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Non-profits start making painful cuts

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Business - USA TODAY

Non-profits start making painful cuts

Wed Sep 17, 6:55 AM ET Add Business - USA TODAY to My Yahoo!

By Sue Kirchhoff, USA TODAY

Soaring demand and shrinking budgets are putting intense stress on the nation's vast non-profit sector an intricate web of hospitals, schools, social service agencies, museums and other organizations that make up about 6% of the economy.

Many of the problems stem directly from the recession, which forced millions of unemployed and uninsured to turn to charity. But the situation could get worse even if the economic rebound continues. Government spending, vital to non-profits, is under continued pressure. Foundation spending is down, private donations have waned and business costs are up. (Related story: Non-profits can still grow in tough times)

"It seems as if the federal government is not wanting to help the states, and the states are strapped financially," says Doreen Marchione, executive director of Seattle-based Hopelink, which provides training, housing and other assistance to more than 50,000 people a year.

Hopelink was forced to lay off 10 employees and leave six positions unfilled because of a decline in state aid, rising caseloads and higher costs, including staff health insurance. Private donations stayed level, but didn't cover rising need. The organization now opens its food banks twice a month rather than once a week despite a 30% increase in demand since 2000. It turns nine families away from temporary housing for every one allowed in.

Hopelink's woes are not uncommon, and the evolving challenges could have a broad impact. The non-profit sector employs nearly 50% more paid workers than construction and three times as many as agriculture. Not-for-profit museums, schools, theaters, schools and orchestras are economic anchors for many communities, improving the quality of life and helping attract investment.

But for possibly the first time since Ronald Reagan (news - web sites) attacked the public welfare state, non-profits face the very real prospect of significant, continuing declines in government funding, their second-largest source of revenue. Many state and local governments, facing budget shortfalls, have already pared back. Congress, staring down $500-billion-plus annual deficits, is beginning to debate cuts or slower spending in some social programs.

At the same time, foundation giving dipped slightly in 2002 and is expected to decline this year as well, following record growth in the 1990s. Endowments and private contributions are lagging, due to the lingering effects of the stock market bust. Non-profits have only so much latitude to increase dues and fees, already their main source of funding. And the nation's unemployment rate is expected to stay high well into next year, even with an improving economy, as businesses delay hiring or move jobs overseas.

In a telling sign, the American Red Cross (news - web sites) said Monday that its disaster relief fund is empty, even as Hurricane Isabel barrels toward the East Coast. Officials blamed the situation partly on the economy.

Making adjustments

Martha Aldridge, executive director of The History Center in Cedar Rapids, Iowa, has increased marketing since the recession, while keeping admission fees for the museum steady. A local hotel tax, a share of which goes to non-profits, is generating less revenue, though private donations are up. Even a federal law tightening public school standards has hurt, increasing costs and forcing teachers to spend more time on class work and less on museum field trips.

"It's very hard for them (city and county) to support museums when they're having to take money away from homeless programs and children's programs," Aldridge says.

The arts have been one of the hardest-hit parts of the non-profit sector. The Philadelphia Museum of Art recently laid off staff for the first time in more than two decades. Colonial Williamsburg, run by a non-profit foundation, has announced layoffs.

The federal government's National Endowment for the Arts on Monday distributed $250,000 in grants to orchestras it said had been underserved in the past, a move that comes just after the Florida Orchestra in Tampa cut musicians' pay 16% by trimming the number of weeks they will be paid. Some orchestras have shut down. In a separate report, the NEA predicted not-for-profit dance companies could lose as much as 30% in earned income in the next several years, based partly on the experiences of dance troupes after the 1990-91 recession.

A July survey by the Center for Civil Society Studies at the Johns Hopkins University's Institute for Policy Studies found nearly two-thirds of a broad cross-section of non-profits were feeling the squeeze of government funding cuts.

The problems aren't over. Alabama voters last week rejected Republican Gov. Bob Riley's $1.2 billion tax-increase package, a move that will force cuts in state spending. That could affect the National Children's Advocacy Center in Huntsville, which helps child-abuse victims.

"There's a real risk," says Connie Carnes, executive director of the center. "There's a very, very big concern here about how we're going to fill those gaps."

Lester Salamon, director of the Johns Hopkins Center, argues that as states cut programs like Medicaid health insurance for the poor, "It's harder to do advocacy, harder to run teaching hospitals, do community organizing work, it's harder to do charity care."

"We're in for a longer-term period of real stringency that will raise a lot of questions about whether this is the non-profit sector we want," Salamon says.

