Are Charities Ready for Tough Times Ahead?

In the 12 months since the financial crisis rocked the world’s economy, nonprofit groups have cut budgets, laid off staff members, and taken other steps to shore up their finances. But have they done enough to prepare for what is likely to be a long and arduous recovery?

While opinions are mixed, many philanthropy experts say the short answer is no; charities and foundations are too complacent in the face of the economic upheaval and only a few have embraced the radical thinking that is needed to maintain, and potentially strengthen, the nonprofit world.

While nonprofit groups may be considering new ideas to generate revenue or looking for ways to do more with less, there seem to be few signs of the big changes that will be required, these experts say.

Many charities are “frozen, like they’re waiting for some kind of leadership that isn’t coming,” says Robert Egger, president of the D.C. Central Kitchen and founder of the V3 Campaign, an effort to get more political candidates to consider nonprofit issues.

Of course, a sense of ease after last year’s near-panic in the economy is perhaps to be expected. And with the stock market rising and the American economy expanding 3.5 percent in July through September, the worst of the downturn may be over. But several signs suggest that 2010 will be far worse for charities than this year.

Foundations are likely to cut grants or keep them steady at 2009’s reduced levels, states face huge budget deficits, and while individuals are often resilient donors, their giving could be hampered by lack of job security and a renewed impetus to be frugal.

What’s more, many charities have survived this year by drawing on their reserve funds, suggesting that as those reserves are exhausted there will be more mergers or charity closings next year.

“The nonprofit economy lags behind the recovery of the regular economy,” says Clara Miller, chief executive of the Nonprofit Finance Fund, in New York. “That’s what’s torturous right now.”

Adds Emmett D. Carson, chief executive of the Silicon Valley Community Foundation: “Over the next year to two years, we’re going to see dramatic strains on the social safety net and on all parts of the nonprofit sector. I have been stunned by the lack of willingness to be candid about the choices that will face our sector.”

The Stimulus Buffer

To be sure, the nonprofit world is not alone in its challenges. Businesses and government agencies are also struggling to reshape themselves for an uncertain future.

But one reason nonprofit organizations may be somewhat complacent is the billions of dollars made available by the federal economic-stimulus package, known as the American Recovery and Reinvestment Act. The $787-billion plan provided an infusion of money for energy-efficiency work, public education, and other nonprofit programs, and helped states with their financial problems.

Even with the influx of federal funds, state officials have struggled to close their budget gaps, often trimming social-services spending; two years from now, when the stimulus money evaporates, nonprofit leaders worry it will trigger even deeper cuts to government programs.

“Up till now, the federal stimulus has really shielded nonprofits from the impact of the recession,” says Lester M. Salamon, who directs the Center for Civil Society Studies at the Johns Hopkins University, in Baltimore. “They probably have gained revenue over the last eight to 10 months that is now being used up.”

Mr. Salamon says that the federal government will probably continue to prop up the states even after the stimulus ends. But at the state level, others are not so sure.

“Some people are as worried about two years from now as they are about what’s happening now,” says Patrick McWhorter, president of the Alliance for Arizona Nonprofits. Arizona adopted a 2010 budget in August, but did not close the deficit, which is about $2-billion.

As the threat of government cuts looms, foundations are also pulling back. In a report released last week, the Foundation Center, a New York research group, says 26 percent of grant makers plan to decrease their giving next year. Of the 583 funds surveyed, 50 percent said they will keep giving steady at 2009 levels, which are roughly 8 to 13 percent lower than 2008 giving.

In addition, recent surveys by the Center for Effective Philanthropy suggest that grant recipients are receiving little assistance from grant makers. For example, 3,600 grant recipients were asked this year if philanthropies had helped them respond to the bad economy, and 67 percent said they had received little or no aid.

“Our interpretation is that nonprofits don’t necessarily think they’re getting a lot of help from foundations in their response to the economic climate, nor do they think foundations have communicated very well their response to the economic climate and how it will affect grantees,” says Phil Buchanan, chief executive of the Cambridge, Mass., research group.

Indeed, some nonprofit leaders argue that foundations need to demonstrate more leadership in this time of crisis.

Mr. Carson of the Silicon Valley Community Foundation, in Mountain View, Calif., says so far grant makers have been “unwilling to raise tough questions” about which cash-strapped charities should survive the recession and which ones may have to go without precious emergency aid.

“Foundations and funding partners across the United States and communities need to sit down together and figure out how to stress-test key nonprofits that cannot be allowed to fail,” he says.

For example, Mr. Carson’s group recently worked with San Mateo County to choose the charities that were, in a sense, “too big to fail.” They allocated $500,000 each to make awards to charities that both agreed provide an invaluable service to the region.

Mr. Carson says that his approach will probably upset charities that are left out, but the current situation, in which financially troubled groups are seeking emergency assistance from multiple donors at the same time, is inefficient.

‘Addicted to the Silo’

The question of who or what organizations should be doing more to rally the nonprofit world is a dicey one.

While national and state nonprofit associations have sought to provide guidance, Mr. Egger, of V3, says the efforts have been deficient.

“You have two forms of leadership: leadership that is just going about the routine of pulling off the annual conference, and then you have leadership that is somewhat addicted to the silo that they know. They can’t see beyond the human-services silo or the environmental silo,” he says.

Independent Sector, a Washington coalition of about 600 charities and grant makers, has tried to break down those barriers by creating a broad discussion about how the economy and other forces will change the nonprofit world. The association created FutureLab, a Web site where people can propose and comment on ideas.

Stephen B. Heintz, president of the Rockefeller Brothers Fund, who is helping the association with its effort, says that while FutureLab has generated some interesting proposals, as a whole the nonprofit world is not doing enough to prepare for new financial realities.

As the search for innovation continues, it may be the everyday nonprofit workers who will be offering fresh ideas.

For example, the musicians of the Baltimore Symphony Orchestra this year volunteered to give up $1-million by forgoing pay increases, taking unpaid furloughs, and offering other austerity steps. In return, they suggested that the orchestra’s management ask donors to match their “gift” $2 to $1. So far the appeal has garnered $1-million for the group, which has a budget of $28.3-million.

The musicians “wanted to do something significant to help and promote the view that this orchestra is valuable to the community,” says Paul Meecham, the orchestra’s chief executive.

While the nonprofit world overall may be reacting slowly to the economy’s challenges, charity experts are hopeful that such “out of the box” thinking will spread.

According to the Foundation Center, 67 percent of 568 foundations said the nonprofit groups that survive the recession will be stronger than before — a sentiment echoed by charities.

“The belt-tightening has to be a permanent diet,” says Marguerite W. Kondracke, chief executive of the America’s Promise Alliance, in Washington. “Instead of waiting for the old normal to come back, we need to start thinking in new ways.”

Holly Hall, Suzanne Perry, and Caroline Preston contributed to this article.

WHAT FOUNDATIONS EXPECT TO GIVE IN 2010 No change 50% Decrease 26% Increase 17% Don’t know 7% NOTE: Based on data from 583 foundations. SOURCE: Foundation Center