Charities That Faced Deficits in Last Recession Are Still Trying to Recover, Report Finds

By Holly Hall

Charities that rely on government aid, especially social-service organizations, are likely to face the rockiest time

as the economy slumps, according a new study released last week.

The study, by the Nonprofit Finance Fund, examined how more than 6,500 organizations fared in the 2001 recession. According to the analysis of charities with annual budgets ranging from $500,000 to $20-million, the number of groups that reported a deficit grew by 20 percent, to 2,660 organizations, from 2000 to 2001. Even in 2005, the last year examined in the analysis, many of those organizations were still in worse financial shape than they had been in 2000.

Meanwhile, for groups that relied on government grants and contracts, the situation was even more gloomy. Among the charities that depended on government money to provide all of their services, the number reporting a deficit grew from a low of 39 percent in 1999 to a high of 55 percent in 2003, declining only slightly to 51 percent by 2005.

Clara Miller, president of the fund, which offers loans and other financial services to charities, said she worries that government cuts will be more severe in the coming years than they were in 2001. She noted that government coffers for social needs have been gutted by tax cuts, war, and ballooning deficits.

In a phone call with reporters, Ms. Miller joined with William J. Eberwein, president of Children’s Choice, a charity that relies on government contracts to provide foster care and other services, to discuss how findings from the study could help charities figure out how best to deal with the turbulent economy.

Among their suggestions:

Press for changes in government-aid policies. Mr. Eberwein said that government agencies should change current policies used in supporting nonprofit social-service groups: They often reimburse charities for only a portion of the actual cost of providing the services, he said, and require that any unused funds be returned. He said other government contractors are allowed to keep money they don’t use.

“If you make a profit that is clawed back by the government, this is wrongheaded,” Ms. Miller said. “Nonprofits need reserve funds built from a profit or surplus. We all know that if we don’t build stronger reserves and a climate that supports organizations asked to take care of children and families, it will cost society for years to come.”

But getting government to provide more money or change policy when it is strapped for cash is difficult at best, Ms. Miller admitted, and charities are partially to blame for the current difficulties.

“In the past few years, we have not used the good times to build our strengths so we are ready for the bad,” she said. “We are not ready for the bad times, even more so than usual. This is a plea to have rules in society to build infrastructure for challenges that inevitably come.”

Avoid sustained spending. In the recession of 2001, Ms. Miller said, many groups, faced with increased demand for services, made the mistake of continuing to spend at the same or higher levels. “Nonprofits need to avoid the tendency to carry the mission forward, with or without enough resources,” she said. “We cannot afford to ‘fake it until we make it.’ This undermines our strength in the long run.”

Put off new investments. A recession is usually not the time to buy a new building or greatly expand the size of the staff or the services offered, Ms. Miller said. Charities’ biggest problem, even in good times, she said, is a lack of available cash. Instead, charities should start or add to a reserve fund to allow for flexibility in case they need to make big changes in direction.

Examine revenue patterns. Charities should look at past economic cycles to see what has historically occurred to their budget in both lean and flush times, Ms. Miller said. In some cases, she noted, nonprofit groups have increased revenue during recessions. In that case, she said, they should put aside money to allow for careful expansion of services, while keeping a close eye on covering the related costs of the new services.