A new normal for the state's nonprofits

Article by: DANIEL JOHNSON
Updated: June 13, 2010 - 3:57 PM

Minnesota charitable organizations on the fault line: looking for how to bridge the sustainability gap.

Don Johnson

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After decades at the nation's charitable epicenter, the new economy has Minnesota facing a tectonic shift in its nonprofit and philanthropic landscape. Our state's social sector has been rocked; it's no longer business as usual.

Case in point: Demand for human services last year far outstripped the ability of the infrastructure to meet mounting needs and still balance budgets. Among local United Way agencies, 74 percent experienced an average increase of 20 percent more requests for their services and 81 percent lost revenue.

Minnesota's nonprofit community has demonstrated characteristic resiliency during the economic crisis. Budgets have been cut, staff reduced and programs curtailed. Last year, more than 40 area charities engaged in merger activity. The donor/grant seeker relationship is changing as both sides demand greater focus, relevancy and accountability.

Is enough being done to help Minnesota nonprofits safeguard our high quality of life and prevent it from slipping -- some would say further -- into the crevasse of mediocrity? Many leaders would say "no."

Amid this new reality, 25 Twin Cities' charitable leaders recently shared their insights with me. Three themes emerged:

•The fault line has shifted. Almost all leaders believe the traditional financial underpinnings of the sector won't return. So much has changed that the operating environment is now referred to as the "new normal."

Some nonprofits have secured footholds in this shifting terrain. To meet skyrocketing demand for its financial counseling Lutheran Social Service (LSS), for example, is using an innovative charitable giving tool called program-related investments that loan funds at below-market interest rates. With this tool, LSS has been able to double its counseling staff. On St. Paul's West Side, Neighborhood House is earning new income by leasing office space.

But a quicker pace is needed. When asked to identify examples of promising transformation one nonprofit consultant said, "Nonprofits need to get busy doing business in new ways."

•Facing the abyss. While it's difficult to forecast how many of Minnesota's 8,931 registered charities are stumbling on rough economic ground, some leaders believe that fewer nonprofits will result in a stronger overall sector. "Let those that will die, die," said a foundation president. "The net result will be a good thing."

However there is strong sentiment that neither volunteer boards nor managers want to be part of dissolving a charity under their watch. In one case, a board director confided he resigned because the board didn't "own up to the organization's failing financial situation."

•Crossing the chasm. The best-positioned nonprofits are those that have strong governance, earned revenue and a capacity for prudent risk taking, including the ability to throw a safety line to others. "The right nonprofits need to take on the good programs of those that are struggling," said a nonprofit industry adviser.

Like nonprofits, grant makers are also evolving. Many are seeking a more compelling definition of success, focusing program areas, leveraging both financial and non-financial capital, and, significantly, working together on pressing social issues.

To bridge the gap

These themes, born of the new economic reality, have created a nonprofit sector sustainability gap. It's evident that a better Minnesota won't spring from some master nonprofit map nor will fundamental change come one organization at a time.

Industry allies, government leaders and creative practitioners can bridge this gap but it will require courageously scaling five key issues:

• Board oversight: Nonprofit boards must take their fiduciary responsibilities seriously and think hard about their mission and how it affects their community. Boards need to think beyond organizational walls and focus on what is ultimately best for the people of the region.

• Principled practice: At a time of instability, the public's trust becomes threatened. Nonprofits must heighten their commitment to transparency and accountability. Excellent resources from the Minnesota Council on Foundations and Charities Review Council can provide the necessary road map.

• Measure with meaning: Rather than "teaching to the test," ensure that effectiveness measures are straightforward and lead to a healthier nonprofit sector.

• Leverage donor resources: Invest in performance-based philanthropy, capacity building, leadership, risk taking and social experimentation; create new business models; influence government.

• Collaborate across sectors: Support nonprofits that find crossing the sustainability gap difficult. Apply lessons from the private sector's vast merger and acquisition experience to hasten consolidation. Expand alliances with proven nonprofits as a cost-effective alternative to outmoded government programs. Forge results-based, public-private partnerships.

We often hear it said that you can measure a society by how it treats its most vulnerable. But it can also be in the way it treats its community institutions. Given the stake Minnesota has in its beloved charities, more needs to be done to shore up the social sector by helping nonprofits and grant makers bridge the sustainability gap.

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Daniel Johnson is a board member of the Charities Review Council and past chair of the Minnesota Council on Foundations. He formerly led charitable foundations for UnitedHealth Group and Blue Cross and Blue Shield of Minnesota. His e-mail address Johnson-Daniel@comcast.net.