Bracing for Battle

Charities vie for fair share of shrinking state budgets

Despite signs that the national economy is improving, nonprofit groups that rely on state money are

bracing for potentially big cuts in the coming months as states approve their budgets for the next fiscal year. Many social-services and health groups are especially likely to be hit hard, at a time when they say they are already dealing with a surge in demand for services.

In all but five states, revenue is lagging behind original estimates, and many states have had to make midyear cuts to compensate for the shortfalls. States must deal with deficits that total $40-billion, according to the most recent estimate by the National Association of State Budget Officers.

The financial squeeze could mean tough times ahead for many charities. “Right at the point where the recession is ending, nonprofits suffer the biggest losses,” says Jon Pratt, executive director of the Minnesota Council of Nonprofits. That is in part because states must make spending decisions for the coming fiscal year, which starts in July for most states, long before they are likely to see increases in revenue as the economy improves.

The state budget battles heating up around the country mark the end of a decade during which charities faced few cuts in state spending.

“Nonprofits are extremely worried this year — not only are they expecting budget cuts to reduce their revenue, but they are expecting increases in the number of people turning to them for assistance,” says Abby Levine, a public-policy analyst at the National Council of Nonprofit Associations, in Washington, which represents state coalitions of charities.

In Connecticut, advocates for the homeless rallied last month in New Haven as part of a string of demonstrations throughout the state to call for increased state support during a time of high shelter use.

Rachel Heerema is executive director of Life Haven, an emergency shelter that receives 61 percent of its $700,000 budget from government sources — including more than $200,000 directly from the state. She says she is disappointed that money her charity would have been eligible for was removed from the state budget in November. In addition, she worries that the state won’t allow for inflation increases in the money it provides to operate shelters, which is especially difficult for her group to bear because it has been operating at 97 percent of capacity all fiscal year, up from 75 percent the year before.

Some charity leaders are experiencing déjà vu, having fought state cuts at the start of the 1990s. Organizations are now applying lessons learned from those battles as they lobby for state money. Minnesota has been at the forefront of such efforts, putting together a $100,000 public-relations and lobbying campaign to ensure that nonprofit groups do not bear too high a share of the state budget cuts needed to balance the budget. The campaign has already had some success this fiscal year but concerns remain about next year’s budget.

Even if nonprofit campaigns successfully stave off cuts, however, charity programs could still suffer since states are not likely to increase spending to cover inflation this year, and could take a while to restore spending to make up for the increased costs incurred by charities. Ken Larsen, public-policy director for the California Association of Nonprofits, says organizations in his state saw no inflation adjustments in their state contracts and grants for five years, beginning in the 1991-92 fiscal year. “After those cuts it took a long time to catch up,” he says.

Among the factors weighing on the current state budget negotiations:

• State grants and contracts with nonprofit groups have grown in number and importance in recent years as government has sought to hire charities to provide services previously handled by government agencies. In particular, federal welfare legislation that passed in 1996 provided states with some of the money previously used for cash payments made directly to welfare recipients and encouraged them to give it instead to organizations that provide job training, child care, transportation, and other services to former welfare recipients.
• Federal money for Medicaid and other entitlement programs has not kept pace with increases in costs, putting a major strain on state budgets. Medicaid — which uses mostly federal and some state dollars but is state-administered — emerged in the 1980s and 1990s as a “critical source of funds for an array of social-service agencies ranging from child and family-service agencies to community mental-health clinics,” says Steven R. Smith, a professor of public administration at the University of Washington.
• Balanced-budget requirements, which are in effect in 40 states, mean that cuts cannot be postponed unless new sources of revenue can be found.
• Tax increases, which many states adopted during the 1991 budget negotiations to cope with deficits at that time, do not seem politically feasible this year. Arturo Perez, a fiscal-policy analyst at the National Council of State Legislatures, a clearinghouse of state data and information, says that almost no governors have proposed tax increases to fix their states’ fiscal problems.
• Term limits, which were voted in by many states during the 1990s, mean that many long-standing members of statehouses have been replaced by men and women in their first or second terms in office. The shuffle has meant that charities in some states have lost advocates whom they could count on to extol the value of specific social-service programs.
• Rainy-day funds, which were amassed from state surpluses during the previous decade’s years of plenty, are helping to cover the deficits in some states, but in others they are insufficient. In New Jersey, for example, the rainy-day fund has been almost emptied to cover this current fiscal year’s budget gaps.
• Many states have seen big infusions of money in recent years from tobacco companies as part of a multiple-state settlement. How that money should be spent is now being hotly contested. Governors in some states, such as Massachusetts and Virginia, have proposed using part of the proceeds to help cover budget shortfalls. But antismoking charities, including the American Cancer Society, are lobbying to persuade states to use their tobacco-settlement money to pay for tobacco control and other public-health programs.

