Nonprofit Harvest

Tuesday’s budget announcement was just the beginning:

The budget debate is just beginning, and Governor Pawlenty said his proposal will need some adjustments in the coming weeks to reflect new financial information.

One change will come when Minnesota learns the amount of its share of the federal economic stimulus bill. Another will come next month, when finance officials update the state economic forecast, which is expected to project an even larger budget deficit.

Deferring Revenue and One-Time Solutions

The Governor proposed a number of one-time solutions which will reduce our budget for the upcoming biennium, but will not address the underlying problems that impact our state.

The impact of these decisions have been addressed more eloquently by others (here, here, here, and here). Concerns about their feasibility can be found here and here.

What strikes me is that we have a problem with our business model. Our expenses outweigh our income.

To fix that problem, we must both cut spending and increase revenue. As D.J. Leary writes in his reaction to the budget, we have a structural problem:

This governor has faced two multi-billion dollar budgetary shortfalls since first being elected in 2002 and he still doesn’t appear to have grasped the reality that Minnesota has a structural defect in its overall fiscal configuration.  Minnesota simply has too narrow an income stream to provide government services at the level its people want and need.  The governor’s budget is nothing more than state government’s version of Three-card Monte.

The Governor is proposing some ways to generate revenue – such as additional fees for service – but has taken off the table one way to do this.  “Don’t increase burdens by raising taxes” was one of the Governor’s underlying principles when crafting this budget.

Taxes are a loaded topic.  Deciding to raise taxes, especially in the midst of a recession, is not easy. What concerns me is that the Governor is not willing to consider this revenue stream.

As an example, can you imagine a nonprofit being unwilling to consider an earned income venture or an individual giving campaign when trying to bridge a 14% funding gap? Or an organization that solved this through problem a large one-time grant, using restricted funds for another purpose, and deferring payments to vendors to the next fiscal year.

Unconvinced? Mr. Leary and I are not alone.

Minnesota Budget Trends Study Commission

Minnesota Budget Trends Study Commission was established at the end of the 2007 session to analyze the factors that were contributing to our state’s ongoing budget volatility.  In particular, they looked at the implications of our shifting demographics:

The State Budget Trends Study Commission is established for the purpose of completing a study of the implications of state demographic trends for future state budget conditions, including both expected revenue collections and spending for state government services and local services supported by state revenues.

On January 12, they released a report that outlined some of the challenges facing the “long-term stability of the state budget.” Their findings included, but were not limited to (emphasis mine):

• Despite continuing to rank high among many key social and economic indicators, Minnesota’s economy has underperformed recently relative to the nation.
• Demographic and economic factors will lead to lower growth of state revenues over the next 25 years.
• Minnesota has a long-term structural budget problem, with long term expenditure growth likely to outpace revenue growth.
• Minnesota’s general fund tax base has grown more volatile in the past decade.

Coverage on the report:

• Report: Minn. budget problems need long-term fix from the AP (via the Star Tribune)
• Minnesota budget trends study says changing demographics require revised state financial system from MinnPost’s Joe Kimball
• Report from Minnesota Budget Trends Study Commission from Jerry Zhao of the Humphrey Institute
• A commission with some common sense ideas from Minnesota Budget Bites

How do we Fix the Problem?

The first step to any solution is acknowledging that there is a problem.

There has been (and will continue to be) a lot of discussion about how to address our state’s $4.8 billion budget gap for the upcoming biennium (2010-2011).

Our goal is to share thoughtful analysis on the budget, the proposed cuts, and what it means for everyday Minnesotans on this blog and over twitter (a great big thank you to @tomsheck, MPR’s Political Reporter for live tweeting the press conference).  We will try to bring you the highlights, with an eye on how these changes will impact Minnesota’s nonprofit organizations and those they serve.

