Boston Foundation report finds Mass. nonprofit sector grew in economic downturn

Download a PDF version of the report

Boston – A new report from the Boston Foundation finds that despite the economic downturn, the Massachusetts nonprofit sector has grown over the past decade, but has not addressed financial concerns that leave it vulnerable in the long term.

The report," Passion and Purpose Revisited: Massachusetts Nonprofits and the Last Decade’s Financial Roller Coaster,” was released at an Understanding Boston forum today. It calls on the nonprofit sector and its stakeholders to continue to explore new ways of organizing and allocating resources, learning from the lessons of the economy of the past decade.

“On the surface, the nonprofit sector appears to have emerged from the economic tumult of the past decade in a relatively strong position, but it is a tenuous one,” said Paul S. Grogan, President and CEO of the Boston Foundation. “Nonprofits rallied in the economic downturn to lead with their mission and provide critical services, but by doing so, many nonprofits continue to put their own long-term financial health at risk.”

The new report is a follow-up to the Foundation’s comprehensive 2008 release.“ Passion and Purpose: Raising the Fiscal Fitness Bar for Massachusetts Nonprofits.”   That report recommended new approaches for nonprofits to strengthen their financial position and ensure their continued abilities to function. The 2012 report notes that while some creative collaborations, needed repositioning and reinvestment has occurred, there is a continued need for new approaches in the face of what could be a prolonged period of economic weakness.

State of the Sector

The report opens with a somewhat surprising finding – that Massachusetts nonprofits actually gained relative strength in a weak economy.  A profile of the sector notes:

• The Commonwealth’s 34,366 registered nonprofits collectively generated $234 billion in revenues in 2011, and held $233 billion in total assets, up from $207 billion in 2007;   
• The sector in 2010 employed nearly 456,000 workers, one-sixth (16.7%) of the Commonwealth’s private workforce. That’s up from 14% of the workforce in 2006; and   
• The assets held by public charities, which make up 69% of the organizations, produced $181.2 billion in revenues and held $193.3 billion in total assets in 2011, up sharply from $70.4 billion and $168.6 billion, respectively in 2007.

Those overall numbers describe a diverse sector that includes large universities and hospitals to the smallest of neighborhood organizations, so the report authors used a structure from the 2008 “Passion and Purpose” report to classify nonprofits in three broad groupings:

• Grassroots organizations have $250,000 or less in total annual expenses, and fuel the creation and expansion of civil society through grassroots action and volunteerism;
• Safety Net organizations, which report $250,000 to $50 million in total expenses and deliver services that build social safety nets for vulnerable citizens and otherwise enhance the quality of life; and 
• Economic Engine organizations, with more than $50 million in annual expenses, which contribute in significant ways to the economic health and competitiveness of the region.

The number of grassroots organizations in Massachusetts grew sharply from 1995 to 2010, in good times and bad, before falling by 10% in 2011 as the IRS moved to revoke the nonprofit status of inactive organizations. Even so, grassroots organizations comprised 78% of public charities in 2011, with 18,623 total. However, they constitute under 1% of the sector’s revenues and assets.

One-fifth of the sector in 2011 is composed of the safety net organizations that provide many of the services most needed during an economic downturn. These 4,982 public charities operate with just 11% of the sector’s revenues and 17% of its assets.

But the financial growth of the overall sector can be largely attributed to the 221 Economic Engine organizations in the state, which accounted for 89% ($161.2 billion) of the nonprofit sector’s revenues and 81% ($157.7 billion) of its assets in 2010. Three-quarters of these organizations are in the Health Care and Education sectors. Just two institutions, Harvard University and the Massachusetts Institute of Technology, hold 31.4% of the statewide nonprofit assets.

The Current Services Trap

The economic downturn has put additional pressure on the nonprofit sector to provide services for larger populations at a time when public investment in basic safety net programs has lagged.

“Nonprofits have responded, creatively and resourcefully enhancing their service offerings in recent years even as they faced their own budget pressures, including public funding cuts,” said Elizabeth Keating, one of the lead authors of the report. “They have served more clients, creatively tapped new resources and have done what they can to persist in their missions – but in doing so have had to put addressing their own financial concerns on a back burner.”

In the strong economy of 2003-2007, nonprofits were able to increase their total revenues at a real compounded annual growth rate of 2.8%. Real expenses grew by just 2.1% in that time, but program expenses rose by 3.1% annually, showing that public charities were by and large expanding programs and limiting their administrative growth.

Nonprofits did take advantage of the economic strength of the time to increase their liquid assets and reduce their long-term debt. But it should be noted that few nonprofits took advantage of the healthier time to invest in their fixed assets – meaning their physical plants and facilities did not get full advantage of the economic upswing.

The economic crisis that began in 2008 hit the nonprofit sector as it did the rest of the economy. Real revenues for nonprofits fell an average of 0.3% annually in 2007-2010, while spending rose by an average of 0.8%. The decision to build operating reserves and forego much needed capital investments during the upswing provided the sector with much needed working capital to withstand this financial stress. Social service organizations and other societal benefit nonprofits were forced to eat into their working capital at a pace of 5.6% per year in an effort to maintain services.

