Targeting Support to Organizations Most in Need
As nonprofits struggle to respond to COVID-19 and the accompanying economic shutdown that has gripped the country, everything that many thought they knew about nonprofit revenue models is being challenged. As it turns out, earned revenue is not the panacea many thought it to be. In fact, the nonprofits with earned revenue spigots that have suddenly been turned off are the ones that find themselves in the most danger at this moment.
In fairness, no one could have predicted this. But recognizing that organizations like UTEC (which I wrote about last week) or arts and culture organizations that derive the bulk of their revenue from ticket sales are taking a different kind of hit than, say, an entirely foundation-funded nonprofit think tank has important implications for what funders should do.
As The Chronicle of Philanthropy reported last week, “Many small and medium-size nonprofits may not survive the one-two punch of closures and the economy’s free fall, and almost every cultural institution is on precarious footing these days.”
“These Organizations Might Not Be Around in Three Months”
The Chronicle is right, though I think what differentiates how organizations will fare goes beyond size of organization to questions about size of reserves relative to budget and, crucially, revenue mix.
“Having grants is fun again,” Julie Phelps quipped to me on the phone Thursday. Phelps is the artistic and executive director of CounterPulse in San Francisco. I had gotten to know Phelps last year when I profiled her in a Chronicle column exploring the challenges of running a small arts organization. I checked in with her last week, assuming these would be trying times for her — and they very much are. But Phelps also expressed gratitude that things aren’t worse, or at least not yet.
Because about 80 percent of CounterPulse’s $1.2 million in annual revenues are grants, because she had two open staff positions she can put the hold on hiring for, because she took quick action the week of March 9 to reschedule events, and because she has some operating reserves, Phelps feels the organization could be alright in the long run. That is assuming that this moment of social distancing, staying at home, and sheltering in place does not stretch into the fall.
But there are also huge challenges and risks for Phelps. Even with a robust and diverse income model, she is still slated to lose nearly $20,000 in the current fiscal year, after projecting a surplus prior to the start of the crisis. That’s 7 percent of a total operating reserve that has been accumulated through hard-earned surpluses netted across 15-plus years of strong management. She had to cancel CounterPulse’s annual gala, which brings in about $80,000, but she has mostly been able to reschedule performances slated for the next several months to July and August — typically a “dark season” for the organization.
Part of the economic model of CounterPulse is that the artists receive the earned revenues from ticket sales, while CounterPulse takes a flat fee. This approach, designed to allow artists to benefit, also is serving to at least somewhat protect the organization in this moment. After looking at other organizations’ earned revenue streams jealously — “I always thought the grass was greener” — Phelps now recognizes the benefits of having a high proportion of revenue be foundation funding. But she is deeply worried for her colleagues at peer arts organizations, as well as for artists and contract workers such as stagehands and event staff.
“It’s not an overstatement to say that some of these organizations might not be around in three months,” Phelps told me.
What should funders do? The pledge that hundreds of foundations have taken in the last week, organized by the Council on Foundations, is a very good one — and affirms what nonprofits have been asking for more broadly for years (for example in study after study CEP has conducted). The kind of flexibility the pledge urges — releasing organizations from funding restrictions, for example, or from particular projects or deliverables — will be crucial if leaders like Phelps are to keep their organizations afloat.
And many organizations will need something more: an infusion of funds. Announcements of this kind of action are much fewer in number than signatories to the pledge, but my hope is that this is simply because it’s early days. I was pleased to see the Bonfils-Stanton Foundation in Denver, for example, move immediately to provide its grantees — arts and culture organizations in Denver — with unrestricted emergency funding of 10 percent of its most recent grants, with a cap of $6,000.
Targeting Limited Funds
The challenge for funders will be to target their inevitably limited resources to those organizations that are close to the financial precipice, or those that could be there soon.
Many are in fact already there. CEP conducted a survey of grantees earlier this year for a research study commissioned by the Ford Foundation examining barriers to the provision of multiyear general support. We saw that, during the past three years, one in five nonprofit organizations reported being unable to cover essential costs. Another 37 percent were at significant risk of not being able to cover costs.
What’s needed now is a way for funders to quickly identify, across their entire population of grantees, those in the most precarious positions — and then target their near-term resources to those organizations accordingly. This week, CEP is launching a standalone, rapid-response survey to help funders both to do that and to gather a comprehensive picture of what grantees are experiencing. We’ll provide this at or below our cost to make it as broadly available as possible. And we will get results back to funders within 48 hours of surveys closing. (Contact my colleague Austin Long for more information.)
Armed with good information, funders will need to increase grantmaking rather than contracting — even as their endowment values plummet — if the hardest-hit nonprofits are to survive the coming weeks and months. Some help from the federal government is possible, and we all need to be supporting organizations like the National Council of Nonprofits, Independent Sector, United Philanthropy Forum, and Council on Foundations that are fighting for nonprofits to get the assistance they need. But increased philanthropic support will also be vital.
I’m pleased to see announcements of philanthropic efforts to help small- and medium-sized nonprofit organizations, like this $75 million fund in New York. As Antony Bugg-Levine, who leads Nonprofit Finance Fund, which is co-running the fund, puts it, “Faced with the sudden calamity that social distancing is creating for the revenue so many nonprofits expected to receive, organizations need their grantmakers to make smart moves that can help them keep more money now, free up time, and reduce costs.”
Being smart will mean having good information about the financial position of organizations and not assuming all are affected in the same ways by the current crisis. It will also mean, as I said in my last post, casting aside conventional approaches to payout and concerns about endowment levels. Perpetual foundations have literally the rest of time to worry about building their endowments back up with smart investing strategies.
My hope is that the question we ask of foundations after this crisis is over will not be, how big is your endowment? Instead, I hope that we’ll be asking, how many nonprofits did you help make it through this unprecedented challenge so that they could continue to do their crucial work to strengthen communities, help the most vulnerable, and make progress on key challenges?
Phil Buchanan is president of the Center for Effective Philanthropy (CEP) and author of Giving Done Right: Effective Philanthropy and Making Every Dollar Count, published by PublicAffairs last year. Follow him on Twitter at @philxbuchanan. This is the third post in a series.