Some types of nonprofit programs will inevitably face deeper cuts than others. The state of Washington — which has one of the highest unemployment rates in the country, at 8.2 percent, and a $1.2-billion deficit — might cut spending on social services and other programs by 15 percent this year if Gov. Gary Locke’s budget recommendation is followed. The cuts are falling in those areas because the governor has asked that elementary and secondary education be exempted from any spending cuts.

The cuts being considered could mean the demise of some state-supported programs, such as efforts to help people with developmental disabilities. Tacoma Goodwill Industries receives a $400,000 state contract to help 80 people train for and get jobs with local businesses. Richard Corak, director of vocational services at the local Goodwill, worries that the program will be “caught between the crosshairs” of state budget cutters. He will know by April, if the Legislature approves the budget on time, what becomes of the money, but he thinks that finding other support will be nearly impossible. “The program is good, but very expensive,” he says.

Like social-service groups, arts organizations have tried to make sure they do not receive deeper cuts in state money than other types of organizations receive.

Alene Valkanas, director of the Illinois Arts Alliance and president of the State Arts Advocacy League of America, recently held a conference call with other state arts-advocacy groups.

“I asked them what kind of cuts they were expecting,” she says. The response: Cuts may range from 4 percent in South Carolina up to 20 to 25 percent in Maryland.

Illinois cut funds to its arts council by 2 percent during a special legislative session in November and the governor now has proposed a 5 percent cut for the coming year, a percentage that Ms. Valkanas had feared would be higher. She says that a letter-writing campaign she organized, which resulted in at least 300 letters to Gov. George Ryan, helped persuade the state to make fairly even cuts across the board rather than taking a bigger bite out of the $21-million that the Illinois Arts Council distributes to 1,700 arts organizations.

Ms. Valkanas says she understands that filling budget gaps is inescapable. If she cannot persuade lawmakers to maintain or raise state support, she at least hopes to avoid “disproportionate damage.”

Here’s how nonprofit organizations in several states are being affected:

California. The state is projecting a $5.5-billion budget deficit this year, the highest in the nation, and next year’s budget could face a shortfall of as much as $15-billion. The financial problems stem in part from consequences of the state’s failed experiment with electricity deregulation, which resulted in steep electric bills and periodic blackouts.

Ken Larsen, a lobbyist for the California Association of Nonprofits, says that the 1,750 nonprofit groups his organization represents are “more concerned this year than in any of the last 10 years.” He predicts that the real showdown will come in May, when the budget is revised: “Things will get hot.”

The California Association of Nonprofits — working with the Nonprofit Advisory Council, United Ways, the California Council of Churches, and other organizations — has taken a lead in arguing the necessity of charity programs to state lawmakers. In addition, the association is working with a state legislator to introduce a bill that would make sure that nonprofit groups are paid on a timely basis in the event that budget negotiations stretch past the official deadline of July 1, as they did last year.

“If they can’t finalize a budget, we’ll all be in a bad situation and need some interim funding,” says Jim Jenkins, chief executive officer of Community Catalysts, in San Diego, an organization financed entirely by the state that provides a variety of services to people with developmental disabilities.

