REPORTER'S NOTEBOOK: Nonprofits fear the 'fiscal cliff' | Crain's Detroit Business

REPORTER'S NOTEBOOK: Nonprofits fear the 'fiscal cliff' | Crain's Detroit Business
November 25, 2012

By Sherri Welch

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Sherri Welch writes about nonprofits and services. Call (313) 446-1694 or write sbegin@crain.com

The so-called "fiscal cliff" that's looming over the country will significantly impact nonprofits and the work they do if not addressed by Congress before year's end.

The cliff refers to the combination of tax increases and budget cuts hitting the country concurrently on Jan. 1.

Legislators are also talking about removing some of the benefits to charities in the tax code, said Kyle Caldwell, president of the Michigan Nonprofit Association. One example: eliminating or capping the charitable deduction, which would follow the elimination of the Michigan charitable tax credits at the end of 2011.

"In a nutshell, the fiscal cliff for the budget means a leap over the edge," Caldwell said. "But for many nonprofits, these spending cuts and less disposable income really means we're standing at the edge of a gravesite."

Much of what nonprofits do is providing the social safety net, Caldwell said: "People live or die by some of the services we provide."

Nonprofit Accountability and Ethics: Rotting from the Head Down - NPQ - Nonprofit Quarterly

Nonprofit Accountability and Ethics: Rotting from the Head Down - NPQ - Nonprofit Quarterly
 Written by Woods Bowman   Created on Friday, 26 October 2012
Editors’ note: This article was excerpted from a chapter in a forthcoming book, Practicing Professional Ethics in Economics and Public Policy, by Elizabeth A. M. and Donald R. Searing, published by Springer. Used with permission.

Slightly more than half of employees in nonprofits observed misconduct in the previous year, and this is roughly on par with that observed in the other sectors. “On average,” the report states, “nonprofits face severe risk from a handful of behaviors: conflicts of interest, lying to employees, misreporting hours worked, abusive behavior, and Internet abuse.” The value of a well-implemented ethics program is beyond question. In organizations with little to no ethics and compliance program, 68 percent of employees observed two or more types of misconduct over the course of a year. This is significantly reduced to just 22 percent in organizations with a well-implemented program.

Although 60 percent of nonprofit employees who observed misconduct reported it, nearly 40 percent of witnesses remained silent, due largely to feelings of futility or fear of retaliation. Indifference is harder to combat than fear. Several famous controlled psychological experiments clearly demonstrate that most people in a crowd will wait for someone else to take action—whether it is helping someone in distress or reporting a crime. Even if employees do not fear the kind of retaliation that is forbidden—discharge, demotion, stalled advancement, and reassignment—they may not want to “get involved” in other people’s affairs. “It’s not my job,” they might say. The best ethics programs address this perverse psychology by providing training that sensitizes people to their personal responsibility in addition to the rules and regulations.

Although nonprofits may believe they have a strong ethical culture, this does not always translate into better ethical behavior or better reporting of unethical behavior. So possibly nonprofits do not deserve the public’s confidence....

Fred Leeb: I think that this is an excellent article.  As a turnaround consultant with a specialty in nonprofits for many years, I have found many of the points in the article to be true in practice.  I particularly agree that "fish rots from the head down" and that it takes constant vigilance on the part of the board to ensure that the organization is behaving in an ethical manner.  Board members serve for many reasons but few serve expecting to ask tough or embarrassing questions or dig into matters not elaborated upon by the CEO.  CEO's often perceive that the board members want meetings to be as short as possible and that they don't want to work hard on key issues.  This leads the CEO to sanitize the information provided at board meetings.  If nobody complains, this results in the CEO realizing that there is really no supervision by the board and no scrutiny of decision-making.  The results of this are obvious.   I wrote an article myself (Who Cares About Nonprofit Finances?  The Top 12 Reasons Why the Most Vulnerable are at Risk) on similar issues and it can be found on my Huffington Post blog at http://www.huffingtonpost.com/fred-leeb/who-cares-about-nonprofit-finance_b_1871260.html.

