The Impact of the Financial Crisis on Nonprofits

I.          INTRODUCTION          

Nonprofits play an important role in the American economy, accounting for 5.2% of the domestic GDP and 8.3% of US wages and salaries. [1] At a time when most sectors of the American economy feel the pinch of the recession, the nonprofit sector’s financial struggles should raise additional concerns for the US government, because of the increasing amount of Americans seeking assistance from the nonprofits.  This article will detail some of the statistics regarding the financial struggles of the nonprofits during the current recession.  Additionally this article offers insight into advice from the legal community regarding counseling such nonprofits. Finally, this article provides a recommendation and conclusion as to the steps that nonprofits should keep in mind while coping through the recession.  

II.        BACKGROUND 

Nonprofits provide a variety of widely needed benefits in our communities, such as serving the needs of low-income neighborhoods, children, and providing additional educational resources.  Several articles and surveys have discussed the impact of the financial crisis on the nonprofit sector. [2] One concern for nonprofits has come from the decline in donations from bank executives and other corporate executives. [3] In 2007, banks were the second largest corporate donator to nonprofits. [4] Now, since the recession, bank executives and corporate executives have contributed less resulting in fewer resources for the nonprofits. [5] Adding further to the problem, the Nonprofit Finance Fund reported earlier in the year that out of 1,100 nonprofits surveyed on the effects of the economy to their organization, 93% of the organizations that provide essential services expected a 2009 increase in demand while 31% did not have more than a month’s operating cash on hand. [6]

 

The National Council of Nonprofits reported similar results in a survey of 2,279 nonprofits. [7] The survey indicated that while demand for services is increasing, nonprofits are facing escalating operating costs and decreasing revenues. [8] The report highlighted the decrease in revenues from the five traditional sources of funding for nonprofits, specifically corporate donations, reduction in fees for services, the shrinking of the nonprofits’ assets, the governments delay or nonpayment for services provided by the nonprofits, and the decline in individual contributions. [9] 

 

The Johns Hopkins University compiled the Listening Post Project, a report of the recession’s impact on 363 nonprofit organizations with a focus on the period of September 2008 thru March 2009. [10] The report found that about 40% of the nonprofits surveyed as well as a third or more of child-serving and elderly-serving nonprofits indicated their fiscal stress to be “severe or very severe.” [11] The majority of nonprofits facing the most difficulties are mid-sized organizations with revenues between $500,000 and $3 million. [12] However, the report also found that due to the steps the nonprofits were taking to reduce the financial impact on their organizations, a substantial portion of them indicated a good financial performance even after months of the recession. [13] Another sign of the nonprofits’ resilience appears in the Midwest as Michigan nonprofits, although facing a heavier stress of financial difficulties than other nonprofits surveyed, were able to cope and increase their services to their patrons to a larger measure than their counterparts. [14]

 

Overall, the statistics indicate that the ever-growing requests for services from their patronage are weighing heavily on the nonprofits resources, which are further exacerbated by the reduction in donations and government spending.  

III.       ANALYSIS 

In this section, I will analyze some of the methods nonprofits are using in order to cope with the recession, as well as review the advice that attorneys are recommending for nonprofit clients that are on the brink of closing their doors.

 

The practices of reducing staff and cutting programs are typically the most common way of cost saving initiatives. [15] Nonprofits are creatively finding new ways to cope with the financial crisis, such as partnering with other nonprofits, and attracting new individual donors. [16] The National Council of Nonprofits provided several additional tips in a report released August 10, 2009. [17] The tips include “staying close to funders.” [18] In essence the nonprofits need to make their donors aware of their financial situation and the steps they are taking to manage the issues. [19] Additionally, the National Council of Nonprofits recommends reducing travel and professional development costs while exploring new ways to develop the training of the nonprofits’ staff in a more cost effective manner. [20]

 

Many of the larger nonprofits have an array of attorneys to consult with them as to the legal ramifications of failing to meet their obligations to creditors or their employees or which paths to take considering the state of their balance sheet. [21] However, many attorneys are faced with counseling the smaller nonprofits that already have a tight budget and not much access to legal counseling. [22] Usually for smaller nonprofits, that will avoid the legal costs of counsel, they seek advice when they are on the brink of closing their doors. [23]

 

