Monday, May 11, 2020

Nonprofits Won't Survive Unless the Federal Government Helps More Medium-Sized Groups

Writing in today's Chronicle of Philanthropy, Susan N. Dreyfus and John MacIntosh opine that during the current COVID-19 crisis and its aftermath, many medium-sized nonprofit organizations will not survive unless the federal government provides them more much-needed support. Dreyfus is CEO of the Alliance for Strong Families and Communities; MacIntosh is managing partner of SeaChange Capital Partners, an organization that helps nonprofits facing complex financial challenges. In their thought-provoking article in today's Chronicle, they argue that while

[n]onprofits of all kinds provide critical help to communities across the United States, . . . it is the medium-sized ones that make a critical difference — those with at least 500 employees. Their workers operate food pantries, and homeless and domestic-violence shelters. They manage and staff residential facilities for young people with mental illnesses. They offer in-home and residential services for older Americans and people with disabilities. During the Covid-19 pandemic, their work is more urgent than ever.

Yet, the authors state, even as these organizations face various challenges -- challenges as daunting as those faced by their smaller counterparts -- they "are not receiving the government support they need to survive." For example, the "federal Paycheck Protection Program excludes nonprofits with more that 500 employees from obtaining the forgivable loans that would allow them to retain and compensate their employees and continue to deliver essential services during this public-health crisis."

What, then, can we do? As the article points out, at "a time when many nonprofits are at a breaking point, we [cannot] afford to leave those with more than 500 employees out of support programs that are keeping smaller organizations afloat."

According to the article,

A new analysis of New York City’s larger nonprofits found that under normal circumstances, most have just two weeks of cash on hand. Without immediate assistance, the report projects that some won’t survive through May and that few, if any, will be in a position to continue services during the Covid-19 crisis and its aftermath. Most of these organizations lack meaningful endowments and have limited access to credit. Their operating margins are razor thin (an average of 1 percent), even before taking into account the reduction in revenue and increase in expenses associated with the pandemic. Most importantly, their philanthropy, which covers less than 5 percent of expenses, cannot make up for a reduction in funding and contracts during the health crisis.

The article continues:

This situation is not unique to New York. A 2018 report on the financial stability of community-based human-services organizations found that 40 percent of the larger nonprofits had less than one month of cash reserves. Those providing housing and shelter-related services faced significantly greater financial stress.

Critics may be quick to argue that the challenges confronting these nonprofits are the result of their own inefficiency and poor management. Not so, argue Dreyfus and MacIntosh. They specifically state that:

The challenges confronting these nonprofits are not the result of inefficiency or poor management. Most government funding and philanthropy traditionally does not cover the full cost of providing services. Government contracts for essential services also create cash-flow problems since, unlike with grants, payments are not made until after the work is completed and can be subject to long and unpredictable delays. Cash, as a consequence, is an ongoing issue. But unlike large for-profits, these organizations do not have access to capital markets, cannot easily unlock illiquid assets, and are unable to use bankruptcy to restructure while continuing to deliver services. Any increase in costs, reduction in revenue, or delay in cash receipts could put some of them permanently over the edge.

So just what is the solution? The authors call for Congressional action: 

The Cares Act, which established the Paycheck Protection Program, does include larger nonprofits in the economic stabilization funding (now known as the Main Street Program), but fails to provide guidance or loan forgiveness for these organizations. 

Nonprofits with more than 500 employees must be able to access capital and receive the same loan forgiveness as smaller nonprofits. This will require changes from Congress in the next stimulus bill. It is unclear whether nonprofits will be competing for the same funds out of the Federal Reserve as corporations under the Main Street Program. For this reason, nonprofits will need a dedicated pool of funds so they are not placed in line behind for-profits to access vital dollars.

A new bill, scheduled to be introduced this week by Rep. Joyce Beatty, an Ohio Democrat, titled the Help Charities Protect Communities Act, would provide some relief by introducing a lending program that includes loan forgiveness for nonprofit organizations with 500 or more employees.

A coalition of more than 200 national nonprofits have outlined these and other priorities in an appeal to lawmakers to recognize the impact and vital importance of larger nonprofit organizations that are continuing to provide for their communities over the course of this pandemic. The Cares Act was an important first step, but we must do more during this unprecedented crisis to sustain the organizations that do so much for the health, well-being, and safety of America’s families.

For the sake of the nonprofits and the many people that they help, I hope that Congress finds a way to fund these medium-sized nonprofit organizations both now and in the aftermath of the current COVID-19 crisis.

Vaughn E. James

 

 

 

https://lawprofessors.typepad.com/nonprofit/2020/05/nonprofits-wont-survive-unless-the-federal-government-helps-more-medium-sized-groups-.html

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Comments

Unfortunately, there will be all kinds of appeals from all kinds of organizations, industries, professions, etc. as we prepare for negotiations over the fourth iteration of federal COVID-19 relief legislation. Each will use lobbyists, grassroots campaigns, and even "astroturf" campaigns to press their case for being somehow "special" (yes, as in special interest).

For larger charities and their representatives to request this special assistance (and especially if thy are successful in receiving it) makes it all the tougher for these same charities to claim they rely on the generosity and benevolence of donors.

Posted by: Michael L. Wyland | May 12, 2020 1:46:16 PM

Exempt organizations are not a single type. Each type should be analyzed differently and treated differently.

Charities that actually help the poor should be aided.

Hospitals, particularly, rural and community hospitals, are suffering from the shutdowns. They need aid or they will go under and the health of their communities will suffer greatly.

Colleges are a tough case. They come in many shapes and sizes. A couple of shapes and sizes are easy to prioritize. State colleges and universities are the creatures of the states that created and maintain them. They should look to their states for aid, or merger or liquidation, as the case may be. There is a small, but very prominent, cohort of schools with billion dollar endowments. They should dip into their endowments. It was for this purpose that the endowments were raised, and why they were given so many tax privileges. Finally, there is a large number of small unendowed colleges that live from year to year on tuition revenue. The truth of the matter is that this cohort was going to be winnowed out over the next few years even in the best of times. There are fewer potential students every year, they have learned what a miserable deal student debt is, and now they are being relegated to online classes. Hundreds of the little colleges will close. They should not be bailed out unless they can provide evidence that can be survivors. Aid will only prolong their misery and drag their students down with them.

MOBS (Museums, Operas, Ballets, Symphonies) are simply ornaments that the rich adorn themselves with and the poor shun. Not only should they not get aid, they should have their tax exempt status revoked. They can cover their costs with admissions, root hog or die.

Posted by: Walter Sobchak | May 21, 2020 7:53:40 PM

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