Balancing the Mission Checkbook

My first blog entry this year, What about the economy?, posted on January 10, 2008, began with this comment:

“Reading the headlines reflecting concerns and jitters about the direction of the economy is causing leaders of nonprofits to ask how it will affect their organizations. For some people, a state of worry has set in.”

We can now say with certainty that all nonprofit leaders share a deep concern about the rest of this year and the prospects for the next couple of years. In that same blog post I encouraged organizations to understand their income mix and focus on what they could learn about the trends affecting their dominant income sources. Different income sources typically have different triggers and cycles. Foundation grantmaking, for example, changes at a slower pace than individual contributions because foundations calculate their endowment “payout” based on average balances over two years or more, while individuals make giving choices partially based on how confident they feel right now.

A lot has been written, and will be written, about the impact of the economy on nonprofits. Some hopeful news comes from the Philanthropy Journal’s article Past sheds light on recession giving, which notes that overall giving doesn’t drop as much as you might fear. Other stories, however, add to the worry, such as A gloomy giving outlook about corporate giving. I sympathize with the reporters who are writing these stories, though, because the real answer to questions about how the current economic environment is affecting nonprofits is “We don’t know yet.” Every week brings more questions and we all hope that the direction for the future will start to be clearer after the election.

On top of everything else, now is the time for all nonprofits to pay attention to developments that will impact the state budget next year. The forecast doesn’t look good according to the Minnesota Budget Bites blog. State funding dominates for human services, education, and many health care organizations, and it is important for many other nonprofits. This is the time and place to prepare for policy discussions, and you need to be a part of them. It’s easy to stay up to date through the blog and other information and meetings sponsored by the Minnesota Council of Nonprofits.

Because of this uncertainty, and the fact that all the indicators look weak, what had been concern has risen to the point of anxiety.  Emily Saunoi-Sandgren, who blogs at the Humphrey Institute’s new pubTalk blog, wrote Much ado about the economy last week looking for signs that these challenges might lead to some bigger ideas and discussions. Yes, it is time for some big discussions (such as the conversation around public policy and the state budget). Unfortunately, the reality for many nonprofits is that they need to be very cautious and careful.

I’m being blunt here, and it makes me feel like a depressing economics professor, but I have a lot of conversations with nonprofits that don’t have a lot of reserves and so their options are limited. So what’s a nonprofit to do?  Here are some fundamental steps you can take:

• Dig in to analyze what income is reliable and what is not.
• Understand the costs of delivering programs and services.
• Keep close track of increases in demand for services and how much of that increase is driven by the same economic factors.
• Scrutinize any plans for expansion carefully until you are confident that the funding is available to fully support the expansion.
• Double check every assumption.

Wouldn’t every nonprofit, and the nonprofit sector overall, love to be able to increase contributions by 50%? No problem!

I don’t actually have the magic trick to make more dollars come in the door. The big increase in contributions is already in our hands in the form of volunteer labor. It’s a fact. When the value of volunteer labor is included, the total amount of contributions to US nonprofits increases by over 50%.

Here’s the data in a nutshell: The Corporation for National and Community Service just released their annual Volunteering in America study. They report that 61 million Americans volunteered in their communities in 2007, donating 8.1 billion hours of service worth more than $158 billion. The recent Giving USA survey for 2007 reported that cash contributions exceeded $300 billion for the first time. This includes individuals, bequests, corporations, and foundations. The actual value of charitable giving, when donated labor is included, is over $450 billion.

Think about that – 8.1 billion hours is roughly equivalent to 4 million full-time employees. Wow.

Where does this $158 billion calculation come from? Every year, Independent Sector calculates an hourly equivalent for volunteer time. The current value is $19.51 per hour, which is reportedly based on the average hourly earnings of all production and non-supervisory workers on private, non-farm payrolls as determined by the Bureau of Labor Statistics. Independent Sector takes this figure and increases it by 12% to estimate for fringe benefits. (I will leave for another discussion the fact that many employees of nonprofit organizations earn less than this amount.) I encourage every nonprofit with volunteer labor to calculate this value for themselves.