Previous growth

Non-profits, loosely defined, are private groups that cannot legally distribute profits they make to the parties that control them. Most have federal tax-exempt status, and many are free from local and state taxes. Contributions may be tax-exempt, depending on the type of organization

Health care and education make up more than 60% of the non-profit sector, followed by social services, religion, civic groups and the arts. Partly because of growth in health and education, fields also expanding in the for-profit sector, many non-profits have continued to create jobs (story, above right).

The emerging financial pinch follows a period of rapid growth, with not-for-profits outpacing for-profit businesses even during the 1990s' boom. Governments at all levels increasingly turned to non-profits to deliver services. Charitable giving climbed as foundations reported years of double-digit increases.

Salamon estimates combined state and federal social welfare programs rose 36% in real terms from 1985 to 1995. The libertarian CATO Institute estimates domestic spending subject to annual review will rise nearly 17% this year, under President Bush (news - web sites)'s watch.

That is turning around.

Charitable donations by individuals last year fell about 1% after inflation to $184 billion, according to a Giving USA survey by the AAFRC Trust for Philanthropy. The Foundation Center says foundation grants declined 0.7% to $30.3 billion in 2002. The drop was less than expected because many foundations base donations on a several-year average of their assets. But 2003 giving is expected to drop

"They can take risks for a few years ... after three consecutive years of decline in the market, they ran out of good years to average against," says Loren Renz, Center vice president, noting foundation assets dropped 10% to 12% last year.

State budget cuts have hit the hardest as legislatures and governors have grappled with a cumulative $200 billion shortfall during the past three years. Thirty-one states reduced spending this year to bring their budgets into balance.

Non-profits are nervously watching Congress, wondering how lawmakers will deal with years of projected deficits caused by a slow economy, big tax cuts, the rising cost of the war and other spending.

Right now the outlook is mixed, and many of the think tanks and advocacy groups analyzing the federal budget and competing for aid are non-profits facing their own funding problems.

Chris Edwards, head of fiscal policy at CATO, doesn't see much chance of big domestic cuts before the 2004 election, even with the White House's recent $87 billion request for Iraq (news - web sites) and Afghanistan (news - web sites). But he says it's a matter of time.

"Groups with low priority, things like housing and transportation money, that's all really going to get squeezed," says Edwards, who has recommended cuts in domestic programs like farm subsidies to cover the cost of the Iraq war. "What saved us in the 1990s was the dramatic drop in defense spending" which is now gone.

A health and human services (news - web sites) spending bill passed by the House would cut a special block grant to states by $151 million or 23%. Non-profits such as Hopelink depend on the program. But House Republicans are also moving a bill to provide $12.6 billion in charitable tax incentives, including a break for filers who don't itemize deductions.

While Medicare spending has been rising, the insurance program has been ratcheting down payments for some services. Conservatives are growing restless about the $400 billion, 10-year price tag for a proposed Medicare prescription drug benefit. Negotiations on the measure have bogged down, partly over efforts to expand Medicare rural health care funding.

"You cannot count on legislators, and we're so dependent on them," says Pat West of Pioneer Home Health Care in Bishop, Calif. Her non-profit home health agency serves about 45 people in two counties that stretch over an area bigger than the state of Maryland. She relies on Medicare for more than 90% of her funding.

Becoming self-sufficient

The trends are intensifying efforts by non-profits to become more self-sufficient and improve their public image, tarnished by recent scandals.

An August study by the Center for Public and Nonprofit Leadership at the Georgetown Public Policy Institute, scrutinizing the 1998 tax returns of 238 foundations, found they spent nearly $45 million on trustee fees, mostly to boards of directors, rather than using that money for charity.

"Not-for-profit organizations are owned by the community, and if anyone should have a sense of public accountability and transparency, it should be the non-profits," says Dan Sisto, president of the HANYS Health Care Association of New York State, which represents 550 non-profit and public hospitals, nursing homes and like groups. Sisto's group is creating accountability standards, based on the recent federal Sarbanes-Oxley law governing publicly traded firms.

Former Democratic presidential candidate Bill Bradley (news - web sites) was an adviser on a controversial study this spring by the non-profit sector at McKinsey & Co., a consulting firm, that found non-profits could free up $100 billion a year by enhancing management.

But the authors of that report say the pending challenges are too big to just be managed away.

"There are not nearly enough efficiency gains in this sector to compensate for the loss of funding," says Les Silverman of McKinsey. "That doesn't mean there aren't good things to do, but it does mean the answer to this does not lie within the sector itself becoming more efficient."

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