizations that won money from Pepsi in 2010, but frankly some of the descriptions are pretty vague and evidence of results is hard to find.  There’s a lot of sincere intention and quite a few competitors are startup organizations, however some appear to have been started in order to compete for funding.

The nonprofit and foundation world has been encouraging donors to seek out high-performing charities, such as in this article by Sean Stannard-Stockton. Nonprofits are working hard to evaluate, measure and communicate impact. Charity contests don’t reward nonprofits with the best results or greatest impact on clients. They reward marketing.

The traditional cumbersome foundation process probably needs a different kind of refreshing, but I have strong misgivings about throwing review and evaluation out the window.  The Technology in the Arts blog asked some good questions last summer in a post about American Express’ online giving contest.

While increased online support and a focus on technology use to reach constituents could provide benefits in this funding model, the prom queens method of distributing support should probably be left where it belongs: high school. This model has no way of insuring the best organizations reap the rewards or that the most efficient and effective programs receive funding. Popularity does not always equal quality, but it will always decide the winner in this funding model.

It’s worth noting that while the marketing department promotes their online contest, PepsiCo Foundation still makes grants the old fashioned way, with criteria including evidence of proven success in the field or scope of work specific to the request, and a method by which to measure and track impact and progress. There is a difference between marketing and traditional philanthropy. Should that matter to nonprofits that need funding to do their work? I think it should.

Want to know who’s winning the Pepsi Refresh contest? According to Mashable, the contest received 61 million votes in 2010. That’s 61 million brand impressions for Pepsi. We have a winner!