Some Small Groups Fail in Recession

After a major donor died this year, Rhoda M. Weisman began desperately searching for new sources of revenue for her Los Angeles charity.

But with the bad economy drying up philanthropic resources, she decided after several months that there was no way to make her $1.4-million budget and it was time to close the Professional Leaders Project, which she started in 2004 to provide leadership training to young Jews so they could fill the gap left as baby boomers retire. “It was a tough decision because of all the good that we did,” she says, “but I think it was financially responsible. Once we knew it would be so hard to raise the kind of money needed to keep us out of massive debt, there didn’t seem to be much choice.”

The Professional Leaders Project is part of a small, but growing, number of charities that have fallen victim to the recession. While most nonprofit groups will survive the downturn, each month a handful of organizations blame their demise in part on poor fund raising, cuts in government aid, and other problems triggered by the sour economy.

The groups struggling to keep their doors open tend to be small organizations, usually with budgets of several million dollars or less, and they represent all types of charitable causes — education, social services, the arts, and aid for people with disabilities.

How Many Groups Will Collapse?

To be sure, there is no solid data on how many groups have been forced to close because of the economy. The state offices that oversee tax-exempt groups and the Internal Revenue Service do not have current information on charity closures. Nonprofit experts agree that some groups may close, but few offer estimates on how many charities have been affected so far. Paul C. Light, a professor at New York University’s Robert F. Wagner School of Public Service, last year said that as many as 100,000 of the nation’s more than one million charities could cease operations. His statement shook the nonprofit world.

Today, with the economy beginning to show signs of recovery, his predictions are less dire.

“It’ll be a substantial number, but I don’t know if it’ll go to 100,000,” Mr. Light says. “Those nonprofits I thought would go under may survive and start to recover next year.”

Mr. Light, who has argued that a consolidation of the charity world could be beneficial, says it seems that nonprofit groups have tended not to close or merge with others with similar missions, but instead shrink the size of their staffs and programs.

Says Mr. Light: “It looks to me like there is more withering going on than winnowing.”

State Cuts

Even so, some groups have completely ceased operations.

In Florida, one of the states hit hardest by the housing-foreclosure crisis, several groups are closing or even declaring bankruptcy, says Marina Pavlov, chief executive of the Florida Association of Nonprofit Organizations, in Miami Lakes.

For example, she says, an organization that provided transportation to people with disabilities closed in October after losing a grant from a Broward County government agency.

“It’s a small and persistent number,” she says about the groups that call her for advice about how to shut down. “And it keeps increasing.”

She says that many small charities have suspended their operations, hoping they can restart when the financial environment improves. But “if there isn’t any change soon, you’re going to see more close.”

Peter Goldberg, chief executive of the Alliance for Children and Families, a coalition of antipoverty organizations, says that during the last 12 months three of the 500 charities in his association have closed.

“A grant or contract doesn’t come through on a funding source you’re too heavily dependent on and suddenly the house of cards comes down,” he says.

When the difficult decision to close is made, Mr. Goldberg says, a nonprofit group must make sure the people who depend on it are taken care of.

For example, Family Services of the Mid-South, in Memphis, is shutting its doors October 1 and is scrambling to persuade other charities to take over its programs. So far it has successfully moved its 24-hour crisis hot line, its housing program for people with AIDS, and other services to other organizations.

“Right now, our clients are the No. 1 project as we transition our programs,” says Terry Barnes, the group’s interim executive director.

Joining Forces

In the Boston area, several arts groups joined together to help the North Shore Music Theater and its patrons. The musical theater in Beverly, Mass., closed this summer after failing to raise $2-million.

A dozen theaters are offering free tickets to North Shore subscribers as a way to lessen the blow to arts lovers, says Catherine Peterson, executive director of ArtsBoston, which arranged the support.

“People have been incredibly touched and are taking advantage of the offer,” she says.

Other organizations in financial peril are hoping another nonprofit group may save them.

Rock the Classroom, which uses music to teach reading and other subjects to students in the Los Angeles area, may shut down after losing $150,000 in school contracts and taking in only $10,000 in its annual online auction; last year the auction brought in $80,000.

“It’s quite a one-two punch,” says Bradley Kesden, a musician who founded Rock the Classroom in 2003.

He is currently talking with a large education charity, which Mr. Kesden declined to name, to acquire the program.

Kent Seton, a Los Angeles lawyer who is helping Mr. Kesden negotiate the possible merger, says that in the last year or so he has worked with almost a dozen organizations on mergers or acquisitions.

In four cases, he has helped a charity completely dissolve. Given the uptick in such work, last year he helped form the Edward Charles Foundation for Dissolving Charities.

When a nonprofit group closes, it is legally required to distribute its assets for charitable purposes. In cases when charities must shut down quickly, sometimes in fewer than 30 days, the Edward Charles Foundation serves as a “holding tank,” Mr. Seton says. It receives the funds, office equipment, or other assets, fulfilling the closing group’s obligation, and then distributes them to other charities.

Mr. Seton says such legal procedures are relatively easy; the hardest part is the “emotional toll” on nonprofit leaders who have to let go of their organizations.

David Choate, who is helping to close a Hampton, N.H., charity, echoes the sentiment. He is president of the board of OdysseyNH, which provided residential treatment for people with drug addictions and behavioral problems. It is closing because the state cut its support for in-patient services and because the group could not muster enough private donations.

Odyssey worked with families and New Hampshire officials to move its residents back home or into new facilities, and the group officially closed its doors last month. But Mr. Choate says the process will continue for at least four or five more months as it settles debts and tries to sell six buildings, which are owned by a foundation created to support Odyssey.

“It’s not a fun process, believe me, especially when you’ve been in business for 40 years,” says Mr. Choate. “It’s kind of like being the executor of an estate; it’s never ending.”