Star Tribune Nonprofit 100: Back to basics

  • Article by: PATRICK KENNEDY and JOHN J. OSLUND , Star Tribune
  • Updated: December 22, 2010 - 6:58 AM

Many nonprofits struggle as philanthropic resources are focused on the most urgent needs -- hunger, homelessness and job skills.

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Sarah Friedman a volunteer at Keystone Community Services in St. Paul takes a box of meat from Jason Vanderboom a driver for Second Harvest Heartland. Vanderboom delivered meats and other perishable foods in a refrigerated truck to local food shelves.

Photo: Jerry Holt, Star Tribune

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Minnesota's largest nonprofit organizations have endured the lingering sting of the Great Recession.

But the experience of two of them -- Greater Twin Cities United Way and food shelf supplier Second Harvest Heartland -- underscores how the weak economy has diverted Minnesota's supply of philanthropic resources away from many worthy causes toward a critical few.

At United Way, revenue fell nearly 11 percent in 2009 when the economy soured. The United Way's annual workplace campaign fell short last year as companies slashed jobs and employees still on the payroll contributed less -- or not at all.

Meanwhile, at Second Harvest Heartland, revenue rose 30.6 percent as the distributor of charitable food donations received more support from smaller retail grocers as well as from the hefty likes of Cub Foods, Target, Wal-Mart and Sam's Club.

"We have seen some shift to basic needs," said Rob Zeaske, executive director of Second Harvest Heartland. "And we have continued to enjoy the vast generosity of our donors."

Second Harvest takes about-to-expire groceries from retail stores and distributors and delivers it to area food shelves. In recent years, Zeaske said, the nonprofit has invested in refrigerator capacity for its warehouses, trucks and at the food shelves, permitting a greater volume of fresh foods and produce to enter what he calls the "food stream."

As a result, the volume of product donations to Second Harvest rose faster than the amount of financial donations, Zeaske said. The volume of "rescue food" distributed has nearly doubled over 2009.

It couldn't have happened at a better time. Sarah Caruso, president and CEO of United Way of the Greater Twin Cities, said demand at food shelves jumped 38 percent in the first three quarters of 2009 compared with the same period in 2008.

"Demand is increasing as well as the complexity of client needs,'' Caruso said. That's one reason United Way, which funds hundreds of nonprofits including Second Harvest, has tapped $7 million from its reserves and is dedicating the money to organizations that meet basic needs -- hunger, homelessness and job skills -- over 2010 and 2011.

"I expect demand to remain higher than normal for the next couple of years,'' Caruso said.

The back-to-basics theme punctuates Minnesota's nonprofit landscape. Overall revenue at Minnesota's 100 largest nonprofits rose 7.3 percent in 2009, according to the Star Tribune's annual nonprofit survey. Expenses rose just 2 percent. Meanwhile, contributions declined about 1 percent last year.

But health care organizations accounted for all the revenue gains as revenue fell at education, social services and arts-and-culture nonprofits.

Minnesota's 100 largest organizations posted $43.7 billion in revenue and $42.2 billion in expenses in 2009, the most recent year for which comparable financial information is available. That compares with $40.7 billion in revenue and $41.4 billion in expenses in 2008.

The list is dominated by health care organizations, which account for nearly 92 percent of all revenue generated by the Nonprofit 100.

While the state's private-sector employers cut payrolls in 2009, the nonprofit sector added jobs. Minnesota's more than 3,750 nonprofits employed about 290,000 workers in 2009, a gain of 2 percent over 2008, the Minnesota Council of Nonprofits reported last week.

Once again health care nonprofits set the hiring pace. According to the council, the health care industry is the largest component of the state's nonprofit sector, accounting for 66 percent of the nonprofit workforce and about three-quarters of all nonprofit wages.

HEALTH CARE

Because of state law and regulatory policies, HMOs and most hospitals in Minnesota are incorporated as nonprofits. As a result, health care nonprofits dominate the Nonprofit 100 survey, accounting for 53 of the top 100 organizations.

Hospitals and clinics were hit hard in 2008 by tanking financial markets and an increase in unpaid patient bills. Many people, either newly uninsured because they had lost their jobs or facing large deductibles, simply put off seeing the doctor. Providers cut costs, including laying off workers, in late 2008 and early 2009, starting the year leaner.

Mayo Clinic, for example, focused on "redesigning clinical practices and re-engineering a lot of back- office processes," chief financial officer Jeffrey Bolton said. As a result, expenses in 2009 were basically flat while patient revenue grew by 4.4 percent. Also, Mayo in 2009 recouped most of the $2 billion it lost on its endowment in 2008, when the famed Rochester-based clinic barely broke even.

Allina, too, saw a rebound in its investment portfolio. And while Allina saw a drop in patient volume of about 2 percent in 2009, that was offset by the fact that the patients were sicker, and therefore had higer bills.

Health insurers also benefited from a rebound in investments. But there's another dynamic at play for the insurance industry. In recent years, they've offloaded some of the risk they used to manage. More employers are self-insuring and simply paying fees to insurers for administrative services and access to their provider networks. These fees are less lucrative for insurers but also more predictable.