According to Business Law Today, attorneys should make sure the nonprofits are aware of the consequences of filing for bankruptcy petition as well as fully understand the nonprofits’ financial position to determine if filing the petition is the best path. [24] As with any other type of commercial counseling, the attorney needs to understand the many facets of the nonprofits’ organization in order to provide a thorough legal opinion. [25] Further steps in counseling a nonprofit include determining what the assets and liabilities of the nonprofit are and the outlook for future donations. [26] These determinations allow the attorney to make the necessary recommendations as to bankruptcy or selling assets of the nonprofit or various alternative measures in order to keep the nonprofits’ doors open. [27] Additionally for many nonprofits no further additional legal steps may be necessary past an initial counseling session with an attorney, which should relieve some stress on their budgets. [28]

IV.       RECOMMENDATION 

Nonprofits as with other struggling sectors of the economy need to reassess where they can best reduce costs while serving the community’s needs with the same mindset and business ingenuity of a “for profit” corporation. Taking steps such as merging with other nonprofits or creatively outreaching towards individual donors may be the best way to ensure the doors stay open and the people are served. 

 

In regard to legal counseling, nonprofits should have a good idea of their financial position and think about the possible options for recovery prior to seeking counsel. Nonprofits should keep an open-mind regarding the options that they are provided by the attorney, and try to seek out attorneys that are willing to counsel them on a pro bono basis.

V.        CONCLUSION 

As with all aspects of the economy the nonprofit sector has been impacted by the current financial crisis. The key to surviving the challenging times will require a focus on keeping the needs of the patronage in mind and creating new ways to cope with the financial stress.  In sum, the difficulties facing the nonprofit sector has led to another area of the law in which legal assistance is required to assist our economy in rebounding from the financial crisis.

End Notes:

[1] Bonnie Erbe, Nonprofits Escape Economic Slowdown, U.S. News & World Rep.,  Jan. 28, 2008, http://www.usnews.com/blogs/erbe/2008/01/28/nonprofits-escape-economic-slowdown.html. 

[2] See generally Stephanie Strom, Financial Safety Net of Nonprofit Organizations Is Fraying, Survey Finds, N.Y. Times, Mar. 25, 2009, at A17, available at http://www.nytimes.com/2009/03/26/us/26charity.html; Dianne Walker, 5 Effects on Nonprofit Funding Due to Tough Economic Times, Examiner, June 30, 2009, http://www.examiner.com/x-12811-DC-Nonprofit-Business-Examiner~y2009m6d30-5-effects-on-nonprofit-funding-due-to-tough-economic-times; Guidestar USA, The Effect of the Economy on the Nonprofit Sector (2009), http://www2.guidestar.org/ViewCmsFile.aspx?ContentID=2319.

 

[3] Aili McConnon, Wall Street’s Financial Crisis Rocks Nonprofits, BusinessWeek, Sept. 25, 2008, available at http://www.businessweek.com/magazine/content/08_40/b4102042668936.htm?chan=magazine+channel_news.

 

[4] Id.

 

[5] Id.

[6] Nonprofit Finance Fund Survey: America’s Nonprofits in Danger, Nonprofit Fin. Fund, Apr. 2009, http://www.nonprofitfinancefund.org/content.php?autoID=166. 

[7] Id.

[8] National Council of Nonprofits, A Respectful Warning Call To Our Partners In Government: The Economic Crisis Is Unraveling The Social Safety Net Faster Than Most Realize (2009), http://www.councilofnonprofits.org/?q=specialreport8

[9] Id. at 2.  

[10] Johns Hopkins University Center For Civil Society Studies Listening Post Project, Communiqué No. 14 Impact of the 2007-2009 Economic Recession on Nonprofit Organizations (2009), http://www.ccss.jhu.edu/pdfs/LP_Communiques/LP_Communique_14.pdf

 

[11] Id. at 1.

[12] Id. at 4. 

[13] Id. at 22. 

[14] Id. at 11-12.

[15] National Council of Nonprofits, Strategies Being Used By Nonprofit Leaders To Cope With The Nation’s Economic Crisis (2009), http://www.councilofnonprofits.org/?q=specialreport9

[16] Id. at 2. 

[17] Id. at 2-5. 

[18] Id. at 2. 

[19] Id.

[20] Id. at 4. 

[21] Shelly Crocker, Counseling the Nonprofit Debtor in Financial Stress, Bus. L. Today, Aug. 18, 2009, at 21. 

[22] Id.  

[23] Id. 

 

[24] Id. at 22-23.

 

[25] Id. at 23.

[26] Id.  

[27] Id. at 22.

 

[28] Id. at 24. 

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