State Budget Woes Imperil Financial Future of Many Nonprofit Groups

Glenna Norvelle has had a frantically busy summer, organizing fund-raising kaffeeklatsches and holding

hopeful meetings with potential supporters of Colorado Youth at Risk, the mentor program for troubled high-school kids that she runs in Denver.

The frenzy of activity has been born of desperation. Ms. Norvelle was counting on $102,000 in state grants this year to help her carry out a planned expansion of mentor services to a second high school. But in May Colorado lawmakers, struggling with one of the worst state budget deficits in the nation, shelled out barely half that amount, forcing Ms. Norvelle to scramble to avoid turning children away this fall.

Colorado is emblematic of the fiscal troubles that numerous states are facing, and Ms. Norvelle’s predicament exemplifies the pressure that nonprofit managers are under to compensate for cuts in government outlays. From dance troupes to food pantries, charities across the nation are receiving bad news — or the threat of it — from state governments that have supported them in the past.

This fiscal year, states will run an estimated aggregate deficit of $58-billion, according to the National Conference of State Legislatures. In Colorado alone, state officials have chopped $17-million in grants to charities, according to the Colorado Association of Nonprofit Organizations. Charities elsewhere, including those in five other states with the most serious deficits — Alaska, Arizona, California, Indiana, and New Jersey — face a similarly perilous financial future.

To deal with the growing state-budget trouble, many nonprofit groups are trying to ferret out new sources of revenue, laying off workers, scuttling programs, and dedicating more resources to political advocacy in a bid to salvage as much government support as possible.

Foundation Support

For some groups, foundation grants have been at least a temporary source of salvation. The Shelter Network, which operates six homeless facilities in San Mateo County, Calif., this year received grants totaling $99,000 from the California Endowment, John S. and James L. Knight Foundation, and Skoll Community Fund.

The Shelter Network receives 60 percent of its $5.5-million budget from the state government, which has a deficit that some observers believe could reach as high as $24-billion this year. Because of layoffs in Silicon Valley, demand for the charity’s shelter and counseling services has mushroomed.

As details of the California state budget continue to be debated in Sacramento, Michele Jackson, the Shelter Network’s director, says she expects the two state programs that provide most of her government money to be cut in 2003.

“The foundations gave us critical safety-net grants” this year, she says. But, she adds, “we’re watching the state budget, and there will be impact this year, but greater impact next year.”

Some other California groups that have not traditionally relied on foundations and private donors for support have little choice but to scale back their operations and run their groups more conservatively. Roy Marshall, executive director of the Child and Family Guidance Center, which provides mental-health programs in Northridge, Calif., says that 95 percent of his group’s $20-million budget comes from state and federal money through the Medicaid program. The rest comes from state grants. Because of California’s budget deficit, Mr. Marshall expects to lose $950,000 in government money this year, and he fears that continued deficits will lead state lawmakers to cut Medicaid expenditures permanently.

That could put the Child and Family Guidance Center in serious straits, Mr. Marshall says, because it does not have a base of private donors to make up a shortfall. “We’re never going to raise $1-million,” he declares.

Role of Advocacy

In Indiana, many social-service groups escaped state cuts this year. But nonprofit officials worry about next year.

Lafayette Urban Ministry, in Lafayette, Ind., which operates a homeless shelter and other services for the poor, gets one-third of its $478,000 annual budget from the state and federal governments. It sidestepped revenue cuts this year, thanks in part to an aggressive advocacy effort staged by the Indiana Coalition for Human Services, a group made up of 20 statewide nonprofit umbrella groups. In June, as Indiana lawmakers met in special session to deal with the state’s budget problems, the coalition held press conferences in five cities, emphasizing charities’ reliance on state money and introducing reporters to poor people who offered firsthand accounts of how charities like Lafayette Urban Ministry had helped them.

The advocacy efforts worked, says Patti O’Callaghan, director of social justice for the Lafayette Urban Ministry. Indiana’s budget deficit was erased with increases in sales, gasoline, and other taxes, and lawmakers agreed to cancel planned cuts in many social programs.

Colorado’s Budget

In Colorado, state-budget woes have conspired with rising service needs to force some nonprofit managers to take strong action — action that could presage what charities in many other states could face in coming months if the national economic malaise persists.

The Mile High United Way, in Denver, lost $235,000 in government revenue this year because of last-minute cuts in outlays for programs that offer mentors to troubled children. Richard Audsley, the United Way’s chief operating officer, says the reduction coincided with problems at some of Denver’s biggest employers, including Qwest Communications, Lucent Technologies, and United Airlines, which all participate in on-the-job giving campaigns.

Because of both fiscal challenges, the United Way is reorganizing its fund-raising operations to gain greater efficiency and give big donors higher levels of service. Among the United Way’s moves: eliminating six development positions and tailoring solicitations and other fund-raising approaches to a donor or corporation’s ability to give, instead of aiming the same type of pitches at all potential donors and companies in a particular industry, as it has done in the past.

“Streamlining our operations was a pre-emptive strike to help us deal with a downturn in corporate giving, state budget cuts, and more,” says Stacy Haskell, a spokeswoman for the Denver United Way.

40% Cut in Arts Funds

Arts groups in Colorado received deeper cuts than social services, as a proportion of their budgets, even though they get less in state money. The state slashed arts funds by 40 percent, or $766,030, this year, forcing many small groups with budgets in the thousands of dollars to scrimp in a tough fund-raising environment.

Colorado arts officials have been meeting regularly in groups of 100 or more to discuss how they can improve their advocacy efforts next year.

Paul Noel Fiorino, who runs a small Baroque and Renaissance dance company in Denver called the Ballet Arts Theatre, said that groups like his, with its budget of less than $50,000, are becoming politically conscious overnight. They no longer are relying on arts councils and nonprofit associations to represent their political interests, he says.

Groups that are located in Denver are particularly vulnerable because they rely on municipal sales-tax revenue as well as state grants. Sales-tax revenue dropped by about 5 percent over the past fiscal year, which means that in Denver outlays for arts groups will drop by $2-million in the coming year, to $36-million.

One strategy that Mr. Fiorino says he will use when approaching donors or legislators for money in the future will be to emphasize arts education, rather than arts performance. Even during tough times, he says, arts education is considered an essential service, not just entertainment.

“Denver philanthropy gives to the big boys already,” Mr. Fiorino says. “Little guys like us, who develop audiences and bring arts into the schools, have got to learn how to play the game.”

Still, it is not just small groups that have suffered in Colorado. Last year the Denver Center for Performing Arts received $3.3-million from local sales-tax revenue and $35,000 from the state. This year it will receive $3.1-million in sales-tax proceeds and nothing from the state. To avoid going into debt, the center’s board decided to lay off some personnel and pare the number of unprofitable performances.

Preparing for Next Year

Watching the budget woes from her seat as executive director of the Colorado Association of Nonprofit Organizations, Barbara Shaw says the cuts in state grants show that her group and others have not done a good job of organizing themselves and publicizing the value of nonprofit work in Colorado.

She is planning rallies and coming up with a comprehensive plan for how to proceed next legislative session.

“We are not a powerful lobby,” Ms. Shaw says of Colorado nonprofit groups. “We know that the governor had some hard decisions to make. But we need to do a better job to educate the people of Colorado about the value of the nonprofit sector.”