Laura Cronin’s interview with Doug Bauer—who is also Chair of the Board of Directors of Philanthropy New York—originally appeared on PhilanTopic, the Philanthropy News Digest blog, on March 26, 2012 and is reprinted with permission.
Philanthropy News Digest: How tough is it out there for nonprofits? And what can the foundation community do to inform itself about the financial challenges confronting the sector?
Doug Bauer: We’re entering what is now the fourth year of reduced funding for nonprofits, with continued cuts at the federal, state, and city levels, and it is taking a toll on the sector, especially in human services and the arts. If there’s any good news, it’s that the state of New York is looking at a $2 billion gap in the coming fiscal year, not the $10 billion previously forecast. That’s a better situation to be in than predicted, but it still means cuts are coming.
Another concern is that some of the performance-based contracts that are being issued, like the ones New York State has put in place, mean that, for example, a senior daycare program that was expecting $1 million for a certain number of slots will not be getting all its funding. They might get 93 percent and then the last 7 percent is a “private match.” What we are seeing, in other words, is the emergence of an expectation—implicit or explicit—that private philanthropy is going to start filling some of these gaps. We all know, however, that the resources available to private philanthropy pale in comparison to what the public sector is able to do and it’s not philanthropy’s job to try to fill these gaps.
Also, If you are working on issues related to poverty, especially in the human services area, some of the change around contracts with private matches and no overhead are going to have a major impact on the financial condition of nonprofits that are working to address those issues. The financial condition of a good chunk of the nonprofits we work with continues to deteriorate. And, by the way, these are not low-performing nonprofits. All of which is to say, funders really have to pay attention.
PND: How can funders support nonprofit leaders—especially leaders of mid-sized organizations—as they deal with a “new normal” characterized by reduced revenue and growing need?
DB: Mid-sized groups are especially vulnerable in the current environment. If you’re a high six- or low- to mid-seven-figure organization, it’s really tough. For example, we supported a mid-sized organization in Brooklyn that had very good programs but ran into some financial difficulties. The board and staff could have tried to make it work, but a better solution for them was to be absorbed into a much larger organization. All the back-office administrative work was brought into the “mother ship,” while the frontline programming at the neighborhood level remained the responsibility of staff at the smaller organization. Let’s face it, a merger like this, where there’s good alignment between organizations’ respective missions and programs, is going to be a solution for some mid-sized groups, while other groups, if they want to remain independent, are going to have to be more nimble, efficient, and effective than they’ve ever been.
Of course, smaller groups tend to be at a fundraising disadvantage simply because they don’t have the development capacity of larger institutions. As you track where public funding is going, and you think about how the social safety net is being restructured, I have to believe that larger nonprofits are going to be in a much better position to figure out what that restructuring ultimately looks like and how they fit in. I have great admiration for leaders of smaller nonprofits who are trying to make a go of it, and there are a lot out there. But it’s going to be interesting to see whether we end up with a nonprofit sector version of—the analogy isn’t perfect—”battleships” and “motorboats.” Are we going to end up with two types of nonprofits—large eight- and nine-figure organizations doing most of the work and a bunch of social entrepreneurs and social enterprises that focus on innovation and figuring out new ways to deliver services? And if that’s our future, where does the mid-sized nonprofit that’s kind of in between the start-up and the behemoth fit in? I’m honestly not sure.
PND: What should private foundations be doing to help their grantees in a time of growing need?
DB: The best dollars a foundation or corporate giving program can be providing right now to nonprofits, especially nonprofits in the human services and poverty-alleviation area, are general operating support dollars. Most of these groups are 80 percent to 90 percent government-funded. And given what’s been going on with government funding and the uncertain political environment, general operating support is the best way to ensure that nonprofits have the flexibility to adapt. The Clark Foundation has provided general operating support to its grantees for almost two decades now, and our board understands how important and necessary it is in this kind of environment. In fact, 80 percent of our grantmaking is awarded as general operating support. And the reason goes back to this question of government support. Those dollars are restricted to the programs that nonprofits are contracted to operate on behalf of government. Not only are the dollars restricted, but the payment cycles associated with government contracts, especially over the last three years, have been all over the map. What used to be a thirty-sixty-ninety-day cycle can now be a hundred-and-twenty-to-two-hundred-and-forty-day cycle, which of course wreaks havoc on your cash flow. So again, general operating support is critical, because those dollars are not allocated to anything but the ultimate success and sustainability of the organization.
PND: What else are you doing to help grantees survive and thrive in this uncertain environment?
