Article: 

On the Edge: Communities Lose as Nonprofits Struggle

by Christina Macklin, MCN Policy Analyst
reprinted from the April 2005 addition of Minnesota Budget Bites, the newsletter of the Minnesota Budget Project

On the Edge: Communities Lose as Nonprofits Struggle

Some nonprofit organizations in Minnesota are nearing financial crisis as their major sources of revenue - particularly government funding - have been on the decline in recent years.  According to a study by the Minnesota Council of Nonprofits, nearly half of the organizations surveyed have experienced cuts in state and local government funding in recent years.  However, reduced funding comes at a time when need has been rising - nearly two-thirds of respondents reported an increase in the demand for their services.¹

As nonprofits struggle to cut costs in response to declining revenues, an inevitable result is a reduction in the services they provide.  And what is the possible impact on the people who rely on these services?  “Unthinkable,” stated one survey participant.  The potential crisis caused by these reductions is real for both rural and urban Minnesota as people may see their most basic needs for food, shelter, health care, transportation, and education and training go unmet.   

Nonprofits and Government: Partners in Providing Services

During the last few legislative sessions, elected officials in Minnesota have had the option of resolving consecutive budget deficits by using reserves, cutting spending, or raising revenues.  They chose to bypass raising broad-based revenues and focused on using reserves, raising fees, shifting money around, and cutting spending.  Decisions always have consequences, and the choice to reduce state investments in a wide variety of programs has had a significant impact on the nonprofit sector and Minnesota ’s communities.

Despite the widespread presence of nonprofits, Minnesotans often do not realize the significant role nonprofits play in their communities.  They may recognize the local theater, nature center, or food shelf as a nonprofit organization, but not be aware that nonprofits also operate community health care clinics, employment training programs, child care centers, nursing homes, after school programs, and many other services.

In 2003, there were over 4,700 nonprofit organizations with employees in Minnesota actively engaged in a variety of activities, including taking care of our elderly, educating children and adults, helping victims of crime, cleaning up our environment, or creating art.  Although the number of nonprofit organizations has remained stable over the last ten years, the number of people working to deliver nonprofit services in Minnesota ’s communities has been rapidly expanding.  In 2003, the size of the nonprofit workforce exceeded one-quarter of a million employees - which meant nearly one out of every ten workers in the state was employed by a nonprofit organization.²   

Nonprofits rely on a variety of funding sources to sustain their activities, including individual donations, foundation and corporate support, and fees for their services.  Government grants and contracts are a fourth major source of financial support for many nonprofit organizations. 

The important role of government funding is a sign of the long-standing partnership between nonprofits and state and local governments in Minnesota to deliver programs and services at the community level.  This joint venture has been key to building the infrastructure of quality services in our state - with government providing funding, coordination, and oversight, and nonprofits supplying the commitment, community-specific know-how, and direct access to the people.

In 2003, nonprofits in Minnesota received almost $1.3 billion in grants from federal, state, and local governments, or about 6% of total revenues for the sector.  However, nonprofits more often receive funding from government in the form of contracts and fees for services, rather than traditional grants.  In 2003, 81% of nonprofit revenues in Minnesota , or $17.6 billion, came from program service revenue, of which government funding is an unknown, but likely very significant, portion.³

The Times, They Are A-Changin’

The nonprofit sector, however, is now witnessing what appears to be government’s retreat from its role in the partnership to provide programs and services in Minnesota ’s communities.  Considering the significant financial role government has historically played, it is not possible for the other sources of revenue - such as individuals and foundations - to fill in the gap, particularly in those areas of the state with fewer economic resources.

In early 2004, the Minnesota Council of Nonprofits (MCN) surveyed nonprofit organizations to find out what was happening to their funding sources and the impact on programs and services.  In total, 698 organizations participated in the survey, reporting information on 1,006 separate programs and services.  Their responses provide insight into what has been happening to the state’s service infrastructure as a result of recent budget cuts and the prolonged recovery from the national recession in 2001.

Overall, evidence suggests that the financial health of the nonprofit sector shows some signs of weakening.  For example, in 2003, the most recent year for which data is available, 44% of nonprofits reported a deficit for the fiscal year, meaning their expenses exceeded their revenues.  This was up from 41% in 2002 and 38% in 2001.⁴

One clear message from MCN’s survey was that state and local government has become the least stable funding source for nonprofits.  Over 70% of the organizations that participated in the survey reported receiving funding from state government.  Of these organizations, 59% saw a decrease in state government grants and contracts in 2003, and 54% of them expected to see further cuts in 2004.

State budget cuts also had indirect consequences.  Direct aid to local governments was cut significantly as the state struggled to balance its budget, and funding to specific services delivered at the county and city level were reduced as well.  As one respondent put it, “Drastic cuts in state funding trickled down to local funding sources.”  Around 60% of survey respondents received some local government funding - 48% of these organizations experienced reductions in grants and contracts from local government in 2003, and 52% expected to see more decreases in 2004.  Only around 10% reported an increase in their funding from state or local government.

Nonprofit organizations were not hopeful that other sources of funding would be able to compensate for the loss of government support.  Although some nonprofits anticipated an increase in foundation, corporate, and individual support in 2004, a majority still expected flat or declining funding from these sources.

Nonprofits were reluctant to increase fees to their clients to help offset other revenue losses, knowing that the people they served were already likely facing increased fees, copayments, premiums, and other expenses as the result of state and local budget decisions.  Less than one-third of the organizations that participated in the survey indicated that they anticipated increasing fees for their programs in 2003 or 2004.  Instead, many organizations reported increasing their fundraising efforts with individual donors in an effort to fill the gap in their budgets.  However, given the large number of organizations that were planning on pursuing this strategy, it seems unlikely that all of these campaigns could have met with success.

