May 27, 2012 | Read Time: 6 minutes
So many people and businesses had disappeared from Braddock, Pa., in the decades since its steel industry collapsed that Heritage Community Initiatives, a home-grown social-service charity, didn’t want to be among them. But saddled with nearly $1-million in unpaid bills, programs bleeding cash, and questions from the state about its financial audits, the group considered shutting its doors a few years ago.
Today, with new leadership, wiped-out debt, cleaned-up financials, and a burgeoning fundraising operation, Heritage has been able to continue to run the preschool center, bus service, and job-training programs the city so desperately needs.
Its story is a tale of a once-richly endowed nonprofit in a once-rich town outside Pittsburgh, battling its own demons and the economic forces that ensnared the region. At the same time, Heritage’s struggles, including bouts with sloppy management and state budget woes, are probably familiar to many charities around the country slogging their way out of the economic downturn.
Heritage’s experiences, say nonprofit experts, could be a road map for other troubled charities.
“So many nonprofits have been riding that bucking bronco, going through ups and downs,” says Peggy Outon, executive director of the Bayer Center for Nonprofit Management at Robert Morris University. “Heritage is using a formula that is working for them and could work elsewhere.”
Righting the Ship
Ms. Outon and observers inside and outside Heritage say much of what the group did to improve its condition was basic and universal: focusing tightly on mission, trimming staff size and excess spending, and enforcing strict financial controls. Other moves were geared more toward its particular circumstance: firing the chief executive and other top finance officials, negotiating terms to pay vendors, and staunching spending from reserves.
Heritage’s turnaround has been orchestrated largely by Michele Atkins, a former nonprofit executive and consultant who joined the charity’s board in 2008 and became its interim CEO two years later. Employees, trustees, donors, and others say that without her determination and willingness to make tough decisions, Heritage would probably have folded.
“We empowered her to right the ship before it sunk, and she had the knowledge and backbone to do it,” says Fred Harnack, a board member. “The main thing for us has been that so many things have gone sour in Braddock, and we wanted Heritage to continue to be there for that struggling community.”
Prosperous Beginnings
Heritage was born nearly 30 years ago in Braddock as the Heritage Health Foundation to raise money for a local hospital. When the hospital was purchased in 1996, the new entity provided $10-million to a new group that would become an independent social-service charity. Braddock, like its neighboring river towns up and down the Mon Valley, outside Pittsburgh, had been a place of great prosperity starting in the late 1800s with the advent of the steel industry. The city quickly became a busy commercial and shopping hub for the region, its main street the site of grand buildings, like Braddock National Bank, built in 1906 with imported marble, and Andrew Carnegie’s first American public library. But as the steel industry collapsed in the 1970s and ’80s, manufacturers and mills pulled up stakes, and Braddock’s population and economy were decimated. The fewer than 3,000 people who have remained in Braddock—down from a high of as many as 20,000—are among the nation’s poorest.
Heritage’s first foray into the community beyond the hospital (which has since closed) was in 1997 to start an early-childhood education center. The charity went on to add programs in transportation, housing, and job training.
In 2009, the group moved into a new home—the donated former Braddock National Bank building—and changed its name to Heritage Community Initiatives. That was also the year the organization’s mounting troubles came to a head. The final straw: Wrangling in Pennsylvania’s legislature over the state budget in 2008 and 2009 slowed payments to Heritage and thousands of other nonprofits that ran programs with government grants.
During one budget stalemate, the state didn’t make any payments for more than three months, crippling nonprofits that spend money to run programs and then count on reimbursements to pay bills. Even after the state aid came through, Heritage still ended up owing one of its transportation vendors nearly $1-million.
Examining that debt prompted the board to consider other financial problems. The organization’s accounting system was in shambles, and its recent audits showed it lacked important internal financial controls.
The charity’s reserve fund had shriveled from $10-million to $1.2-million. Some of the losses were due to poor investment returns over time. But Ms. Atkins and other trustees say that the fund was also tapped too often to pay for operating expenses. The preschool center alone, they say, was taking $250,000 each year to stay out of the red.
Some board members felt staying in business was just too expensive, arguing that Heritage should use what was left in the reserves to pay its debts and wrap up operations. Ms. Atkins and the board analyzed options to close or merge, ultimately rejecting those moves.
“The pickings were slim,” Ms. Atkins says. “There was no other agency with the capacity to take over our programs. We were serving more than 100 children and their families at the center and providing thousands of rides a month to people who wouldn’t otherwise be able to get to their jobs. How do you walk away from that?”
Heritage decided not to. Instead, it made arrangements to pay back its debt and took steps to put the charity back in the black. So far this fiscal year, which ends next month, Heritage is on pace to meet its $3.4-million budget without running a deficit or dipping into reserves, which now stand at about $390,000. Last year’s audit showed no accounting problems, and the charity has embarked on fundraising efforts to lessen its reliance on state aid. (See article on Page 21.)
Among the key elements of its recovery strategy:
Get the charity’s financial house in order. Heritage’s new top finance officials, along with outside accountants, auditors, and consultants, spent six months wading through messy and uneven records to produce a proper cash-flow report and a clear picture of the group’s finances.
“They were running through cash like crazy, had no understandable financial statements or [profit and loss] reports, and had poor management of accounts receivable,” says Tom Canfield, a retired investment banker who volunteered to consult for Heritage and then joined the board. “They were running through raindrops without a clear light at the end.”
Focus on programs that matter most. Heritage dropped the work it did building or renovating homes for low-income residents since another local nonprofit, the Mon Valley Initiative, already provided those services. Heritage has been selling or donating some of the properties it owns and plans to hand over vacant land to Mon Valley.
“We have limited resources,” Ms. Atkins says. “Why would we replicate a service that someone else is doing and doing well?”
Operate at maximum efficiency. Heritage reshaped, literally, its education center, moving walls and reconfiguring classrooms to use space more efficiently and to better meet the state’s standards for reimbursements.
To improve its bus service, Heritage officials met with the county’s transportation agency to eliminate duplication in their routes. Such changes allowed the charity to reduce the size of its staff. Other difficult layoff decisions were made, shrinking the staff size from 63 to 42.
“That’s bare bones,” Ms. Atkins says, ”but a must for now to balance the books.”
