Charities Brace for Shakeout

Government cuts, financial woes could cause many groups to fold

InterCommunity Caregivers, in Denver, started in 1997 with a promising future, a $25,000 grant

from the Robert Wood Johnson Foundation, and an agenda to organize volunteers to visit elderly and disabled people in their homes — a mission that would expand as more older Americans required services.

But now the organization has become a victim of the economic downturn, forced to merge with a larger charity because of a decline in foundation support and its inability to raise enough elsewhere to make up the difference.

Frank J. Shaw, the group’s former executive director — who will serve as a board member with Helping Hands: Faith in Action, which took over InterCommunity Caregivers — says he heard time and again from grant makers this past year that they couldn’t support his organization because there were “a tremendous number of applications” for the limited funds available. So “our board agreed we needed to do one of two things: either find a compatible agency we could merge with or die a slow death,” he says.

Mr. Shaw’s group is not alone in its fund-raising woes. A midyear check with more than 50 fund raisers and nonprofit officials reveals that economic stagnation, a roller-coaster stock market, and growing state-budget shortfalls have created a challenging, almost Darwinian, fund-raising environment in 2003 as the largest pool of nonprofit groups in history competes for a shrinking pot of government and charitable dollars.

The sluggish economy has hurt more than just the small groups, like InterCommunity Caregivers. The country’s 1,400 United Ways experienced the worst fund-raising decline in three decades in their 2002-3 campaign season. And for the first time in 15 years, donations to colleges and universities fell, according to the Council for Aid to Education. Giving dropped 2.5 percent in the fiscal year ending June 30, 2002, according to the council.

Substantial Changes

The tough fiscal climate has forced many charities to take severe steps to survive. After two years of troubled fund raising, many groups can no longer make superficial reductions in their budgets and must start trimming charitable programs and laying off staff, steps charities have been reluctant to take because they will not be easy to reverse when the economy recovers.

Some observers predict that over the next several years, tens of thousands of charities — one official estimates as much as 30 percent of the nation’s 900,000 nonprofit groups — will be swallowed up by more-established organizations or forced to shut their doors.

To be sure, a number of groups expect to raise as much money as last year or even more, in part because of aggressive fund-raising efforts, particularly those aimed at getting Americans to give more.

Indeed, the “Giving USA” report for 2002, a survey on the state of philanthropy released this week by the American Association of Fundraising Counsel Trust for Philanthropy, in Indianapolis, found that charitable giving by individuals, corporations, and foundations reached $240.9-billion last year, a historical high. In inflation-adjusted dollars, giving fell 0.5 percent compared with 2001, a relatively small decline considering that during recessions contributions dip an average of 1.1 percent.

Eugene R. Tempel, executive director of the Center on Philanthropy at Indiana University, in Indianapolis, which conducted the research for the survey, says “Giving USA” shows the resilience of philanthropy. “Charities should take hope from the notion that the American tradition of giving is very strong and the commitment seems to persist at this time,” he says.

But for many organizations, the gains are not enough to offset losses in government money, earned revenue, or big foundation grants — or to meet increases in demand for services.

“It’s a tough time to be a social-services organization,” says John Keightly, vice president for development at Catholic Charities USA, an Alexandria, Va., group made up of 1,600 charities across the country. “It’s a tougher time to be poor.”

Outlook for 2003

The outlook for giving in 2003 is less certain.

Some organizations, particularly the biggest ones, continue to report solid growth. Some have recently completed major capital campaigns, while others are in the middle of or just starting campaigns. But many small and medium-size organizations, especially those that depend heavily on any single source of money, are faltering.

According to the Philanthropic Giving Index — a semiannual measure of fund-raiser confidence produced by the Center on Philanthropy — 85 percent of the 218 fund raisers who responded in April said the economy is hurting their ability to garner donations. About 36 percent of them expect the economy to be strong enough by January to help fund-raising efforts.

While the economy has shown some signs of recovery lately — the Dow Jones industrial average broke 9,000 this month for the first time in almost 10 months — the benefits typically do not flow to charities for many months after a rebound.

And given the length of the downturn, a return to robust times could take several years. Foundations largely plan their giving based on their endowments’ earnings the previous year, so even if the stock market does well throughout 2003, it won’t be until 2004, at the earliest, that most grant makers would start awarding more money.

Moreover, state and local governments are expected to continue to suffer from drops in revenue for at least two years, so social spending and other programs for charities are expected to remain tight. The National Association of State Budget Officers, in Washington, says it often takes 12 to 18 months after a recession for economic gains to translate into increases in state budgets.

State Spending

Fund raisers and other charity officials say arts groups and social-service charities face the toughest challenges today, while environmental organizations have also been stretched thin.

Major cutbacks by state governments pose a big problem for many charities, which often depend on such aid. Every state — except New Mexico and Wyoming — faces fiscal problems, said Nicholas Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities, a Washington think tank. For fiscal 2004, state shortfalls are expected to reach $80-billion, Mr. Johnson said, as rainy-day funds are depleted and “one-time accounting gimmicks” to raise revenue are no longer able to be used.

The federal government also is causing headaches for charities. Organizations that use AmeriCorps national-service members to deliver programs are scrambling to respond to news of massive cuts to that program. The number of service-corps members could drop from 72,000 to 13,000, meaning that charities would have to either pay employees to take over the jobs handled by AmeriCorps members or stop programs run by them.

In Kansas, the loss of state funds has sent charities hunting for private support, causing a “domino effect,” says Herb Callison, executive director of the Kansas Association of Nonprofits. “As the state budgets cut back, human-services providers and arts groups begin competing more heartily for private funds and that makes them more scarce,” he says.