Unfortunately, it’s too easy for this important economic information to be lost because of accounting rules. Most of this economic value is never reported in audited financial statements or IRS 990s. The applicable accounting rule, FASB 116: Accounting for contributions, limits the recognition of the financial value of volunteers to a very narrow definition. Because of this, the actual economic profile of many nonprofits is skewed. When comparing nonprofits to for-profit enterprises, we usually dwell on the role of contributed income and subsidy. The importance of contributed labor is easily lost. I understand why the accounting profession is concerned about accuracy and reliability when recognizing the value of volunteers. However, it’s time to revisit these accounting rules. We’ve been willing to overlook this financial under-reporting for years, but I think the importance and value of volunteers is becoming too significant to ignore for much longer.

End note: There’s a bit of local pride to be found in the new volunteering study. Minnesota ranks #3 by state and the Twin Cities is #1 for large cities in the percentage of the adult population who volunteer. Learn more about how to make the most of volunteers from Hands On Twin Cities.

Right now, about 25% of the nonprofits that we are working with pretty closely are in the midst of a capital campaign, are just finishing their campaign, or have plans to launch one in the next year or so. The meaning of “capital” campaign is evolving, and about one-third of these campaigns include a substantial amount of flexible working capital and infrastructure investment in addition to traditional bricks and mortar. (This is an important trend that I’ve written about before.) Looking at the campaigns and organizations as a whole, it’s clear that the campaigns that are going well were thoughtfully planned out, based on feasibility studies, and focused on donors with whom the nonprofit already had a relationship. The campaigns that have floundered or dragged on were based on some broad assumptions about who “should” support them, plugged numbers to fill out the budget, and the planning happened along the way. These observations lead right to the basics of capital campaigns – lots of planning, being realistic, committing the time and people, and monitoring everything as you progress.

Capital campaigns also demand consideration of external factors, including the competitive impact of other capital campaigns and of economic trends. We in Minnesota can thank the Minnesota Council on Foundations for conducting a survey last month on Capital and Endowment Campaigns in Minnesota, 2007-2008. The survey reports on 62 current and 72 planned campaigns for buildings, endowments, and infrastructure investments. The largest campaigns are for colleges and universities, with human services and health care a distant second and third. Interestingly, the higher ed, health care, and arts organizations expect most of their funds to come from individuals donors, while human service nonprofits expect about half to come from grants. This week’s Chronicle of Philanthropy reports in “Feeling the Squeeze” that some large capital campaigns are running into some resistance from large donors concerned about the economy. The examples in the article, which is only available in its online format to subscribers, indicated that gifts were delayed or stretched out, but that the campaigns continued to be successful in a different environment.

If you are beginning to plan a new fundraising push – whether you call it capital campaign or not – you need to understand the trends, the local landscape, and how many other “asks” will be in the mail.

I recently had the pleasure of participating in a roundtable conversation with leaders from several Minnesota foundations about the Big Topic of general operating support. The meeting was convened by Minnesota Council on Foundations and published as the feature story in the new issue of Giving Forum. This issue includes the roundtable discussion as well as related stories about trends in types of support, current practices, and additional thoughts from other leading foundations.

I left the roundtable with a sense that this may be a good time to start moving on from this endless discussion/argument. As Juliet remarked, “What’s in a name? That which we call a rose, by any other word would smell as sweet.” Today’s version is “General operating support, by any other name would help as much.” It was notable that the participants didn’t have a “line in the sand” definition of general operating support. The distinction didn’t seem to be nearly as important as you might think with these foundations that understand that program grants have to include all the costs of the programs. The foundations were not very concerned with tossing out gen op requests. They were focused on working with nonprofits doing good work in the community that matched their foundation’s areas of interest, and providing support – program, project, organizational – to help them to do that work. We talked a lot about flexibility, long-term relationships, trust, and shared community goals.

What are the goals? Foundations want and need to understand how the funds they provide are helping to meet needs in the community that match their priorities and interests. Nonprofits want and need funds to support programs that further their mission with some flexibility to respond to the changes that might occur. Both foundations and nonprofits want to help the community. Both also want to have trusting, honest relationships. Too often, unfortunately, these priorities have led to battles in the general operating vs. program grant war. Are the goals really all that different? I suggest that we move the last goal into first position – both foundations and nonprofits want to have trusting, honest relationships. These relationships require clear information, reliable decisions (no surprises on either side), real numbers, and a good match in mission and community vision. I know that you might say that the particular foundations represented at the roundtable are some of the most committed to creating these relationships (and they are). Fortunately they are also leaders in the foundation community.

By the way, it’s interesting to read your own words in a transcript, as I got to do with this Giving Forum. I cringed a little when I read this verbatim excerpt: Barr, “I hear [nonprofits] say that general operating pays the rent and program support pays for the work; that’s the worst accounting I’ve ever heard.” Harsh – but I stand by it.