The problem of maintaining and expanding services to meet current needs is exacerbated by the end of funding through the American Recovery and Reinvestment Act, which provided more than $5.3 billion in critical resources to the Commonwealth. That government funding ended in 2011, widening the gap between the demand for services and the pace of funding growth for the sector.

Profitability, Liquidity, Sustainability

When the economy faltered in 2008, the pressure on nonprofits to provide services accelerated even as the recession created real contractions in total revenue. This combined pressure drove more nonprofits toward zero or negative profitability, with 42% of nonprofits reporting negative or breakeven operating results.

In 2003, the median nonprofit held just 55 days of cash on hand for operations, well below the recommended level of three months. Cash levels improved during the economic upswing to 118 days, with the number skewed by a large increase in cash held by grassroots organizations, and has slid back slightly since then. Unfortunately, the increase is in great measure a demonstration of the tight credit markets, which force nonprofits to conserve cash resources, including postponing fixed asset purchases, selling investments and delaying bill payments, since they cannot as readily get credit.

The nonprofit sector has shown a remarkable ability to sustain itself during the economic roller coaster, but it’s a sector feeling the stress. During the upswing, a portion of the Grassroots and Safety Net organizations were able to garner enough resources to obtain some access to credit. The economic downturn was so severe and threatens to be so lengthy that nonprofits have increasingly opted to forego operational and financially-wise long-term financial and infrastructure investments in order to hold on to cash.

“It’s not surprising that nonprofit organizations set a primary goal of sustaining their mission in both good times and bad,” said Geeta Pradhan, Director of Programs at the Boston Foundation and a primary author of the report. “But it has forced organizations to make decisions detrimental to their long-term financial health, as they try to ride out a struggling economy that shows few signs of improving.”

Regional Differences

The report also gets beneath the surface, looking at the substantial differences in the impact and evolution of nonprofits over the decade in ten different sectors and by comparing the impact and finances of nonprofits in each of the 14 Massachusetts counties. The county-by-county breakdown highlights an extreme inequality in the per capita distribution of nonprofit assets in the state – Middlesex County leads with 5,943 public charities and $77,962 in public charity revenue per capita in 2011, while neighboring Plymouth County lags with its public charities with just $2,959 in public charity revenues per capita. Suffolk County is second in the state with nearly $44,000 in public charity revenue per capita. No other county had more than $14,119 in per capita public charity revenue, demonstrating the high concentration of the Commonwealth’s largest public charities.

A New Course of Action

The 2008 Passion and Purpose report urged the sector and its stakeholders to consider: (1) Restructuring and Consolidation; (2) Repositioning; and (3) Reinvention and Reinvestment. A critical condition for those recommendations was the diversion of more resources—public and philanthropic—toward building the capacity and strength of the sector.

This report stands behind those recommendations and reinforces the call to action with new insights from the financial turbulence of the 2000s into their financial challenges and creative responses.

(1) Assess and address community needs: The economic crisis provided a “utility of trouble” – a chance to level the playing field - by creating an opportunity and need for nonprofits to develop new models for determining community need, allocating resources and delivering services – an effort which needs to continue.

(2) Align programs and funding: The downturn has increased competition for scarce funding resources. Under pressure, many funders have retained a focus on smaller, one-time, restrictive grants and contracts. Opportunities exist to enhance impact:

•  use mergers, strategic collaborations and other innovative ways to grow programs to meet community  needs;
• use transparency and breakthrough technology to improve matching of needs, funding and programs, and improve service; and  
• expand measures to attract, retain and develop staff capacity

(3) Assure Sustainable Funding: The decline in traditional sources of government funding and tight credit markets have forced nonprofits to find new funding and financing ideas, such as Program Related Investments, Social Impact Bonds, and progressive ‘sin taxes’ to counteract behaviors.

******

The Boston Foundation, Greater Boston’s community foundation, is one of the oldest and largest community foundations in the nation, with net assets of $850 million.  In 2011, the Foundation and its donors made almost $78 million in grants to nonprofit organizations and received gifts of $81 million. The Foundation is made up of some 850 separate charitable funds established by donors either for the general benefit of the community or for special purposes.  The Boston Foundation also serves as a major civic leader, provider of information, convener and sponsor of special initiatives designed to address the community’s and region’s most pressing challenges.

In 2012, the Boston Foundation and The Philanthropic Initiative (TPI) merged, with TPI operating as a distinct unit of the Boston Foundation.  TPI pioneered the field of strategic philanthropic advising over 20 years ago and remains a national leader today. Through its consulting services and its work to advance the broader field of strategic philanthropy, TPI has influenced billions of dollars of giving worldwide. TPI’s Center for Global Philanthropy promotes international giving from the U.S. and indigenous philanthropy abroad.

For more information about the Boston Foundation and TPI, visit www.tbf.org or call 617-338-1700.