Also, more health plans now feature high deductibles, shifting risk to consumers who now pay the first few thousand dollars out-of-pocket.

In 2009, revenue grew 9.4 percent for this group compared with 2.3 percent in 2008. Meanwhile, 2009 expenses rose 2.2 percent compared with 8.3 percent in 2008.

Seventeen of the 59 health care nonprofits in our survey spent more than they generated in revenue last year, an improvement over 2008 when the figure was 23.

SOCIAL SERVICES

Revenue at the 32 Minnesota social services organizations surveyed dropped 4.9 percent in 2009 after rising 5.8 percent in 2008. Overall expenses were flat last year.

But a closer look reveals double-digit revenue declines at some of the biggest organizations. For example, Greater Twin Cities United Way saw revenue drop 10.8 percent; YMCA of Minneapolis was down 16.2 percent while Catholic Charities of Minneapolis and St. Paul saw revenue drop 17 percent.

Greater Twin Cities United Way is Minnesota's largest social services nonprofit and a key provider of grants to smaller nonprofits. CEO Caruso said the agency's crucial workplace campaign fell short of goals as the economy weakened in 2009.

"Donors are just like consumers,'' Caruso said. "Donor confidence in the economy was down'' and that translated into less giving. In response, United Way trimmed staffing about 10 percent by cutting five positions and leaving another 12 unfilled.

Now, in the midst of the 2010 workplace campaign, Caruso said donation trends are improving. Contributions are running between 2 percent and 5 percent ahead of last year.

Revenue fell year-over-year at 14 of the 32 social service organizations surveyed. That compares with eight in 2008. Meanwhile, 13 social services nonprofits spent more than they generated in revenue last year, the same as in 2008.

EDUCATION

Many education and arts-and-culture nonprofits have large endowments that they rely on to help fund operations. Steep investment losses eroded many endowments and also caused many private donors to scale back their contributions. Both outcomes are evident in our survey.

Revenue collectively dropped 15 percent in 2009 among the 32 education nonprofits in the survey. Expenses for the group were down 1 percent while contributions fell 8.5 percent.

Market trends and investment styles can lead to large year-to-year revenue swings, in part because nonprofits must include investment gains and losses on their IRS Form 990. The Star Tribune uses data from those forms to rank the nonprofits. Most of the investment losses at the colleges and universities were unrealized losses from their endowments, meaning that if they had been required to sell those investments at the end of the year, they would have incurred those losses. But for the most part, they held onto their investments and were able to see significant gains the next year as markets recovered.

Timing also played a role for organizations whose fiscal years end in May or June. The financial crisis began in July 2008 and hit its lows in the first half of 2009.

The pain was widespread, with 20 of the 32 education organizations in our survey showing revenue drops compared with four in 2008. In another sign of stress, 20 organizations spent more than they generated in revenue last year. That compares with 14 in 2008.

The University of St. Thomas remains the state's largest private college, with $266.1 million in 2009 revenue, down 15 percent from 2008.

Big investment losses in the education category included St. Thomas, which recorded unrealized investment losses of $67 million. Unrealized investment losses at St. Olaf College totaled $78.4 million. Carleton College posted $126.4 million in unrealized losses, and Macalester College had $132.8 million.

ARTS AND CULTURE

The arts group was hit hard in 2009. Revenue plummeted 31.9 percent as steep losses in financial markets eroded endowments, stunted contributions from patrons and consumer belt-tightening trimmed ticket sales at the box office.

The pain was felt across the arts spectrum as revenue fell at 12 of the 13 organizations we surveyed and expenses exceeded revenue at 11. Contributions to the organizations collectively fell 14.3 percent.

At American Public Media Group (APMG), corporate parent of Minnesota Public Radio, revenue dropped 37.5 percent to $68 million while expenses came in at $106.3 million. Investment losses, again mostly unrealized losses, contributed to the revenue decrease. But product sales also declined, said an APMG spokeswoman. Earned revenue from events produced in 2008 that were not repeated in 2009 and lower capital campaign contributions compared with the previous year also skewed the numbers. APMG said operating performance remains steady and that fiscal 2010 numbers will show substantial improvement, again because of improved investment returns in the endowment and increased capital campaign contributions.

The Minnesota Orchestral Association suffered the biggest percentage drop in revenue -- 62 percent, to $15 million. Meanwhile expenses were $34 million, up from $32.7 million in 2008. The orchestral association, for example, saw a $20 million drop in investment returns from the previous year, to go along with a $4 million drop in contributions, said spokeswoman Gwen Pappas. In terms of operations, however, Pappas noted that the orchestra has reported balanced budgets for several years. Expenses, which hit $34 million in this reporting period, have been cut to about $30 million for the current fiscal year.

Staff Writers Chen May Yee and Graydon Royce contributed to this story.

Patrick Kennedy • 612-673-792 • pkennedy@startribune.com • John J. Oslund • 612-673-7206 • oslund@startribune.com

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