Recommended Reading

• State of Minnesota press release
• Star Tribune
  • Pawlenty would balance budget with cuts, federal stimulus
  • Your Voices (especially Budget doesn’t solve deficit, just prolongs it)
  • Losses loom for adults without children
• Minnesota Budget Bites
• Pie charts and numbers of Minnesota’s proposed budget fix don’t tell the whole story from MinnPost
• MPR
  • Pawlenty’s budget: 2.2 percent spending cut
  • Human services cuts inevitable under Pawlenty plan
  • The governor’s budget from Bob Collins’ News Cut
  • Legislature to begin dissecting Pawlenty’s budget proposal

Governor Pawlenty’s Proposal

Yesterday the Governor released his 2010-2011 budget proposal. All of the information is available at the Minnesota State Budget website. State budgets are incredibly complex, and we are still trying to make sense of it.

However, there are some overarching principles, goals, and recommendations that we can unpack.

Budget Principles

•

• Balance the budget (this is mandated by our state Constitution)
• Fund priorities in order of importance
• Strategically position Minnesota for success in a changing world
• Enhance and expand pay for performance
• Don’t increase burdens by raising taxes

Financial Goals

• $250 million in budget reserves to address additional economic risk
• $350 million in cash flow account
• Understate potential level of federal fiscal assistance until finalized
• Improve structural budget – reduce 2012-13 budget gap by nearly half

As the slide illustrates, in order to achieve his goals, he proposes a series of cuts and cost saving measures. (Please note that these are screen shots and the presentation can be downloaded here.)

Budget Assumptions

All budgets have a set of assumptions. Minnesota Budget Bites unpacks some of the Governor’s underlying assumptions:

• He assumes Minnesota will get $920 million in federal stimulus relief (this is just a placeholder amount for now).
• He reduces the FY 2010-11 deficit by $1.3 billion by shifting K-12 education payments into the future.
• He raises close to $1 billion upfront by selling bonds secured with our tobacco lawsuit revenues.

Budget Priorities

• Enhance Minnesota’s job climate
• Improve K-12 education
• Protect state public safety programs
• Maintain military and veterans programs
• Increase government reform and accountability

Budget Cuts

The budget calls for $2,368 million in permanent spending cuts (a 2.2% spending cut). These cuts include:

• Changing eligibility standards for MinnesotaCare, which means that “84,000 people will lose health care eligibility over the next two years.” These changes include:
  • Only those at 100% of the federal poverty level qualify for Medical Assistance (a family of four living on $21,200)
  • Adults without children are no longer eligible for MinnesotaCare
  • Cuts in state reimbursement to hospital and long-term care providers
• $151 million to the University of Minnesota (you can read their response here)
• $245 million in Local Government Aid
• $125 million in County Program Aid
• 5% cut in state agencies

All of these cuts will impact nonprofits.  The changes in health care eligibility, a decrease in reimbursements, and cuts to local and county governments will affect health and human service organizations precisely at a time when need is growing and donations and foundation support is lagging.

These budget cuts, while not surprising, will force nonprofits to make hard choices.

Other Recommendations

• Borrowing $153 million from the Health Care Access Fund.  It often runs a surplus and the state has used these funds to balance the budget in the past.
• Merge the Health Care Access Fund with the General Fund. 
• Sell half of bonds from the state’s tobacco settlement
• Freeze wages
• K-12 payment shifts, totaling $1,294 million.
  • This means deferring state reimbursements to school districts to the following year, known as the “holdback.” The current holdback is 10%, under Pawlenty’s budget it would be 20%.
    

These additional recommendations are primarily one-time solutions that will balance the budget for the moment, but not address the underlying structural problem – Minnesota has a flawed business model.

Nonprofits Assistance Fund and MAP for Nonprofits recently launched the Social Enterprise Network (#SEN).  It was a great event, full of energetic social entrepreneurs.

I was amazed at the breadth of experience in the room. We have a vibrant nonprofit community.  Many of these organizations are pursuing entrepreneurial earned income strategies.  The purpose of this network is to to support and strengthen social enterprise in Minnesota, and provide a space to facilitate dialogue.

These notes are the participants’ thoughts on how organizations can foster a culture of entrepreneurship. Please share your own ideas and any reactions in the comments section.

