Public funding: Other shoe drops on nonprofits

Outreach: Key Tool in Crisis

Published in the June 26, 2009 edition of Columbus Business First

Nonprofits are facing a second stage of financial crisis as their public sector supporters are reopening historic funding contracts amid a free fall in tax revenue.  In the first stage of this recession, nonprofits had to cope with reductions in corporate and individual donations.  Now the second public-sector shoe of support is dropping.

Nonprofits have provided public services for years in good faith that government contracts would be renewed on similar financial terms.  In recent weeks, however, many nonprofits have been abruptly notified of reductions that place them in jeopardy of insolvency.  And some reductions have been retroactive, placing nonprofits in the situation of losing reimbursement for services that have already been provided. 

Nonprofits that receive state support are also in a planning dilemma as states face budget deadlocks over how to respond to plunging tax revenue with their new fiscal years just a few weeks away. 

The biggest mistake a nonprofit can make is to keep its worries quiet or to rely on informal networking to make its concerns known.  In difficult times especially, it is in the nonprofit organization’s interest to broadcast its financial situation openly and routinely. 

For-profit, publicly traded companies have this routine enforced by Securities and Exchange Commission rules that require any material new information to be communicated promptly and publicly in a Form 8-K.  Nonprofits should follow this example, but this advice often goes against the grain.  When times are great nonprofits like to brag, but when times are tough they withdraw. 

By keeping quiet, the nonprofit deprives its supporters of facts that can rally support around the organization. 

In the current circumstances, it is particularly important for nonprofits to utilize the media and the Internet to make certain there is a widespread perception a financial problem truly exists and that any proposed responses are necessary and merit support. 

It is critical to stick to the facts.  Any effort to garner sympathy and support is easily undermined by speculation, crying wolf, and idle threats of worst-case spending cuts. 

Instead the communication program must be dominated by these facts:

• What financial problems already exist,
• What service effects are known versus what effects are speculative,
• What options are available and what options are not available,
• What decisions have been made and what decisions have not been made,
• What was the net cash loss for the month and what is its significance.

Much of the mystery, speculation, and confusion over the actual financial health of nonprofits could be avoided if the organizations made transparency and disclosure of their operations a routine activity.  With the universal availability of the Internet, nonprofits should more actively utilize this easily searchable platform to make basic information more available.

But surprisingly little financial information is routinely provided by nonprofits. 

A new report issued by GuideStar, The State of Nonprofit Transparency, 2008: Voluntary Disclosure Practices, examined the Web sites of the 1,837 nonprofits most frequently viewed on GuideStar’s website.  GuideStar was founded in 1994 and provides the most extensive database on nonprofit finances available.  Since 2000 it has posted on its Web site the IRS Form 990 nonprofit disclosure forms for every nonprofit and private foundation in the United States. 

While virtually all nonprofits posted information about their programs on their Web sites, the report found that fewer than three-fourths posted information on their boards of directors and staff.  Fewer than half posted an annual report, and fewer than one in seven posted their audited financial statements.  Virtually none posted their IRS notice of tax-exempt status. 

While the level of disclosure varied by category of nonprofit, those with the least disclosure were education, arts, culture, and humanities. 

The GuideStar report recommends five Web site disclosures that merit consideration by every nonprofit:

• Nonprofits should regularly update their websites with current, detailed program and evaluation information.
• In addition to posting board members’ and key staff names and titles, nonprofits should post brief biographic information for these important leaders.
• Every nonprofit that produces an annual report should post the report on its site.
• Every nonprofit that has an audited financial statement should post it on its Web site.
• Every nonprofit that has an IRS letter of determination of its tax-exempt status should post it on its site.

Each of these suggested disclosures establishes a routine clearinghouse of information that a nonprofit’s supporters can use to advocate the organization’s value to the community, its fiduciary responsibility, and its need for financial support.  With this level of routine disclosure, communicating the extraordinary challenges facing nonprofits today can be more effective and more credible. 

Allen J. Proctor was formerly chief financial officer of Harvard University and is the author of Linking Mission to Money® Finance for Nonprofit Board Members. Subscribe to his free newsletter at www.proctorconsulting.org.

Copyright 2009. Reprinted with permission, Business First of Columbus Inc.