Minnesota's nonprofits are in survival mode

Cost-cutting, consolidation and redesigned missions have become the strategies of choice for the nonprofit sector.

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Jessica Bedward, right, youth and family counsellor at The Bridge for Youth crisis hotline updated her supervisor Sarah Williams, left, about two sisters staying at the program whose immigrant parents want to send them back to the country they emigrated from years ago.

Photo: Glen Stubbe, Star Tribune

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By training, Dan Pfarr is a social worker. By necessity, he's become a sharp-penciled business manager.

As executive director of the Bridge for Youth in Minneapolis, Pfarr, 46, has watched demand for his nonprofit's services grow by 20 percent while funding has dropped by 25 percent. The Bridge for Youth provides crisis hotlines, youth-and-family counseling and emergency shelter for kids ages 10 to 17.

Revenue dropped after cuts in state and local government contracts and a couple of major donors found other good causes to support.

"I'm not a woe-is-me kind of person," said Pfarr. "I grew up on a big family farm and the harder it got during the farm crisis in the early 1980s, the harder we worked and the smarter we tried to work. We hung on to the farm, but we kind of had to redesign things to survive. And that's what we're trying to do here.''

Payroll is down to 38 from 50 in 2009. Pfarr cut his direct reports from six to three.

"We're trying to match up to the marketplace,'' he said. "And if we need 100 more beds for homeless youth, my answer may be that we're just going to have to do more prevention work with families. Beds and buildings are really expensive."

There has been no economic recovery for many small nonprofits. While the largest 34 social service agencies in the Star Tribune's Nonprofit 100 survey saw revenue rise by an average 13 percent in 2010, most street-level agencies did not.

Across the state, the number of nonprofit employers fell 2.7 percent in 2010, to 3,630, according to the Minnesota Council of Nonprofits, which tracks trends in the sector. Job growth in the nonprofit sector, which also includes large health care organizations, was virtually flat.

"The small organizations, those with less than 10 employees, some of those did go out of business," said Jon Pratt, executive director of the council. "And some went from a few employees to all volunteers."

From the top down, cost-cutting and consolidation have become the survival strategies of choice in the nonprofit sector. The recession, a weak recovery and state and federal budget cuts have only accelerated the trend.

The once-separate United Ways of Minneapolis and St. Paul merged about a decade ago, for example. The Minneapolis and St. Paul YMCAs, which have merged back-office and administrative functions for several years, will formally merge into one Twin Cities nonprofit with the retirements of their respective CEOs.

United Way now has a "merger'' fund to help small agencies examine potential merger partners, and about 20 nonprofit mergers have occurred over the past three years.

"Our request to nonprofit boards and executives is: 'You must begin rethinking your business model and what changes might you begin to make to be relevant, stable and healthy in this new environment,'" said Frank Forsberg, United Way's senior vice president of change and innovation.

He points to the recent merger of the former Family & Children's Service and Reuben Lindh Family Services into the Family Partnership as an example of two financially challenged agencies that emerged stronger as one. The Family Partnership was named 2011 "agency of the year" in the midsize category by the national Alliance for Children and Families.

Human services funding has been hardest hit at the state and county level. That translates into less money per client at the nonprofits that deliver the service.

"Government just doesn't cover the full cost of delivering the service,'' said Kate Barr, a former commercial banker who heads the Nonprofit Assistance Fund. "If they pay you 80 cents to cover a homeless kid, it costs a buck.''

The nonprofits that seem to make government funding work for them have more size and ability to cover the unfunded portion, Barr said. "Lutheran Social Services and Catholic Charities, for example, have the 'brand,' and more heft and a supporter network.''

Meanwhile, the Twin Cities is coping with the highest unemployment rate in years. Social service providers, from homeless shelters to food shelves, report record demand.

Sarah Caruso, head of the Greater Twin Cities United Way, said: "Our intent and ability is to not replace those public dollars. It is to leverage and accelerate high-performing programs that help move people out of poverty. Over the next three to five years this will be important work for our sector.''

