Trouble ahead for Minnesota's nonprofits

Minnesota's sturdy nonprofit sector braces for tough times as people have less money to give.

When the economy falters, the nonprofit sector historically has coasted for up to a year before feeling ill effects.

Not this time. The recession of 2008 has hit nonprofits harder and faster than previous recessions. And because more than half of nonprofits get most of their individual donations in the fourth quarter, they are already seeing donations plummet.

"They have to make quick decisions for next year, at the same time [they're] facing immediate decreases in donations," said Jon Pratt, executive director of the Minnesota Council of Nonprofits. This is happening at the same time that demand for services is increasing, thanks to the housing bust, credit crisis and a rapidly cooling global economy.

"The state needs more of what nonprofits are doing,'' Pratt said. "At the same time, they have less resources to do it."

The situation has deteriorated so rapidly in recent weeks that the council surveyed nonprofits during the first 10 days of December. The results, released Tuesday, show that 54.5 percent of the 1,950 nonprofits surveyed reported total revenue decreases in 2008; 49 percent reported higher expenses and 47.4 percent reported a drop in contributions from individuals.

The nonprofit sector reports financial information on a slower yearly cycle than private companies do, so the Star Tribune's annual Nonprofit 100 survey relies on the most recent information reported by Minnesota nonprofits. For most organizations on this year's list, that's 2007 -- the calm before the storm. Overall, most of the state's largest nonprofits appeared strong as they headed into the toughest economy in decades.

Revenue at Minnesota's 100 largest nonprofit organizations grew 8.2 percent in 2007, down slightly from 9.2 percent growth in 2006. Expenses rose 8.2 percent as well, slightly slower than the 9.5 percent jump in 2006 expenses. Minnesota's 100 largest organizations posted $39.9 billion in revenue and $38.4 billion in expenses in 2007, the most recent year for which comparable figures are available. In 2006, they had revenue of $34.7 billion and expenses of $33.4 billion.

Revenue grew in three of the four major categories: education, health care and social services. Revenue at arts and culture organizations dropped slightly.

The health care sector dominates the Nonprofit 100. Because of state law and regulatory policies, HMOs and most hospitals in Minnesota are incorporated as nonprofits. As a result, health care nonprofits account for 52 of the top 100 organizations in our survey and 91 percent of the revenue.

Altogether, the state has more than 3,500 nonprofit employers, according to the Minnesota Council of Nonprofits. They employed nearly 280,000 workers in 2007, a gain of 3.6 percent, and accounted for one in every 10 jobs in the state.

But a closer look shows that both the number of nonprofit employers and the number of locations declined in 2007 for the first time since 1998. Pratt attributed the decline to a sector that's maturing after a period of prolonged growth. Nonprofit employers may be closing branch offices, merging with other organizations or shutting down. And today's economy likely will accelerate those trends.

Health care

As private-sector and government employers struggle to contain health care costs, revenue growth has slowed at hospitals, clinics and health insurance providers. In 2007, the average revenue increase was 7.9 percent, down from 8.4 percent in 2006 and moderate by recent standards. For example, revenue grew 8.7 percent for this group in 2004 and 11.2 percent in 2003.

At health insurance provider Blue Cross and Blue Shield of Minnesota, the largest nonprofit on the list, revenue grew 6.4 percent to $8.37 billion. Although Blue Cross had an operating loss of $104.1 million, the company's net income, including investment gains, was $25.1 million.

At the Mayo Foundation, which operates the largest health care services provider on our list, revenue jumped 9.1 percent, to $7.3 billion in 2007, after a 9.7 percent jump in 2006.

Fifteen health care nonprofits spent more in 2007 than they generated in revenue. In 2006, the figure was nine and in 2005 the figure was 10.

Seven of the 60 health care nonprofits we surveyed reported revenue declines in 2007, including Ecumen (down 3.2 percent) and Hazelden Foundation (down 10 percent). In 2006, just two health care nonprofits surveyed had revenue declines.

Social services

Revenue at the 32 Minnesota social services organizations surveyed rose an average 3.9 percent in 2007, down from 4.5 percent in 2006 while expenses rose an average 3.2 percent.

Revenue fell year-over-year at nine organizations in 2007 compared with 10 in 2006 and 12 in 2005. Meanwhile, 11 social services nonprofits spent more than they generated in revenue last year, compared with 10 in 2006 and 11 in 2005.

