Balancing the Mission Checkbook

I am so glad that I’m not the director of a Minnesota charter school. Imagine working in a small segment of the nonprofit sector, comprised of 150 organizations, and opening the paper to regularly find a headline announcing that your field is “out of control” or in “rough waters.” Meanwhile, you go to work every day to lead the teachers at your school and together work to educate the students whose families have chosen to enroll at your school. I wouldn’t appreciate, much less enjoy, the attention. Every report brings with it questions about whether our hypothetical school director is among those with the problems described in the news. Whatever the current condition of this individual school, they end up tainted a bit by the sheer volume of news.

In just the past week, our hypothetical charter school director has seen these reports:

• State charter schools program is ‘out of control’, reports the Star Tribune in an investigative article about the use of bonds for financing of 18 buildings for charter schools.
• The Pioneer Press reported Strapped St. Paul charter school to close midyear on the decision by the board of directors of Skills for Tomorrow school to close at the semester break because of declining enrollment.
• Last week, in Payment shift makes rough waters for charter schools Minnesota Public Radio provided background and examples of the impact on charter schools of the state’s new deferred payment schedule for all public school payments.

While each news story is accurate, it does not paint an accurate overall picture. The individual schools don’t have the chance to explain all of their plans, budgets, and curriculum philosophy to the community. I have a deep enough understanding of charter schools to respond to each with the comment that “it’s more complicated than that.” I don’t want to gloss over some very real issues with finance, leadership and governance at some charter schools, but I am trying to figure out why this small group of nonprofits is such a magnet for news, investigation, and opinion.

As some background, Minnesota was the first state in the nation to create “charter schools.” Today Minnesota has about 150 operating charter schools, with roughly half in the Twin Cities Metro area, and the remainder in Greater Minnesota. Together, these schools serve about 33,000 students. Charter schools are true public schools. They are created by state law, are funded by government, and are subject to most state laws governing public education. They cannot charge tuition and they cannot discriminate in admissions. They are subject to state graduation requirements and the mandates of the federal No Child Left Behind legislation. Structurally, charter schools are both nonprofit corporations and independent school districts.

This structure presents complexities that affect both governance and financial management. As I detailed in a previous entry, Charter school myths and realities, the reality is that the management quality of most charter schools in Minnesota is on par with the management of nonprofit organizations overall. The vast majority of charter school directors and teachers are hardworking, mission-focused, committed educators, and I thank them for their work.

For such a small group of organizations, charter schools attract an awful lot of attention, scrutiny, and criticism. As a community, we feel strongly about education and about the use of taxes and public funds. Charter schools are right in the middle of both.  The field needs to find a way to communicate their value to the community – unless they like opening the paper every day to read another report about problems.

Maybe it’s a holdover from my former life as a banker, but I often read the business section of the paper first (yes, I still like to hold an actual printed newspaper in my hand). Lately, of course, there is news almost every day about job cuts at some of the best known national and local companies. Some recent examples are Caterpillar, Starbucks, SuperValu, Best Buy, and M & I Bank. As you can see from this list losses are occurring in all industries. Unemployment in Minnesota hit 6.9% in December and is clearly getting worse.

How does this impact Minnesota’s nonprofits?

When people lose income and important benefits they turn to the state’s nonprofits for assistance with everything from food and shelter, support and counseling, and job search and retraining. As reported in Minnesota Council of Nonprofits’ Current Conditions Report published in December 2008, 42% of surveyed organizations reported increased demand for services. But over 50% of the nonprofits also reported actual and anticipated decreases in income.

If service demand goes up and income goes down, where are the reports of job cuts at nonprofits? There have been a few reports locally and nationally including American Red Cross Twin Cities, Neighborhood House, Metropolitan Opera, and Harlem Children’s Zone. I know, though, that there are many more organizations that have already made staff reductions or that will have to make some cuts because of their budget shortfalls. One reason that we don’t read about it every day is the different requirements and expectations for disclosure between publicly traded companies and nonprofits.

But I think that many nonprofits feel that speaking openly about cuts is their “family business” and are afraid that it reflects poorly on management and the board. There is actually an odd dynamic at work now – more calls and emails from recently laid- off corporate people who would like to “explore a shift” into the nonprofit sector. As a “shifter” myself I can’t be too cynical, but I’ve got to tell the truth about their prospects right now. (I encourage volunteering.)

Nonprofits are Businesses

I’m starting to think that nonprofits need to be much more public about their staff reductions. At the same time that the community needs nonprofits to provide more and more help and support, income of all types for nonprofits is declining. Let’s not hide the reality that there will be an impact from these changes. The recession is impacting corporations and nonprofits alike.

For years I’ve been a part of discussions about how the public doesn’t understand how nonprofits work. Now is the time to start the tutorial. By being open we can educate the community about how the business of nonprofits actually works – the complex web of financial and volunteer resources, staff and program costs, and role in the economy as service provider and employer.

I like the logo of the V3 Campaign – Nonprofits Are Businesses. It’s an effort to educate the general public about the economic impact of nonprofit organizations.

What do you think? Is it risky to announce cutbacks and program reductions, or could these news stories ultimately strengthen understanding and support for the sector?

I’m pretty sure that every nonprofit would love to have enough money that some of the funds can be invested for the future. In the past month, though, nonprofits may have seen their investment portfolios buffeted by the markets. If that wasn’t enough of a concern, this week we read about losses for some local nonprofits from investments related to the Petters Company fraud case. News reports this week in both MinnPost and the Star Tribune describe the negative impact on organizations that may lose millions from investments that were made to provide short-term loans to companies for inventory purchases. As Scott Russell said in the MinnPost article, these cases are “a wake-up call for other nonprofits to review their investment policies and portfolios.”  As an outside observer, it’s easy to say that these investments seem like an unlikely fit for a nonprofit organization, but we don’t know what standards or criteria those boards were using to evaluate and select investments. This is a good time, though, to review some fundamental guidelines for investments by nonprofits.

• Time Horizon – Funds that may be needed within a few months must be invested in highly liquid, safe investments. This is the most common type of investment fund for most nonprofits, composed of operating funds and reserves. In order to be assured that the funds will be available as needed, the investment choice must be readily available. The recent financial news has even raised red flags about some short-term investments – see my earlier post It’s 10 AM, do you know where your cash is?.

• Risk Tolerance – One of the fundamentals of investing is the balance of risk versus return. Investments with a higher return almost always also come with higher risk. The key question for nonprofit leaders and boards is to understand how much risk is involved and to decide if they can accept the risk. As an example, if the funds to be invested represent the balance of a large program grant that will be spent over the next year, then the organization can’t afford to risk the loss of any of the funds. A permanent endowment fund, on the other hand, is usually invested in a diverse portfolio that includes more risk in return for a higher long-term return.

• Responsibility – The nonprofit’s board of directors is responsible for overseeing this balance of risk and return for the health of the organization and any legal requirements. In order to fulfill this responsibility the board must act as prudent and loyal stewards of the organization’s assets. The board may decide to employ professional staff or outside advisers to manage the investments if the amount if large enough.  At minimum, the board needs to adopt and follow an investment policy. I highly recommend a booklet from BoardSource, Minding the Money: An Investment Guide for Nonprofit Board Members.

In this economic environment, every nonprofit needs to take a look at their investments and understand any risks that may have been taken for granted. It’s better to spend some time now and avoid surprises later.