Meanwhile, back at the Bridge for Youth, Pfarr is looking for more economies. He saved 20 percent, or about $60,000, on health insurance this year, by moving to a higher-deductible plan with a wellness program. He saved another $10,000 in interest by refinancing an $800,000 mortgage on the Bridge's south Minneapolis headquarters and transitional living residence. He's also working with a consultant on a "digital assessment and intake tool."

"We get 6,000 calls on our crisis lines every year," Pfarr said. "We will double that number through innovation."

Preventing a crisis through intervention is far less costly than coping later with violence or picking up somebody on the street. That makes the Bridge a key link in Hennepin County's fight against youth homelessness.

"About 85 percent of our kids go back home to 'a family,' a mom, dad, foster care provider, a grandma, whoever is a safe adult who is granted legal custody," said Bridge board chairman Michael Alexin, a Target Corp. vice president. "We wrap around case management and comprehensive services to help them stay out of trouble, including 'survival crimes' of theft or prostitution."

That's a good outcome for the kids and the taxpayers. Once kids get caught up in the criminal justice system, the public tab spirals upward.

The Bridge's board has embraced Pfarr's growth plan built around efficiency, innovation and achieving measurable outcomes. The challenge will be recruiting new funders willing to invest in the Bridge.

A look at the categories

Overall revenue at Minnesota's 100 largest nonprofits rose 4.1 percent to $45.5 billion in 2010 from $43.7 billion in 2009. Expenses rose more slowly, up 3.3 percent to $43.6 billion in 2010 compared with $42.2 billion the year before.

And revenue growth came across-the-board at all four categories in 2010, an improvement from 2009 when only health care nonprofits grew revenue.

Health care nonprofits, including insurers like Blue Cross and Blue Shield and health care providers like the Mayo Clinic, account for 92 percent of the revenue on our list.

Education groups including private colleges, universities and prep schools account for the next-biggest portion with about 5 percent of revenue. Social services and arts and culture nonprofits account for the remaining 3 percent.

Health care and education organizations traditionally are the most-recession-resistant types of nonprofits, in part because demand for their services tends to remain steady and they can pass along costs by raising fees and tuition. In 2010, both groups spent about 97.5 cents in expenses for every $1 of revenue.

Social services agencies and arts group are more vulnerable to economic downturns, in part because they rely more heavily on contributions and government grants, which have fallen in recent years.

In 2010, expenses at social services and arts and culture nonprofits exceeded revenue for the year. Arts groups posted $1.05 in expenses for each $1 of revenue, while social services organizations spent nearly $1.03 on expenses for each revenue dollar.

Arts and culture groups also have struggled with declining contributions, as many cash-strapped donors give less or divert their contributions to organizations that address basic needs such as food, clothing and shelter.

The Minnesota Council on Foundations' annual Giving in Minnesota report shows that giving from individuals, foundations and corporate giving programs declined 9.3 percent to $4.9 billion from 2008 to 2009. And giving from individuals, the largest source of giving in Minnesota, had declined 11.3 percent.

Nonprofits that have sizable endowments also have seen their investment portfolios fluctuate with global markets since 2008. For accounting purposes, investment gains and losses are counted as revenue.

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 in 2010 -- the same as in 2009.

We looked at 61 health care organizations for this year's survey including large and small health care systems, senior care organizations and blood and organ donor organizations. In 2010 their combined revenue was $42.1 billion, a 3.4 percent increase over 2009.

Health care organizations are becoming more efficient: Only 13 of the 61 health care organizations spent more than they generated in revenue last year, an improvement over 2009 when that figure was 17 and 2008 when it was 23.

At Blue Cross and Blue Shield of Minnesota, the largest nonprofit on our list, revenue fell nearly 1 percent to $9 billion. At No. 2-ranked Mayo Clinic, revenue rose 3.2 percent to $8.2 billion.

Jim McManus, spokesman for Blue Cross and Blue Shield of Minnesota, said a drop in enrollment explains the decline.