Top 10 Ways to Foster a Culture of Entrepreneurship

Jim Thalhuber of Goodwill/Easter Seals hosted the first Network on Fostering a Culture of Entrepreneurship.  He shared his Top 10 Ways Nonprofits Can Build and Nurture a Culture of Social Enterprise:

10. They keep their board on board

• Set up an enterprise committee
• Don’t let board members “turn off their business brain”

9.  They keep their employees engaged

• Be transparent
• Engage as many different people and voices in the process as possible
• Generate buy-in by discussing
  • What is going on
  • Why it’s happening
  • The desired outcomes
  • How it will impact everyone’s job

8. They are brutally candid

• Assess the marketplace
  • What is unique about your organization?
  • What are your skills? What are your core competencies?
  • Don’t confuse the way things actually are with the way you would like them to be
• Cannot have tunnel vision

7.  They push the envelope

6.  They focus, focus, focus on what the customer needs

• 3 most dangerous words:  “I like that”
  • Doesn’t matter what you like
  • What does the customer like? What does the customer want?
• Remember the double bottom line
  • The customer’s needs are more important than what you want, but less important than your mission
    • Be mindful of this tension
    • Know your organization’s priorities to help make decisions when they are in conflict
  • A successful social enterprise is where the customer’s desires and the organization’s mission come together

5.  They don’t assume anything

• Research
• Make fact-based decisions

4.  They are keen on their core values

• Core values – what you do when no one is looking
• Social enterprise is a means to an end – to achieve your mission
• You don’t want the tail to wag the dog

3.  They are clear about their core competencies

• What does the market value in your organization?
  • How can you leverage that?
  • Where is there room for innovation?
• Avoid everything else

2.  They are persistent

• Social enterprise is a long-term strategic decision

1. They learn how to dance

• Be flexible
• Have a plan – but don’t be wedded to it

Other Thoughts

Why is internal culture important?

• Internal culture eats change for breakfast
• Takes time and commitment,  keep at it

It’s ok for nonprofits to talk about profit

• Some people are nervous to say the word “profit” or “sales” (the “p” word)
• Profit is good
• The real issue is what you do with the profit
• It’s ok to adopt from for-profit businesses
  • Use what works: business models, terminology, best practices
  • Nonprofits have a double bottom line, so not everything will be applicable
• Helpful framework: I operate a small business within a nonprofit environment

Perceptions

• Is a social enterprise marginalized if it’s one part of a larger nonprofit?
  • Important to engage your colleagues
  • Social enterprise helps support the mission & core services
• Perception that nonprofits can’t run themselves
• Must be good at the business you are doing

Dealing with Risk

• There is risk involved – but you have to leap/seize the moment
• What is the culture of your organization?
  • Is it risk adverse? If you are focused on stability and providing services, a risky venture will not work.
  • Having cash reserves increases your ability to take risks
• The value of a needs assessment
  • Although it can’t guarantee success, it can help mitigate risk
  • Balance risk with market need
  • Consider the opportunity cost
  • Assess what you can afford
    • Can you afford to take the risk?
    • Can you afford not to?
    • Can you afford to wait?
• Don’t put all of your eggs in one basket

Defining Success

• Do what it takes to be successful – to generate earned income for your organization
  • Don’t be married to a particular idea
  • Narrow it down to what is successful
    • Grow deeper, not wider
    • This may mean eliminating programs, rather than adding
    • Keep the focus on your mission and core competencies

Getting the Right Board

• Having the right board might be the most important factor in a successful nonprofit social enterprise
• Look outside the organization and your traditional constituencies
• Ideally you want a balance between “business” and “nonprofit”
• Try to recruit successful small business entrepreneurs
  • Running a successful small business takes a different set of skills than working at a large corporation
  • They have been there, done that (including failed)
  • They are probably connected with other successful entrepreneurs
  • They could serve in an advisory capacity or be elected to the board

Running a Social Enterprise

• You cannot run a social enterprise like you run a nonprofit
• You must generate a profit
  • Time costs money
  • What is the true cost of your social enterprise?
  • What are the true costs of your programs?
  • How much income do you need to generate from this venture?
  • This will help you set a realistic price point