Innovation Delivery Teams Tackle Cities' Problems Through Bloomberg Philanthropies Grants

Innovation Delivery Teams Tackle Cities' Problems Through Bloomberg Philanthropies Grants
The Bridgespan Group, October 15, 2012

Overcoming common barriers to innovation

America’s largest cities face increasing demands from their constituents, even as their resources diminish. Given the prevailing social, demographic, economic, and environmental trends, these challenges are unlikely to abate any time soon. While state and federal governments use policy to effect change, city governments are on the front lines, directly responsible for executing change efforts. Ultimately, many of society’s problems, from handgun violence to homelessness and climate change, will be solved—or not—in our cities.
But innovation is a tremendous challenge, due to three particular barriers: silos that prevent collaboration on cross-cutting issues; limited funding for new initiatives; and the blend of talent in government itself, with longstanding civil servants working alongside relatively short-lived political administrators. The last challenge is particularly cumbersome, and can exacerbate the others. Civil servants have few incentives to rally for change, and more incentive to wait out the current administration to minimize offending longstanding constituencies and relationships. Because change efforts are typically a risk until there is a positive effect to show for them, it’s not surprising that civil servants are slow to embrace the flavor of the month coming from the mayor’s office, when history has shown that they may just be asked to undo it when the next mayor arrives.
To spur change, the Innovation Delivery Team Initiative funds a group of people who sit outside of all municipal departments and report directly to the mayor. These teams look across agencies and functions of government in their cities to address critical priorities. The Initiative borrows from successful models used around the world, including Sir Michael Barber’s approach to change in the United Kingdom, which championed a relentless focus on results. The Initiative also incorporates lessons from New York City, Malaysia, Maryland, Louisiana, and other areas. The result? A detailed “playbook” with tactical advice on how teams can generate solutions and deliver results.

Nonprofits are Now Too Critical to Fail--Are Mergers a Solution?

http://origin.library.constantcontact.com/download/get/file/1101086242761-21/StrategicRestructuringArticle070212.pdf





By Fred P. Leeb, Fred Leeb & Associates and the Nonprofit Management Group

Nonprofits are Now Too Critical to Fail

In 2010, 46.2 million people were in poverty according to the U.S. Census Bureau.   Of those, 15.7 million or 22% of the children under 18 were in poverty.  The total number of people in poverty had worsened significantly in 2010 to 15.1%, up by 2.6 percentage points from 2007*. 

According to Scott Allard of the School of Social Service Administration, University of Chicago, assistance from nonprofits is even more critical in today’s down economy because the needs are greater but,

“Economic hard times also cut into tax revenues and cause governments, especially at the state and local level, to reduce funding.   Because poor people lack political clout, social service programs are among the first places governments look to cut spending.” 

“Services are mainly funded by government grants and contracts, but typically delivered to millions of people through local community-based nonprofit organizations. Programs for low-income Americans currently spend somewhere between $150 and $200 billion annually from both public and private sources. For every dollar spent on cash assistance, the United States spends about $15 to $20 on social service programs. Americans prefer to help the poor this way – through community-based nonprofit organizations that stress personal contact.”

One Million Nonprofits Control Large Financial Resources

Nonprofits have become an essential part of the fabric of our communities.  The number of registered tax-exempt public charity nonprofits has grown to over 1 million, increasing by 59% from 1999 to 2009. A little over one-third of those (approximately 368,000 with more than $25,000 in gross receipts) filed a tax form 990 with the IRS.  These public charities reported over $1.4 trillion in total revenues and $2.5 trillion in total assets in 2009, according to the National Center for Charitable Statistics (NCCS).

The great majority of these organizations are very small--83% or 304,000 of these registered public charities had revenue of less than $1 million in 2009.  Therefore, they accounted for total revenue of only $60 billion or 4% of the total (an average of $197,000 per organization).  Only approximately 13% (about 49,000) of the public charities had revenue of between $1 and $10 million and 4% (about 14,000) had revenue over $10 million.  These latter two categories (approximately 63,000 public charities) accounted for 96% of the total revenue in 2009.

