One-Third of Charities Expect to Come Under Severe Financial Stress This Year

By Peter Panepento

Steep cost increases and waning government support are squeezing nonprofit groups to the point that about one third of all organizations are expecting severe financial stress during the next year, according to a report released today by the Johns Hopkins University's Center for Civil Society Studies.

But although those forces are putting many charities under substantial economic pressure, the financial health of the nonprofit world is stronger than it was three years ago, as many donors are stepping up their giving and nonprofit groups have been increasing fees for their services, the study found.

The study, part of the center's Nonprofit Listening Post Project, is based on surveys completed in 2006 by 341 charities, including museums, theaters and other nonprofit organizations that focus on aiding children and families, providing housing and other services to the elderly, and spurring community and economic development.

Of those surveyed, 34 percent said they expect to experience financial stress during the next 12 months — a smaller percentage than in 2003, when the Listening Post survey found that 51 percent of organizations were expecting similar levels of financial stress.

Nonprofit officials say that change is partly the result of the fact that the country was in an economic recession three years ago and partly the result of an improved ability by charity leaders to navigate difficult financial conditions.

"Persistent crisis has become a way of life for America's nonprofits," said Peter Goldberg, chair of the Listening Post Project Steering Committee and chief executive officer of the Alliance for Children and Families, in Milwaukee. "What this survey shows, however, is that America's nonprofit executives have become skilled crisis managers."

Those executives have also become more skilled at finding creative ways to generate revenue for their organizations, the survey found.

Thirty percent of the groups surveyed expected revenue from government to decline in 2006 — a worrisome finding given the fact that government accounted for 44 percent of all income for the charities in the survey. Another 17 percent of groups said they expected foundation giving to drop.

Not surprisingly, many organizations have turned to other sources to bridge the gap.

Nearly one half, or 49 percent, of the groups surveyed, for instance, said that last year they increased the amount they raised from individuals. Another 45 percent were able to increase revenue from fees.

Rising Costs

But even as charities adjust their approaches to make sure they can replace government funds, they are doing so at a time when costs are rising at a rapid rate.

More than two-thirds of all organizations reported an increase in costs in 2006 and nearly one in five — 17 percent — reported that costs had risen by more than 10 percent. Cost increases were especially painful for organizations that specialize in services for the elderly — 87 percent of groups that provide services to the elderly said their costs had risen last year.

Wages and salaries are the primary reason for the rising costs — as nearly 60 percent of organizations reported that personnel costs were the most influential expense item. But other items are putting pressure on budgets — two thirds of groups reported increases in health-benefit costs, 56 percent reported increases in facilities costs, and 55 percent in liability-insurance costs.

These pressures, in turn, have hurt the quality of the services offered by many groups and damaged working conditions:

• One-third of the organizations surveyed reported that they had to increase the number of hours staff members worked without additional compensation.

• One quarter of the groups said the waiting times for services had increased.

• One quarter of organizations face increased staff turnover.

• One quarter of organizations had reduced their training budgets for employees.

Those strategies, while helpful in managing short-term crunches, could hurt some organizations in the future, said Lester M. Salamon, director of the Johns Hopkins Center for Civil Society Studies and of the Listening Post Project. "Organizations are using up their capital stock of energy and time of their employees," Mr. Salamon said. "It's a strategy that has potentially damaging long-term consequences."

Still, even with all of those challenges, the majority of organizations said they had achieved financial success.

More than three quarters of the groups surveyed, 76 percent, rated their financial performance during the past 12 months as either somewhat successful or very successful — a number that is comparable with the 77 percent of groups that offered the same assessment during the survey in 2003.

And a similar number — 75 percent — reported that they had increased their volume of services in 2006 — with 35 percent of groups increasing their services by 10 percent or more. What's more, 42 percent of the organizations surveyed were able to increase their service to the poor — while only 8 percent reported decreased services.

"We were heartened by that," Mr. Salamon said. "Agencies seem to be resisting the pressure to cut back services to the most needy. That's a real encouraging sign."

The full report, "Nonprofit Fiscal Trends and Challenges," is available free on the Johns Hopkins Web site.