COVID-19 Could Mean Extinction for Many Charities

Monday, March 23, 2020

COVID-19 Could Mean Extinction for Many Charities
By: John MacIntosh, Managing Partner, SeaChange Capital Partners. This article was originally published by CNN on March 20, 2020.

(CNN) Covid-19 is poised to become an extinction-level event for America's nonprofits. Cultural institutions have been forced to close their doors. Organizations working in and around public schools or in senior centers cannot provide services because their clients are not showing up.

Fundraising events have been canceled. Many essential front-line social services -- e.g., operating homeless shelters -- cannot be delivered remotely and pose particular risks of infection, increasing the costs of keeping staff safe.

Unless government, funders and nonprofit leaders take immediate and decisive action, many nonprofits around the nation may just disappear over the next few months leaving those they serve and employ in disastrous circumstances.

Unfortunately, nonprofits that fail cannot be so easily replaced or restarted. Few have the type of hard, tangible assets that can survive a gap in service. There is no all-powerful profit-motive to fuel a reconstruction. Philanthropy is not good at providing front-loaded, restart capital at scale.

While the nonprofit sector is often taken for granted, it provides much of what is most valuable in social service, arts and culture, recreation and education. For example, the countless nonprofits delivering human services represent a $200 billion industry that touches the lives of more than 1 in 5 Americans, including: housing more than 200,000 elderly Americans, providing homes to 670,00 foster children and serving food to 46 million people through food banks.

Just how bad could it be? Our earlier analysis of nonprofits suggests that less than half of nonprofits have one month of operating reserves and less than six months of cash to keep them running. Without outside help, the trajectory of demise for many nonprofits is clear: the executive directors and boards delay taking tough restructuring actions; the organizations have to stiff their vendors, then furlough or lay off staff; the founders stop paying themselves; and finally, they shut down when the bank account is dry and payroll can't be made.

The failure of Federation Employment & Guidance Service (FEGS) in 2015, then New York City's largest social service agency, should remind us how damaging it can be when a big nonprofit fails, leaving vulnerable people—the home-bound, the developmentally disabled, the homeless, foster-children—without services.

Fortunately, FEGS failed for idiosyncratic, self-inflicted reasons and was surrounded by healthy groups -- like the Jewish Board of Family and Children's Services -- who were able to pick up the pieces.

In the current environment, this is unlikely to happen. More likely, the failure of a single large organization will have a cascading impact on the local social service system.

Many social service nonprofits with budgets of $50 million or more are overwhelmingly reliant on government funding.

They are, in effect, extensions of city and state government. Each of these large, groups should be deemed a Systemically Important Nonprofit Institution (a "SINI"), and state and local government should be in continuous contact with each of them just as the federal government is with Systemically Important Financial Institutions it deems "too big to fail."

In the face of this looming disaster, we all have work to do:

Nonprofit leaders and boards: Be tough-minded. Nonprofits must go into cash-conservation mode. It is hard to stiff vendors, lay people off, furlough or reduce pay or take advantage of eviction-stays to simply not pay the rent. But a tough restructuring allowing for survival and the continuation of the mission (which is a nonprofit's sole reason for being) is far better than hitting the wall and closing up shop altogether. Nonprofits should also explore mergers, consolidations and the divestment of "non-core" programs, though the number of "takers" is probably small in the midst of a crisis. They must learn to play "hard ball" and remember that a nonprofit cannot be involuntarily put into bankruptcy by its creditors. If hitting the wall is inevitable, leaders must resist magical thinking and plan for a sensible dissolution that aims to preserve and transition services for those in need. Making the best of a terrible situation may be the only thing leaders can do.

Foundations: Step up and be creative. Foundations should boost their support now to keep nonprofits in business and then, if necessary, cut their spending in future years once these organizations are back on their feet. The only thing that prevents foundations from giving more now is their desire not to privilege the present over the future. But at this moment the present needs privileging.

It is heartening that in SeattleSilicon ValleyPhiladelphia, New York and other cities, philanthropic leaders are actively exploring (or have already created) collaborative rapid response funds. These funds need to be able to make fast decisions and should offer loans, grants and guarantees. They should support nonprofits, underlying individuals (both clients and staff), restructurings and even managed dissolutions.

Rich people: If not now, when? Despite the paper losses in their portfolios due to the crisis, the 1% have never been more (relatively) privileged than they are right now. They can work from their second homes, can meet monthly expenses, and some—like distressed investors—may even profit from the carnage.

They should front-load their giving by paying for next year's theatre season this year, giving as if they had attended a canceled gala, accelerating multi-year pledges, and more. Those who had been planning to be more philanthropic in the future —for example, the Giving Pledgers who have yet to give much—must ask themselves "If not now, when?"

Government: Be a good partner. Nonprofits that cannot do the work through no fault of their own should still be paid (teachers are paid if school is closed). Government agencies should waive normal procurement procedures to get contracts registered and bills paid on an accelerated basis. They should defer the recoupment of advances. They should ease performance-based payment requirements. They should recognize that protecting the Systemically Important Nonprofit Institutions will be less costly—in financial and human terms—than letting them fail and scrambling to pick-up the pieces. Initiatives to provide zero-interest loans and employee-retention grants to support small businesses should be extended to include nonprofits.

Even if we do all this, many nonprofits will still disappear. Some will likely close their doors in the next six months, more over the next two years. Work that has been going on for decades or longer may vanish. But hopefully the passion and people once invested in these organizations will, after we get through this mess, find its way back into the sector. We can't afford to lose these precious resources. The work of nonprofits and the passion of their people will be more important than ever as we rebuild the post-Covid-19 world. Part of that rebuilding must include putting in place the systems to ensure that we are better prepared next time.