Revenue of Registered Public Charity	Number of Organizations	Average Revenue Per Organization	Total Revenue	Revenue Percentage of Total	Total Assets
Less than $950,000	304,000	$197,000	$60 billion	4%	$197 billion
$1-9.9 million	49,000	$3,135,000	$155 billion	11%	$338 billion
$10 Million or More	14,000	$83,207,000	$1.186 trillion	85%	$2.0 trillion
Total	367,000	$3.8 million	$1.4 trillion	100%	$2.5 trillion

According to the IRS Business Master File for March 2012, there were about 18,000 public charities in Michigan alone that filed a tax form 990 (those with revenue greater than $50,000).  These charities had revenue of approximately $43 billion and assets of $67 billion.

Precarious Nonprofit Financials

Though nonprofits as a whole control large financial resources, many are operating on razor-thin margins.  According to the Nonprofit Finance Fund’s 2012 State of the Sector Survey, 56% of the 4,607 nonprofit respondents surveyed in 2011 were operating at deficit or breakeven levels.  In addition, 9% had no cash on hand, 16% had only one month of cash and 32% had 2-3 months.   The conclusion of the Survey was that the,

“Nonprofit Finance Fund’s fourth annual survey of nonprofits nationwide reveals that rising service demand is overwhelming a sector still coping with a brittle economy and a barrage of funding cuts.  While there are hints that some organizations may have navigated through the worst of the recession, the ever-increasing need for services suggests that our communities have not. The 4,607 respondents tell a story of a sector still stretched thin, with organizations feeling distant from their funders and boards, and staff facing more work with less money and fewer benefits to take home. This is a wake-up call to funders, government, board members, advocates and all of us who care about the critical work nonprofits do to build a just and vibrant society. The recession may be over, but the nonprofit financial crisis is not.” 

Merger as One Tool to Increase Operating Efficiency

Many people have recommended for many years that nonprofits consider merging as one method to improve their organizational effectiveness.  Some of the more common reasons for merger strategies are as follows:

1. Increasing the quality of programming and producing better outcomes
2. Gaining vertical or horizontal integration--providing a better continuum of service to clients; being able to address more complex issues; gaining efficiencies and economies of scale
3. Expanding the geographic or demographic reach of the organization; responding to the increased demand for services
4. Growing more quickly via merger instead of building internally
5. Reaching critical mass and being more visible in the community
6. Selecting the best board members from both organizations to strengthen the organization, improve fundraising capability and leadership, access key relationships, and gain more expertise
7. Competing more effectively for grant funding and major donors (with a larger organization)
8. Reducing the cost of duplicative administrative operations (e.g., finance, human resources, accreditation, fundraising, IT, etc.)
9. Reducing facilities costs
10. Obtaining and affording high-quality talented staff and training programs
11. Building on the best attributes of both organizations while pruning the weakest attributes
12. Diversifying and expanding the sources of revenue to reduce the risk of being dependent on only one or two major sources of funding, some of which fluctuate widely and regularly pay late.

If there are many good reasons for nonprofit mergers and acquisitions, why does it seem as though there is a lot of discussion in the nonprofit world only about the softer approaches to these issues: collaborations, alliances, joint ventures, partnerships, resource sharing and joint programming?  Many obvious questions come up, such as:

• Are these discussions often really just a veil to cover up the lack of desire to push for the more fundamental changes that are needed? 
• Why aren’t nonprofits using the terminology of the business world—takeover, merger, outsourcing, acquisition—to achieve their goals of improving services and operating for the benefit of their clients (particularly now when competition for dollars is fierce and resources must be used most efficiently)? 
• Why does there appear to be no sense of urgency? 
• Aren’t there stakeholders in the nonprofit world who have a vested interest in pushing for fundamental change? 

These questions will be answered in our next article in this series entitled “Who Cares About Nonprofit Finances?”


* [Poverty thresholds for 2010 were $11,344 for one person under 65, $14,602 for a two-person household, $17,552 for a three-person household with one child under 18, and $22,113 for a four-person household with two children under 18.]