Large Minnesota nonprofits caught in stimulus aid gap, face cost-cutting

Some of Minnesota's largest nonprofits that help the homeless and people with disabilities or mental illness are struggling in the COVID-19 pandemic, caught in a gap that disqualifies them for emergency federal stimulus money.

Nonprofits with more than 500 employees don't qualify for the federal aid that smaller Minnesota nonprofits have received. So a group of nine social services nonprofits are pushing Minnesota's congressional delegation for help.

"The community can't afford for us to fail, or we have the most vulnerable people in our state without social services," said Julie Sjordal, CEO of St. David's Center for Child and Family Development in Minnetonka, which has 540 employees and provides preschool, mental health and other programs for children with autism and mental illnesses.

The pandemic has led St. David's, Lutheran Social Service, Catholic Charities of St. Paul and Minneapolis and other Twin Cities nonprofits to cancel or scale back many services that brought in most of their revenue. Many are resorting to layoffs, furloughs and other budget cuts to stay afloat.

In May, U.S. Sen. Amy Klobuchar, D-Minn., introduced legislation to give grants to nonprofits of any size. The WORK NOW Act has only Democratic support in the Senate so far. Klobuchar said she expects a companion House bill as soon as next week.

"It's not the time in our history that you want to lose your nonprofit sector," she said. "You need it more than ever."

Klobuchar said the legislation draws inspiration from the Depression-era Civilian Conservation Corps, which employed Americans on environmental projects.

"We now have a really well-structured nonprofit — especially in Minnesota — segment of our economy ... so this is the modern day version of that," Klobuchar said. "People are out of work. They could get jobs working for nonprofits. And the nonprofits, in turn, have huge demands on them to help people, yet they don't have the funding to be able to do it like they want."

Little financial cushion

Minnesota's more than 9,000 nonprofits have been hit hard by the pandemic, losing an estimated $1 billion in revenue in April. Unlike private businesses, nonprofits often don't have much of a financial cushion. In a Minnesota Council of Nonprofits survey, nearly half said they have three months of cash or less on hand.

Most nonprofits in Minnesota have fewer than 500 employees, so they qualified for Paycheck Protection Program loans, said Jon Pratt, who heads the council, which has endorsed Klobuchar's legislation. In fact, in a council survey, 78% of nonprofits said they received Paycheck Protection Program loans, with the average loan representing 14% of an organization's annual budget.

"It was pretty substantial help," Pratt said.

Approximately 100 nonprofits in the state have more than 500 employees, but their employees make up two-thirds of the whole sector's workforce. The larger nonprofits also have bigger expenses and revenue losses, nonprofit leaders say.

"We need them to keep working in the same way we need others in the economy to keep working," Pratt said. "These are essential services."

'Burning through cash'

Besides St. David's, Lutheran Social Service and Catholic Charities, the nonprofits in the coalition are Nexus, People Incorporated, Fraser, Opportunity Partners, Goodwill-Easter Seals Minnesota and Volunteers of America Minnesota and Wisconsin.

People Incorporated issued furloughs and layoffs in March. So did Opportunity Partners, furloughing 200 employees indefinitely out of about 500 employees. The Minnetonka-based disability services provider is down more than 60% of its budgeted revenue since March and is dipping into reserves to cover the up to $500,000 monthly deficits while looking for other ways to cut costs.

"We are burning through cash," said Bill Schultz, Opportunity Partners' interim CEO.

The federal aid would have allowed the nonprofit to bring back its furloughed workers and hire even more. Before COVID-19, Opportunity Partners had 100 openings due to a workforce shortage.

Volunteers of America was mistakenly told by the Small Business Administration that it qualified for $5.4 million from the Paycheck Protection Program and actually received the money before having to pay most of it back, CEO Julie Manworren said.

"I think we are walking a very thin wire financially," said Manworren, adding that she will look for other ways to borrow money and cut costs from an annual $46 million budget, such as consolidating youth residential services to have the option to sell a building. "We will do everything we can not to cut people because ours is a people's business."

At St. David's, which had a $22 million budget last year, program fees and medical assistance brings in about 85% of its revenue. But with programs sidelined in the outbreak, Sjordal had to furlough 200 employees, cut vendor contracts and close a site to drop the lease.

"We basically had a catastrophic drop in revenue," Sjordal said. "We've cut expenses at every corner we can."

Now, Sjordal is slowly reopening some programs in compliance with physical distancing rules, continuing to offer telehealth services and bringing back many of the furloughed staff while she applies for other federal grants to bridge the financial gaps.

At Catholic Charities, which has a $55 million annual budget, COVID-19 is increasing costs by $1 million a month, going toward more food, additional cleaning and overtime spending for staff. The nonprofit hasn't had to cut staff members yet but dipped into reserves to cover a $5 million deficit for the end of its fiscal year June 30.

"This is a defining moment for the sector, a sector the community relies on," said Tim Marx, CEO of Catholic Charities, which has 600 employees. "We serve those most in need."

Lutheran Social Service is one of the state's largest social services nonprofits with a $162 million budget and 2,400 employees. It furloughed 100 workers, and leaders took pay cuts. CEO Patrick Thueson said the nonprofit was already operating on thin margins and isn't like a private-sector retailer that can just raise costs.

More seniors need food, which is being shipped to them because of COVID-19. Group homes need more cleaning, and workers need masks and gowns. So costs rose $3 million over five months. But there are bright spots, Thueson said — Minnesota donors are giving more money, and volunteers at churches created 10,000 masks.

"We feel like Minnesotans have really rallied around us," he said. "Somehow this [federal aid] just got missed. It would make sense to make sure we get through this as well."