At the Greater Twin Cities United Way, the largest social services nonprofit on the list and a key provider of grants to smaller nonprofits, revenue rose 5.4 percent in 2007 after falling 1.4 percent in 2006. That decline came after a record fund drive in 2005.

Ten social services nonprofits recorded two-figure revenue gains, led by Hunger Solutions Minnesota, where revenue grew 45 percent, to $30 million.

At the YMCA of Metropolitan Minneapolis, revenue rose 6.9 percent, to $58.57 million, while across the river in St. Paul, YMCA revenue jumped 15.1 percent, to $48.7 million.

Revenue at Second Harvest jumped 18.3 percent in 2007, to $46.3 million. Ray Ahlgren, controller at the hunger-fighting nonprofit, said Second Harvest has increased the amount of food it distributes each year from about 30 million pounds a year earlier in the decade to 34.5 million in fiscal 2007 and 41.3 million pounds in fiscal 2008. Ahlgren is predicting the nonprofit will distribute more than 45 million pounds of food in the coming year.

Second Harvest has partnerships with Cub Foods, Sam's Club, Wal-Mart, Target and SuperTarget. It visits more than 60 stores two to three times a week.

"We've increased our pound- age by hard work and new partnerships," Ahlgren said.

As the economy has deteriorated, Second Harvest has gotten a positive response from the community. In these economic times people's charitable donations shift to basic needs, he said.

Education

Northstar Education Finance Inc., a hybrid nonprofit that specializes in loans for graduate students including doctors and lawyers, tops our list of education nonprofits for the second consecutive year.

St. Paul-based Northstar reported revenue of $408.6 million in 2007, up 29 percent. The nonprofit entity makes the loans while a for-profit subsidiary of Northstar services the loans and pays employees. CEO Taige Thornton's total compensation of $779,520 makes him the highest-paid top officer in the education category and the 13th-highest-paid CEO among the Nonprofit 100.

The University of St. Thomas remains the state's largest private college, with $288.3 million in 2007 revenue, up slightly from 2006.

Investment gains and losses typically skew results in the education category. Nonprofits must record their nonrealized investment gains and losses on the IRS Form 990. For organizations with large endowments, which include many of the education nonprofits, market trends and investment styles can lead to large year-to-year swings. Also, capital campaigns can affect the comparisons.

Of 32 colleges, universities or preparatory schools in the education category, 13 recorded two-figure revenue gains. Six posted revenue declines.

Among the biggest revenue gainers in 2007 were Bethany Lutheran College & Seminary (up 66.6 percent), Shattuck-St. Mary's School (up 66.3 percent) and Breck School (up 51 percent). Three education nonprofits had expenses greater than revenue in 2007, down from four in 2006. Average revenue increased 12.5 percent, while average expenses rose 7 percent.

Arts and culture

Turnover among top officers at Minnesota's largest arts and culture nonprofits continued in 2007. William Griswold left the Minneapolis Society of Fine Arts after 23 months and was replaced by Kaywin Feldman; Anthony Woodcock left the Minnesota Orchestral Association for Boston and was replaced by Michael Henson.

Kathy Halbreich, longtime director of the Walker Art Center, was succeeded by Olga Viso of the Hirshhorn Museum and Sculpture Garden in Washington.

Meanwhile, Teresa Eyring left the Twin Cities early in 2007 after stepping down as managing director at Children's Theatre Company. Eyring was succeeded by Gabriella Calicchio of the Marin Theatre Company of Mill Valley, Calif.

Finally, Patricia Mitchell, head of Los Angeles-based Literacy Network, was named president and CEO of the Ordway Center for the Performing Arts in 2007. She succeeded interim President Jeff Bakken, who had taken over when David Galligan resigned in 2006.

Revenue for the arts and culture group dipped slightly in 2007 (down 0.3 percent) while expenses rose 10.6 percent. Four of the 12 arts and culture nonprofits -- the Guthrie Theater, the Walker, Public Radio International and Twin Cities Public Television -- had expenses greater than revenue in 2007.

The Guthrie Theater's Joe Dowling took home the biggest pay package in the group, at $682,299. Second on the compensation list was Bill Kling of American Public Media Group, whose 2007 pay was $628,174, down slightly from 2006.

John J. Oslund • 612-673-7206 • oslund@startribune.com Patrick Kennedy • 612-673-7926 • pkennedy@startribune.com

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