"Enrollment was down slightly in 2010, which resulted in a corresponding decline in revenue. We were able to achieve a modest positive operating margin of just over 1 percent, which continued our financial recovery from some significant operating losses incurred in recent years."

Medica's $456 million revenue increase for 2010 was primarily due to an accounting move related to capital requirements as its Medica Insurance Co. business grew. To meet the capital requirements, Medica Health Plan is assuming risk from Medica Insurance and that's reflected as premium. That transition accounted for most of the 12.6 percent growth for 2010.

But approximately $100 million of Medica's growth in 2010 can be attributed to state-sponsored programs and its private fee-for-service Medicare business.

"It was fairly modest growth that we saw in our regular organic business," said a spokeswoman for Medica.

SOCIAL SERVICES

Revenue at the 34 Minnesota social service organizations surveyed increased 13.7 percent in 2010 after dropping 4.9 percent in 2009. Overall expenses rose 12 percent for 2010.

Revenue fell year-over-year at just seven of the 34 social service organizations surveyed. That compares with 14 in 2009.

Meanwhile, 12 social service nonprofits spent more than they generated in revenue last year, similar to the previous two years.

Second Harvest Heartland became the largest social services nonprofit on our list, as revenue jumped nearly 38 percent to $91.7 million. The hunger relief organization has grown rapidly in recent years in part because as the economy soured more philanthropic resources were targeted at basic needs such as food.

The Greater Twin Cities United Way, long the No. 1-ranked social service nonprofit in Minnesota, dropped into second place, despite a healthy 5 percent revenue increase.

Second Harvest, United Way and Lutheran Social Service of Minnesota -- the state's three biggest social service agencies -- all spent more on expenses than they generated in revenue last year.

EDUCATION

Revenue among the 32 education nonprofits in the survey rose 4.4 percent in fiscal 2010. Expenses for the group decreased 2 percent. Contributions dropped 1.4 percent in 2010, an improvement over 2009 when contributions to the education nonprofits we surveyed fell 8.5 percent.

Eight of the 32 education nonprofits saw revenue fall. Fourteen organizations spent more than they took in last year.

Education nonprofits rebounded in 2010 after revenue collectively dropped 15 percent in 2009.

Most of the colleges and universities have a May or June year-end, and the most recent data are from the year ended June 30, 2010. Fortunes improved mainly due to the improved stock market returns at organizations with large endowments.

The biggest revenue gainer among the colleges and universities was Hamline University, where total revenue increased 31 percent. Revenue from program services (largely tuition) was up just 2.2 percent to $99.3 million. But much of Hamline's improvement came from contributions, gifts and grants, which nearly doubled to $16 million. Investment income improved as well, from a $14.5 million loss in 2009 to a $4.4 million gain in 2010.

Hamline will open a new university center, the Carol Young Anderson and Dennis L. Anderson Center, in the fall of 2012 as a result of a $36 million capital campaign that began in July 2009. The center is named after longtime Hamline supporters Carol and Dennis Anderson.

Doug Anderson (no relation), Hamline vice president of finance, said: "We were fortunate to have enhanced success in fundraising (mainly for the Anderson Center project); the securing of grants (including the lead role on a Bush Foundation grant); and solid investment returns.''

ARTS AND CULTURE

At the 13 arts organizations we surveyed, five saw revenue decline from 2009.

But as a group, revenue jumped 36.8 percent, mainly from gains at the Minnesota Orchestral Association, the Minneapolis Society of Fine Arts and American Public Media Group.

At the Minneapolis Society of Fine Arts revenue was up 103 percent, much of which can be attributed to higher investment returns. For the year ended June 30, 2010, investments rose $7.2 million compared with a $7.3 million loss the year before.

It was much the same at American Public Media Group, where officials said the 70.2 percent increase in revenue (and the corresponding drop in revenue the previous year) were mostly related to investment gains and losses.

pkennedy@startribune.com • 612-673-7926 nstanthony@startribune.com • 612-673-7144

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