Reductions in foster care and adoption programs led to a $2.5-million cut in state money awarded to the Kansas Children’s Services League, which provides services throughout the state, according to W. Clark Luster, the nonprofit group’s president. Unable to find charitable dollars to fill that gap, the children’s organization let go 25 of its 500 employees.

Many organizations have had to make similar decisions largely because of drops in private aid.

The Pasadena Shakespeare Company, in California, has canceled the rest of its season this year because it doesn’t have the $40,000 needed to produce its last two plays. Slow ticket sales have been largely to blame, and the group hasn’t been able to make up the difference by persuading donors to give more or by cutting expenses. Gillian Bagwell, the group’s founder and artistic director, says she is not sure if the group will ever reopen. “It’s always been tight,” says Ms. Bagwell, who hasn’t drawn a salary since August. But this year “prospects were much bleaker.”

In Texas, the United Way of Metropolitan Dallas laid off seven people when it trimmed $800,000 from its budget because it brought in $5-million less in 2002 than in the previous year, says Gary G. Godsey, the group’s chief executive. Mr. Godsey expects to raise about $46-million in 2003, the same as last year, by focusing appeals on women and minority business owners. “We’re going to try and knock out every dime we can possibly find in the community,” he says.

Some Successes

At the same time that some charities report financial struggles, many nonprofit organizations, particularly national or very large groups with sophisticated fund raisers, have increased their fund-raising totals, or at least kept pace with last year’s, and many expect similar results for 2003.

The Anti-Defamation League, in New York, expects to raise about $42-million by the time its 2003 fiscal year closes this month, a $3.5-million increase, says Caryl M. Stern, the organization’s chief operating officer. Ms. Stern says all of the recent attention to antiterrorism efforts in the United States and to the conflicts in the Middle East has helped emphasize the need for the organization. “In some years you have to make the case for your agenda,” she says. “Post-9/11 we’ve not had to make a case for our agenda at all.”

Public attention focused on relief efforts in Afghanistan, Africa, Iraq, and elsewhere has triggered lots of small donations from individuals to charities providing aid overseas. CARE International is on track to raise nearly $54-million in its current fiscal year, which ends this month — an increase of nearly 12 percent over last year — says Lmichael Green, the charity’s director of strategic planning and analysis.

At WXEL, a public television and radio station in West Palm Beach, Fla., fund raising is up 11 percent compared with last year, says Fred Flaxman, vice president of development. While foundation grants and individual gifts of $1,000 or more have come in below expectations, a surge in money from corporate underwriting has more than made up the difference this year.

Universities and colleges, for the most part, also appear to be navigating the rough fund-raising waters effectively in 2003, although cuts in state money are a concern for many.

While some institutions are delaying capital campaigns, especially ones that have a high percentage of alumni involved in the technology industry, Vance T. Peterson, president of the Council for Advancement and Support of Education, says many are continuing with their plans.

The University of Virginia, in Charlottesville, for example, is starting the “quiet phase” of a $3-billion capital campaign, according to Bob Sweeney, senior vice president for development.

Officials at Gonzaga University, in Spokane, Wash., say the institution’s $119-million capital campaign is still on track, although some donors have stretched their pledges over more years than usual or asked for a breather of one to two years before starting to make payments on a pledge.

Giving to annual funds at colleges, in some cases, has taken a hit. Ronald D. Vanden Dorpel, senior vice-president for university advancement at Brown University, says this year has been “the most difficult fund-raising environment” he’s seen since the late 1970s. Giving for general operations this year is down 7.8 percent so far compared with the same period last fiscal year. Even so, Mr. Vanden Dorpel says Brown still hopes to end the year with a roughly $2-million increase, for a total of $19-million.

Growth in Charities

Today’s fund-raising problems have been exacerbated by the proliferation of charities during the 1990s. As of last September, 909,574 charities and private foundations had registered with the Internal Revenue Service, a 76-percent increase over 10 years ago.

“There are too many organizations fighting over the same dollars,” says Trent Stamp, executive director of Charity Navigator, a nonprofit watchdog in Mahwah, N.J. “It’s heresy in the charity world, but I’ll go ahead and say it: There are probably too many charities out there.”

Foundations can be blamed, in part, for the current “market saturation,” says Robert Egger, president of the D.C. Central Kitchen, in Washington. “You’ve had this emphasis on new, new, new, and I can’t stress how destructive that force has been to have the foundation community focus on new and not strengthen what exists.” The result, he says, is “the nonprofit equivalent of a food riot.”

While the nonprofit field could benefit from a winnowing, the way it’s being done now is too “haphazard” and could lead to gaps in services to poor people, Mr. Egger argues. “What you’re going to get is survival of the cleverest,” Mr. Egger says, adding he expects about 30 percent of the charities in the United States to close or merge in the next several years because of the competition.

Some Room to Grow

As the competition intensifies, charities continue to seek out sources of income that still have potential for growth.

David M. Van Slyke, an assistant professor at Georgia State University, says fund raisers should do more to solicit people who do not hold college degrees. Findings from a university survey of about 2,400 people in the Atlanta area showed that people who had a high-school education or less were giving more on average and in larger numbers in 2002 compared with 1999, he says.

Mr. Tempel of Indiana University urges charities not to let the economy keep them from courting major donors. “Stay close to your donors,” he says. “Don’t get discouraged when people say come back and see me in six months.”

Michael Anft, Stephen G. Greene, Nicole Lewis, Elizabeth Schwinn, and Nicole Wallace contributed to this article.