Anxiety on the rise at area's nonprofits

Faced with economic battering just when their services are needed most, more struggling nonprofit agencies in Minnesota are merging, collaborating on programs or backroom expenses, cutting costs or just plain going out of business.

"This has been the worst financial year, probably ever, for nonprofits," said CEO Mike Weber, whose Volunteers of America-Minnesota provides $40 million a year in services to children, families and the aged. "Next year will be worse. Some agencies won't make it."

Waves of consolidation in the nonprofit world to cope with cuts in private giving and government contracts have been a way for some nonprofits simply to survive. Others have actually found it's been a way to expand or strengthen core missions.

"Our merger in January was partly because of tighter finances, but also it made programmatic sense," said John Barrett, president of Rise Inc., a $28-million-a-year Spring Lake Park agency that helps people with mental and developmental disabilities enter the job market.

Rise absorbed the much-smaller Family Life Mental Health Center of Coon Rapids, which remains a separate program offering therapy to people with mental illnesses. It has benefited from Rise's administrative and grant-writing expertise, and clients more easily are served by both programs.

But in larger numbers, many observers say, more agencies will emulate the Minnesota Senior Federation and dissolve, spinning off some programs to other nonprofits.

Crushed by debt and retrenchment from major donors, the federation had reorganized twice in recent years. But this time it probably waited too long to consider other options, said its consultant. At the end, the federation was behind on paying bills and staff.

"We were like a ship at sea, like the Queen Mary," said President Barb Kaufman of Plymouth. "With 37 years of history and tradition, we just couldn't streamline it or turn it around in time."

Budgeting on hope

"A mistake many nonprofits make is to budget based on what they hope they will get rather than what they know they will get," said Ron Reed of MAP for Nonprofits, who worked with the Senior Federation. His agency has completed 32 strategic assessments for nonprofits and is counseling 22 agencies thinking of merging.

MAP is building a $200,000 Community Realignment Fund to help up to 50 small nonprofits explore mergers or other ways to navigate the economic shoals.

Among Minnesota's 3,500 or so nonprofit organizations, "it's becoming pretty common to look at the economic landscape and try to figure out how to survive," said Frank Forsberg, senior vice president for community impact at the Greater Twin Cities United Way -- itself a product of a merger eight years ago.

"It's been like watching the hurricane approaching," he said. "You know there's going to be some damage, but where will it hit? Will it be massive damage or selective? We're starting to get some answers."

To cope with a drop in donations, grants and government contracts, most Minnesota nonprofits are trimming salaries and other expenses, and some are cutting services, the Minnesota Council of Nonprofits reported last month after surveying its 2,000 members.

A perfect storm

"It's been kind of a perfect storm," said Weber, of Volunteers of America-Minnesota. "All the factors that could turn south are headed that direction."

While the downward direction of funding is clear, nonprofits and associations that serve them are still trying to calculate the depth of cuts among donors and governments. Many of those spending decisions are still unfolding, and extent of the cuts will not be clear until the end of the year.

First, foundation giving was battered by the 38 percent plunge in the stock market value last year that cut deeply into state charitable foundation assets -- although not as much as nationally, the Minnesota Council on Foundations reported Thursday. The result: Half will cut giving this year, and many will focus grants on support for food, housing and jobs where the economic spasms have taken a toll.

Then, convincing individuals to give grew harder as more people braced against eroding savings, home values and jobs.

On top of that, falling tax collections gave the state government a projected deficit of $4.6 billion for the biennium that starts next week, so the Legislature and governor slashed spending for programs that serve poor, sick or disabled people -- clients of many nonprofits.

There will be cascading government spending cuts by the state and counties over the next two years.

It may not end there. Without significant economic recovery, the state may face an even deeper budget deficit two years from now, Forsberg, Weber and others say.

Merging and cutting

Minnesota's chapter of the National Alliance on Mental Illness has merged with two other agencies in the past five years, in part to keep those smaller programs alive, said executive director Sue Abderholden.

"We're doing better than agencies that provide direct services, where cuts in state and county contracts are really starting to hurt," she said. Still, the agency imposed a 10 percent pay cut on the 17 employees this year and left a grant-writing job vacant. It was hit hard when it lost $200,000 pledged by the Jeht Foundation, whose assets disappeared with financier Bernie Madoff in an alleged Ponzi scheme.

"We're cutting costs every way we can, even using scrap paper for everyday copying. Later this year, we'll decide if we have to cut staff, a last resort," she said.

In the meantime, although not actively seeking new merger partners, the alliance is looking for tiny agencies that might want to rent a desk in its St. Paul office.

Merger talk overblown?

"Everybody seems to be talking about mergers, but I think that's more talk than action," said Kate Barr, whose Nonprofits Assistance Fund counsels and lends about $12 million to Minnesota agencies.

But for long-term survival, she said, many nonprofits must look deeper than simply at how to meet their budgets, she said.

"We're encouraging organizations to go behind the curtain and take a hard look at what they need to do to deliver their services," Barr said. "Maybe you need to look at merger, or outsourcing, or in some cases maybe even drop some programs or even dissolve."

A silver lining of the economic pressures on nonprofits is that "it's forcing all of us to be straight with ourselves, to look hard at what we do and how we do it," said Forsberg of the United Way.

Echoing the words of many other nonprofit executives, he said, "This is a frightening for some of us, but it's giving us a huge opportunity to restructure ourselves.

"When this economic crisis ends in three or four or five years, it will be a changed landscape for nonprofits," he said. "Some will merge, some will be gone, and the survivors are going to be a lot stronger."

Warren Wolfe • 612-673-7253