Rising Costs Put Pressure on Charity Budgets

Steep cost increases and waning government support are squeezing nonprofit groups to the point that about one-third of all organizations are expecting severe financial stress during the next year, according to a new report by the Johns Hopkins University’s Center for Civil Society Studies.

But although those forces are putting many charities under substantial economic pressure, the financial health of the nonprofit world is stronger than it was three years ago, as many donors are stepping up their giving and nonprofit groups are increasing fees for their services, the study found.

The study, part of the center’s Nonprofit Listening Post Project, is based on surveys completed in 2006 by 341 charities, including museums, theaters, and other nonprofit organizations that focus on aiding children and families, providing housing and other services to the elderly, and spurring community and economic development.

Of those surveyed, 34 percent said they expect to experience financial stress during the next 12 months — a smaller percentage than in 2003, when the Listening Post survey found that 51 percent of organizations were expecting similar levels of financial stress.

Nonprofit officials say that change is partly the result of the economic recession three years ago and partly the result of an improved ability by charity leaders to navigate difficult financial conditions.

Thirty percent of the groups surveyed expected revenue from government to decline in 2006 — a worrisome finding given the fact that government accounted for 44 percent of all income for the charities in the survey. Another 17 percent of groups said they expected foundation giving to drop.

Not surprisingly, many organizations have turned to other sources to bridge the gap.

Nearly half, or 49 percent, of the groups surveyed, for instance, said that last year they increased the amount they raised from individuals. Another 45 percent were able to increase revenue from fees.

Rising Costs

But even as charities adjust their approaches to make sure they can replace government funds, they are doing so at a time when costs are rising at a rapid rate.

More than two-thirds of all organizations reported an increase in costs in 2006 and nearly one in five — 17 percent — reported that costs had risen by more than 10 percent.

Wages and salaries are the primary reason for the rising costs — as nearly 60 percent of organizations reported that personnel costs were the most influential expense item. But other items are putting pressure on budgets — two-thirds of groups reported increases in health-benefit costs, 56 percent reported increases in facilities costs, and 55 percent in liability-insurance costs.

Rising wages are particularly troubling for theaters as they try to balance their budgets.

“When you look at the issues we are facing in the nonprofit sector and see how much of it is human-resources cost, it’s part of the reason why conditions are so difficult for so many theaters,” says Caryn Desai, general manager of the International City Theatre, in Long Beach, Calif. “We’re a people-based art form. We face those increases every year. The union costs go up every year.”

To keep up with those rising costs, Ms. Desai says, her theater has had to increase donations it raised through its annual black-tie dinner, which netted the theater more than $300,000 in October.

The event — which in previous years had brought the theater between $150,000 and $200,000 in net income — allowed the organization to end the year in the black.

Harming Work Conditions

The Johns Hopkins report found many groups have turned to other strategies, some of which have hurt the quality of their services and damaged working conditions:

• One-third of the organizations surveyed reported that they had had to increase the number of hours that staff members worked without additional compensation.
• One-quarter of the groups said the waiting times for services had increased.
• A quarter of the organizations faced increased staff turnover.
• A quarter had reduced their training budgets for employees.

Those approaches could hurt some groups in the future, said Lester M. Salamon, director of the Johns Hopkins Center for Civil Society Studies and of the Listening Post Project. “Organizations are using up their capital stock of energy and time of their employees,” Mr. Salamon said. “It’s a strategy that has potentially damaging long-term consequences.”

Still, even with all of those challenges, the majority of organizations said they had achieved financial success.

Seventy-six percent of the groups rated their financial performance during the past 12 months as either somewhat successful or very successful — about the same share that offered the same assessment in 2003.

And a similar proportion — 75 percent — reported that they had increased their volume of services in 2006 — with 35 percent of groups increasing their services by 10 percent or more. What’s more, 42 percent of the organizations surveyed were able to increase their services to the poor — while only 8 percent reported decreased services.

The full report, “Nonprofit Fiscal Trends and Challenges,” is available free on the Johns Hopkins Web site.