DB: Based on some 2011 research conducted by Philanthropy New York, we learned that the Clark Foundation is one of the largest funders of nonprofit management training in New York City, at just over $2 million a year, and it’s proven to be immensely beneficial to our grantees. We fund a number of organizations that are dedicated to helping nonprofits perform better, including the Support Center for Nonprofit Management, the Nonprofit Finance Fund, and the Rensselaerville Institute.
That said, we don’t go in and say to a grantee, “You need this.” Instead, we try to pay close attention to the organization’s existing needs and whether the advice, counsel, or consulting offered is practical, outcome-oriented, and will actually help them in the near term as well as in the long term.
Of course, when foundations suggest, or worse, force mergers or other changes on an organization, it can be problematic. A new initiative, the New York City Merger, Acquisition and Collaboration Fund, or NYMAC, has been launched by SeaChange Capital Partners and a group of foundations to advance management transitions while avoiding the whole problem of funders acting as unwelcome matchmakers on nonprofit mergers. Several foundations and, interestingly, several individual donors, pooled over $1 million to create the fund, and those funds will be used to help pay for and facilitate mergers, acquisitions, and collaborations in the nonprofit sector.
As you can tell, I don’t necessarily believe that mergers are a panacea for the sector. We’re all familiar with examples from the corporate world where mergers have not worked out or created additional value. That said, given the environment we’re in, we have to look at the question of encouraging more mergers, acquisitions, and collaborations. And I’m excited about NYMAC because it puts money in place to, one, have that conversation on a case-by-case basis; two, to pay for legal, financial, programmatic due diligence if the conversation goes well; and, three, if the conversation goes really well, to eliminate any roadblocks or deal breakers that might derail a merger or collaboration. For example, an organization might say, “We can’t do this deal unless we break our lease.” If that organization needs to come up with, say, $50,000 to legally break the lease so that a merger can go through, NYMAC is in a position to provide those funds.
We’re very excited about it, and I hope, if it proves to be a success, that we’ll be able to replenish and maybe even grow the fund.
PND: The Clark Foundation is known for its collegial relationship with its grantees and its commitment to regular site visits. Have you been inviting conversations with your grantees about their financial health and sustainability? And what would you recommend to other funders about managing those kinds of conversations?
DB: First of all, a good look at an organization’s grant proposal, Form 990, three years’ worth of audits, and management letter will give you a pretty good sense of how it is doing. The importance of advance preparation cannot be overstated. We also make a real effort to talk to other funders. A lot of our grantees are receiving support from other funders, and so we try to get their perspectives as well. Again, we try to go into meetings with our grantees with as much information as possible.
But you know that we tend to provide consistent support to our grantees over long periods of time; we even have a few we’ve been funding since the 1960s. And we would hope that, over time, with all our grantees, especially these last three years, that finances and financial health are going to be part of the discussion. Not asking about an organization’s finances in any kind of detail is poor due diligence on the part of a funder. It’s a “must have” conversation. And it’s a conversation that grantees should welcome.
That said, we hope, and usually request, that a board member or officer is present during our site visit. It makes for a far richer conversation. And I have to say, as I look at the hundred-plus grantees we work with, I’ve been impressed with how attuned board leadership is to these issues. They understand that it’s a difficult environment and that one of their key responsibilities is fiduciary oversight of the organization. I know of board chairs of well-run nonprofits that, because government funding and payment cycles have become so erratic, are looking at cash flows on a weekly basis; it’s the only way they can stay on top of what’s going on.
Of course, the funder/grantee dynamic is always a factor. And we try to mitigate that power imbalance by being responsive, being attentive, and listening. Funders need to listen more than they do. And, you know, your parents were right: manners matter. You have to be present. You have to be open. And you have to be nice. If you take the time to really analyze what grantees are doing; if you make an effort to see them on their turf; and if you listen a lot, you are demonstrating, via your actions, that you care about the organization and its work and are a conscientious partner.
I’m always pleased when a grantee, at the end of a site visit, says, “You came prepared.” I’ve never had an executive director not enjoy a robust conversation about what their organization is doing. They’re always eager and willing to defend, debate, or support their programs. I always enjoy, for example, my conversations with a particular ED. He’s not a wallflower, and more importantly, he really does want to have a good discussion about what his organization is doing because he’s interested in continuous improvement and he sees us as a partner in that process. Yes, there are some longtime EDs—and I get that the ED role is tough—who are a little cynical about funders and funder behavior. Believe me, I know there’s a lot that funders do to encourage that kind of cynicism. But I think, especially in this environment, that the funder-grantee relationship has to be a partnership, and a free flow of information is critical if the partnership is to be successful.
UPDATE: Nonprofit Quarterly’s Rick Cohen responds to this interview with Five More Questions for the Clark Foundation’s Doug Bauer.