New Jersey. The state is busy patching a projected $2.9-billion budget deficit for the current fiscal year and will have to confront a $5-billion deficit projected for next year. The new governor, James McGreevey, announced plans for an across-the-board cut of 5 percent to solve current problems, in addition to using most of the state’s $720-million rainy-day fund. He also announced layoffs of 1,000 state employees this year.

Linda Czipo, executive director of the New Jersey Center for Non-Profit Corporations, says that the budget news looks grim for charities.

She estimates that nonprofit groups in her state have several thousand contracts with the Department of Human Services alone, and she doubts that there will be any additional money for programs until 2004.

Many nonprofit leaders in the state are starting to become resigned to some state cuts in the coming year.

Tom Zsiga, program director at North Jersey 4 C’s, a charity in Passaic County that provides day care and other services for children, says he is trying to prepare his organization for major changes. Grants from the state represent the organization’s largest income source.

Mr. Zsiga expects that a pilot program, in which his group inspects homes of would-be day-care providers for smoke detectors and other safety measures, will be eliminated.

He is focusing now on protecting “the most critical programs,” such as one that provides day-care vouchers for 2,000 children, in hopes that they get spared. The voucher program has a waiting list of 850 children, but Mr. Zsiga says he is concerned that the program will be cut next year, doubling the waiting list. He says arguing the merits of one program over another is necessary in the current budget climate — but difficult: “It’s like a parent deciding which child you’re not going to feed.”

North Carolina. Lawmakers in the Tarheel State may find themselves facing a lot of tough decisions before June, when budgeting season ends. The state is projecting a shortfall of about $500-million for the coming fiscal year, which follows declines in revenue the two previous years.

Kim Cartron, director of the North Carolina Budget and Tax Center, a group that analyzes the state budget’s impact on low- and middle-income people, says this year’s state cuts will probably be worse than in previous years. Money in a reserve fund, which helped cover shortfalls before, has now all been spent, she says.

Ms. Cartron says that “nonprofits are in major jeopardy because much of their work is paid in one-year contracts, which are usually the first to go.” She says that, even with drastic spending cuts, she doesn’t see how the state can avoid raising taxes.

Charities share Ms. Cartron’s concerns. Some 200 nonprofit leaders attended a meeting with state lawmakers and their staff members that was held last month by the North Carolina Center for Nonprofits, in Raleigh.

Ms. Gita Gulati-Partee, a policy analyst at the center, had one message for those attending the meeting: Budgets will be cut, like it or not. She offered recommendations to the audience about how best to minimize the pain. First, quantify what difference an organization’s services make and broadcast that message as loudly as possible. Second, be concise. Prepare one-page memos that legislators can grasp during the time they stand in the hall between meetings. Third, build support for nonprofit services from a wide range of local leaders.

Pennsylvania. Charities here that receive state money expect to fare better than many of their counterparts in other states. Pennsylvania is trying to cover its $622-million deficit with money from its rainy-day fund, eliminating inflation adjustments for some programs, and delaying previously approved tax cuts. An additional $550-million from the rainy-day fund is expected to help prevent major state cuts next fiscal year.

Tom Foley, president of the United Way of Pennsylvania, says his group feels fortunate compared with peers in other states.

“We are unique, having a rainy-day fund that will cover the anticipated revenue shortfall,” says Mr. Foley.

In a sign of the state’s relative good fortune, Gov. Mark Schweiker has even proposed that early-childhood development programs be expanded next year.

Even so, some nonprofit leaders say the lack of cost-of-living adjustments in state money is really a cut in disguise.

Jeffrey Cooper, president of United Cerebral Palsy of Central Pennsylvania, in Camp Hill, which receives state money, has been told by the state secretary of public welfare not to expect cost-of-living adjustments.

Yet Mr. Cooper says that, because the cost of providing four different kinds of therapy to children with cerebral palsy continues to grow every year, “Cutting COLA’s is a big cut on its own.”