Working with the Government

•  MCN’s Nonprofit Day at the Capitol is February 5th
• The Property Tax Exemption question will impact nonprofits whether or not they own land
• There are huge budget cuts coming – social enterprise can help mitigate reductions
  • Contact your representatives and let them know your thoughts
  • The State House and the State Senate both have websites devoted to the budget deficit

Innovation

This week has been a mix of optimism and pessimism. When I saw a blog post titled Innovation in a Recession, I had to read more. It directed me to this post, which summarizes the opportunities Tim Draper, a venture capitalist, sees in the current economic climate.  Although I don’t agree with all of his ideas, I appreciate his willingness to reframe this moment:

Don’t panic and don’t cling to the past as it will be a new game. We need to all stick together to solve our current problems. We face not only a crisis but many opportunities for new innovation.

I think that this framework segues nicely with Blue Avocado’s suggestion to declare an emergency:

An emergency doesn’t mean people should panic . . . an emergency means considering the bold and wacky ideas that are either brand new or used to be off the table.

Transformation

For some thoughtful analysis on what the future could hold for the nonprofit community, I suggest reading Paul Light’s recent article in Nonprofit Quarterly, Four Futures.  The entire piece is worth reading, but for the moment I want to focus on the forth possible future:

Transformation. This fourth scenario is hopeful but different, and it is likely only if nonprofits make it so. As has been noted in several of this issue’s articles, nonprofits could use the faltering economy and its impact on the sector as an opportunity to reinvent themselves. But this approach requires examining all possible options quickly and creatively. In state budgets, should certain services be saved over others? Are there ways to redesign organizations to achieve greater synergy between community players? Are there ways to involve communities in rethinking and reenergizing our work? A transformation-oriented approach requires deliberate and collective action by the sector’s stakeholders: communities, philanthropists, governments, intermediaries, constituents, nonprofit associations, and boards.

He goes on to list some strategies for moving towards this more hopeful future.

This Week’s Harvest

Considering the Inauguration

• America’s Greatest ‘Public Works’ by Clara Miller in Chronicle of Philanthropy

• Foundations Should Step Up as Obama Steps In by Mark Kramer and Amber Johnson for Chronicle of Philanthropy

On the Proposed Stimulus Package

• Economic-Stimulus Package to Help Nonprofit Groups Meet Social Needs from Chronicle of Philanthropy

• State fiscal aid key part of federal economic recovery package from Minnesota Budget Bites

• Economic Recovery Bill Would Add Little to Long-Run Fiscal Problem from CBPP

On the State Budget

• Minnesota Budget Bites

• MPR’s coverage of Minnesota’s budget shortfall

• Pawlenty’s deficit plan: Freeze, cut from the Star Tribune

Additional Articles and Resources

• When Good Data Goes Bad from Minnesota Budget Bites

• When the Ax-Man Cometh: What to cut out of your budget from Katya’s Marketing Blog

• A giving recession? from The Economist

• Great Depression Giving- Data sources part two in Philanthropy 2173

Focus on Excellence

At this time of year, there are many blog posts on resolutions (mine, Kate’s) and strategies about how to achieve our goals.  PhilanTopic has one that stood out, More Good Advice for Nonprofits.

I suggest you read the entire post, but my favorite suggestion is:

2. Grow your mission. Many nonprofit organizations that were founded between 1929 and 1935 are still in existence. Focus your attention on growing your mission. If you focus on excellence, money will follow. If you focus on money, excellence never happens. As in the best of times, let your mission dictate management decisions.

Grow as in nurture, not grow as in expand.  At a time when we are all fighting the urge to do more with less, let your mission and core competencies be your guide.

Outlook for 2009

This week, the Chronicle of Philanthropy hosted an online discussion, Outlook for 2009: What the Recession Will Mean for Your Organization.

This was a particularly useful and timely discussion.  In the risk of overdoing it, the topic of mission creep came up here as well:

What would be the top five things you would recommend in either assessment/ evaluation or strategic implementation for 2009?

The response?