This week has brought an interesting alignment in the discussion, or debate, about the future of philanthropy. Last Sunday, the magazine section of The New York Times was all about “Giving it Away” and trends in philanthropy. One particular article, “For Good, Measure” discusses a current hot topic: “Foundations are increasingly using “metrics” to determine if their grants are working. But can you really measure the return-on-investment of giving to a cause?” The article is one of many that I’ve read on this theme of trying to quantify impact, and it’s direct cost and value. An interesting article and we could debate many of the points. I really paid attention, though when, in a single day this week, two business leaders in Minneapolis asked me if I had read the article. They were impressed and very interested. That was a sign to me that this is moving from the conferences and into daily reality.

On the heels of this article, Nonprofit Quarterly offered a preview of a new book, Just Another Emperor: the Myths and Realities of Philanthrocapitalism, by author Mike Edwards, opening with:

“A new movement is afoot that promises to save the world by revolutionizing philanthropy, making non-profit organizations operate like business, and creating new markets for goods and services that benefit society. Nick-named ‘philanthrocapitalism’ for short, its supporters believe that business principles can be successfully combined with the search for social transformation.”

Edwards makes a strong argument that this movement is the wrong direction for several reasons, chiefly that social transformation is an entirely different “product” than producing goods and services. The preview sparked a lively response in blogs and on NPQ’s Forum from leaders in the sector. There is an air of “think tank” to this for me, though. We can have a healthy, and undoubtedly lengthy, debate on theory, myth, and reality. Most of the nonprofit organizations that we work with every day are not immediately affected by this trend, if that’s what it is. Most charitable dollars are still received from individuals or from traditional grantmaking practices. For “service-providing” nonprofits, delivering the essential social services, health care, and education needed in the community, public dollars dominate and are unlikely to take a radical turn towards long-term “investment.”

The growing awareness of philanthrocapitalism in the business world will require an equal awareness and response from nonprofits. If you think this debate can be ignored and relegated to the think tankers, I’d suggest that the discussion is important for us all to pay close attention to. Remember that there was a time decades ago that the basic structure of grantmaking was created. You wouldn’t want to be caught napping if the world that you know really changes. This topic relates to my post last week, which generated a comment recommending the book Good to Great and the Social Sectors by Jim Collins. Edwards also notes this short (35 pages) and valuable book – add it to your must read list.

Continuing on this theme, how effective are nonprofits at making the case for unrestricted support? Rather than bemoaning the lack of unrestricted funds, what can we learn? An article in last Sunday’s New York Times, “Here’s My Check, Spend It All At Once”, connects the current financial challenges at the American Red Cross to their Donor Direct policy established in response to the fallout about the use of funds donated after the September 11 attacks. When the Red Cross commits to direct all of your donated funds wherever you choose, what donor wouldn’t take the opportunity to be the master of their own philanthropy? The long-term results, though, may be the kind of deficits that the American Red Cross is facing. Was the Donor Direct policy an extreme reaction – did the Red Cross go too far as a reaction to a communications and PR problem?Following the references in the Times article, I compared the online fundraising messages of the American Red Cross and of Doctors Without Borders. The choice of how to direct donations is the first question for a donor at the American Red Cross. While the option “Where the Need is Greatest” is the first choice offered, specific funds are immediately listed below. The FAQ section even offers more options:

I don’t see the fund that I wanted to donate to. What do I do?
Due to space limitations, we are limited in how many funds we can make available for online donations. If you would like to donate to a fund that is not listed, please contact Donor Services.

Contrast this with the Doctors Without Borders website, which provides a concise summary of how funding is used to carry out their programs. Note that the information doesn’t offer the donor a choice to designate their funds to a specific use. In the FAQ section, in fact, Doctors Without Borders makes the case for unrestricted gifts:

Can I earmark my donation for a certain area/project?
We appreciate your interest in supporting our programs. While it is possible to have your gift directed toward a specific program or country where we are currently working, we ask that you contribute unrestricted funding. By not restricting your contribution for a specific emergency or project, you will enable us to allocate our resources more efficiently and where the needs are greatest.

All of these appeals and messages rely on trust, of course, and donor trust is what the American Red Cross must rebuild. Every nonprofit should care about this, because the public’s perception and confidence in the Red Cross is a good indicator of confidence in all nonprofits.