Communities Pay a Price

The slow economic recovery from the last recession, coupled with cuts in government programs and increased out-of-pocket costs for individuals, has meant that the need for the programs and services nonprofits provide is steadily growing.  In MCN’s survey, 58% of respondents reported increased demand for their services in 2003, and 63% expected increased demand in 2004.

As the economic downturn and budget cuts have driven up demand, they have also squeezed nonprofit resources.  Motivated by a strong commitment to their organizational missions, many nonprofits delay cuts to programs and services as long as possible.  They first resort to cost-saving measures such as merging with other organizations, a salary or hiring freeze, reducing employee benefits, increasing the employee share of health insurance premiums, salary reductions, voluntary unpaid leave, and cutting back on office supplies and cleaning costs.  Said one respondent, “This actually forced us to look at ways to work smarter and it has been successful.”

While budget pressures can reveal opportunities, they can also make organizations less efficient.  For instance, the loss of resources makes it more difficult for nonprofits to take advantage of volunteers because there is insufficient staff to train and supervise them.  Also, collaborative efforts between organizations to coordinate the delivery of services can result in long-term efficiencies, but may be put on hold because they often have significant start-up costs.  And the loss of government funding can make it more difficult to raise matching funding from community sources.

Eventually, nonprofits are no longer able to stretch their limited resources far enough to meet the call for additional help from the community.  Roughly 60% of organizations that participated in MCN’s survey reported maintaining the same level of services in 2003, and an additional 14% decreased services.  That means the nonprofit sector is experiencing increased demand, but little increase in capacity, and certainly not more money to support programs and services. 

The survey results raise concerns about damage to the infrastructure of the nonprofit sector, including the network of interrelated services that the community relies on.  When survey respondents were asked if there were alternative resources for their clients, nearly two-thirds said that there were no other community resources available to meet the needs of those they were unable to serve.  Options for clients are often limited because a nonprofit program might serve a very specific population, such as Hmong women, that could not get individualized services elsewhere.  In other cases, the nonprofit may provide services at a reduced rate, or even no cost, while other options would be unaffordable for their clients.  And in other cases, the alternative resources in the community are facing the same increases in demand coupled with declines in revenue.

While the sky has not yet fallen for all nonprofits, over 100 of the organizations that participated in the survey reported that they had already reduced, or planned to reduce, the number of locations providing one of their programs or services. 

The survey also raises concerns that budget cuts will exacerbate the disparities in access to services between rural and urban areas of Minnesota .  The lack of other community resources can particularly be a problem in Greater Minnesota, where there might be only one organization delivering in-home meals or providing transportation services for an entire county, or even an entire region.  If these organizations reduce services, close sites, or shut their doors, there are no other options.

The consequences of these cutbacks are hardly abstract for the people losing access to services.

In many cases, nonprofits were concerned that the most basic needs will go unmet.  Survey participants reported that, without the services they provide, people in their communities would become or remain homeless, go hungry, lose power or heat in their homes, or even face injury or death due to abuse or unmet health and mental health needs.  Several respondents described how persons who would otherwise be working would lose their employment due to lack of child care, job training, or English skills.  Many respondents reported that elderly, disabled, or HIV+ persons would face serious declines in their quality of life or would need to enter a nursing home due to the lack of home-delivered meals, health care, or transportation services.

The larger community also pays a price in the long run.  Survey respondents commented that government budget cuts would only mean more expensive alternatives - such as emergency room care, nursing home placement, or incarceration - for the people they would otherwise be able to serve.  Respondents described how the people they serve would be less able to be independent or self-sufficient, or less able to make informed choices about what is best for themselves and their families.  “Denying someone safety and security does not save money.  It merely shifts the cost elsewhere and the long-term effects are very serious in terms of lives lost, medical costs, and generational violence,” observed one survey participant.

Long-Term Costs for Short-Term Savings

As government redefines its role in serving the people of Minnesota , there is a price to be paid by the state.  There are, of course, the economic costs of nonprofit jobs that are lost or office space that stands empty.  For example, another survey MCN conducted in late 2003 found that the average wage for a nonprofit employee in Minnesota that had been laid-off was over $15.00 an hour.⁵   While the nonprofit sector has proven to be resilient and creative in the face of declining revenues from all its funding sources, it is impossible for any organization to continue to do more and more with less.  It may take time to see the erosion of the nonprofit service infrastructure at the macro level, but the consequences are becoming clear at the community level as nonprofits reduce hours, cut back on programming, increase fees, or even close their doors.

Even more concerning, however, are the human costs.  Where will Minnesotans be able to turn to for transportation to a doctor’s appointment, or a meal in their home, or tutoring in English, or a play for school children?  And what opportunities will we have lost to create a better future?  As one respondent reflected,  “Unfortunately, while we save money in the present, we ultimately end up spending more down river by not being able to work with these people when it could make a difference.”

Notes

^1.             This survey, which was conducted in early 2004, was not based on a scientifically selected sample in that MCN solicited responses from all nonprofit organizations in Minnesota through a variety of methods.  However, the participants were representative of the nonprofit sector in terms of geographic distribution and budget size.

^2.             Minnesota Council of Nonprofits, 2004 Minnesota Nonprofit Economy Report, www.mncn.org/nper.htm.

^3.             2004 Minnesota Nonprofit Economy Report.   The primary source of information on nonprofit finances, the Form 990 that nearly all nonprofit organizations are required to file each year, combines government fees and contracts with other sources of earned income.

^4.             2002, 2003, and 2004 Minnesota Nonprofit Economy Report.

^5.             Minnesota Council of Nonprofits, Nonprofit Workforce Hurt by Government Cuts, Slow Economic Recovery, www.mncn.org/doc/marchlayoffreport.pdf.

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