1. Making sure mission and program [and budget] are aligned. If not, why not?

2. Make sure that core competencies of the org – including staff, facilities, etc are aligned with #1. In good times, orgs sometimes add all sorts of people and programs, and suddenly find that there is an imbalance between what is being done with core mission. Has you mission in fact changed? Ask the hard questions.

If I seem preoccupied with mission creep, it is because we see how it impacts organizations.  An expanded mission may not create a stronger organization. Often it dilutes the services, goals, and focus — which we cannot afford right now.

Check out the rest of the transcript for more information on how the recession may impact your organization’s bottom line.

Giving in Minnesota

For local organizations looking for additional insights, MCF has released its 2009 Outlook Report, which projects foundation and corporate giving for the year.  According to their findings, we should anticipate a decrease in overall giving as compared to 2008:

Overall, grantmakers anticipate giving will drop about four percent in 2009, as compared to 2008. For grantmakers in the sample who give $10 million or more annually, giving is expected to decrease only 1 to 2 percent.

MCF President Bill King also issues a reminder: “This is, of course, a snapshot in time. The giving picture may change with the economy throughout the year.”

• Read the press release

•  2009 Outlook Report

The upcoming Giving Forum will include additional analysis and recommendations.

This Week’s Harvest

• Climate Change on SSIR (Hat tip: Rosetta Thurman)

• Briefing on the Economy and Charitable Giving: December 2008 from the Center on Philanthropy at Indiana University

• Fiscal Sponsors Directory:  Connecting Community Projects with Fiscal Sponsors (Hat tip: PhilanTopic)

• How Small Foundations Can Protect Themselves From a Madoff-Style Scandal

• NEA study: Theaters vulnerable during recession

Unhappy New Year?

Unfortunately, the start of this year doesn’t feel bright and shiny.  We’re worrying about survival and how we can maximize our impact with limited resources. How can we respond to the challenges of 2009?

This is not the first challenging time the nonprofit community has experienced.  However, even if this economic crisis is not different, it feels different.

The folks at Blue Avocado have hit the nail on the head with some outside the box thinking, And Now for Something Different About Nonprofits and the Economy.    I suggest you read the full post, but here are my two favorite suggestion (the bold italics are mine):

1. Declare an emergency. When people have permission to think and act out of the normal grooves, they can be bolder, more creative, energized, or at least more ready to accept changes. So say it out loud: “We are in an emergency period (or we are going into an emergency period). Our funding looks okay through the next four months, but there’s a good shot we’ll get some bad news starting then. We need to start making changes and coming up with some contingency plans that go beyond what we’ve done before.” An emergency doesn’t mean people should panic . . . an emergency means considering the bold and wacky ideas that are either brand new or used to be off the table.

3. Do less with less. Of course there is more need, more demand, and we probably have less money. And we love the gritty heartfelt nature of the cry, “We need to do more with less!” Pause. But it’s not only unsustainable, it probably means you will be able to do even less in the future. If a program’s funding has been cut by 30%, you may need to do 30% less. The best decision may be to be open fewer days a week, hold fewer performances, or stop taking children over 5. On the other hand, working harder might be necessary, at least for awhile, but only if it’s to get to a different business model.

What I like about both of these suggestions is their honesty. We have to be honest with ourselves about what we can accomplish. The same old tactics (not to mention expectations) are not realistic.  2009 will be a time of change, because it must be.

Nonprofit and Foundation Resolutions

Speaking of change, what are your New Year’s Resolutions?  Here’s my response:

Our #resolution? To help nonprofits manage & adapt to changing circumstances – we’re using all our tools, incl social media #npecon #npfin 

To get you thinking, here are some resolutions from others in the nonprofit community:

• 2009 Resolutions for Foundations from New Voices in Philanthropy

• Ten Resolutions for the New Year from Leading By Design

• Cheers to the New Year… and its Resolutions from the Case Foundation

For more resolutions, check out Philanthropy Potluck.

2009: A Year of Action?

Hopefully this will spark some creative thinking at your organization.  However, thinking outside the box is not enough. We must also take action to implement necessary changes.

There is an interesting discussion on facebook about nonprofits ability to act quickly and decisively. What do you think?