Standing Beside Alaska's Non-Profits

Nonprofit Trends for Alaska, 2011-2020

We will never forget the images of the tsunami in Thailand four years ago. The warning system didn’t work. For some people, the first indication of a problem came when the tide rushed out. For others, it happened when they saw the wave rushing toward them. Either way, it was too late for any but the lucky to escape. Shortly after that disaster, The Foraker Group saw the results of the first ISER Economic Report on the Nonprofit Sector. The data in that report was like an earthquake for the sector and we started to issue our warnings in early 2007. We spread the word that a disaster could be on the horizon for nonprofits in Alaska. Like a tsunami, it would come in waves and damage the entire nonprofit landscape. That was the warning. Today the tide is rushing out – the first big wave is on the horizon.

John Naisbitt published a book in 1982 called Megatrends. Like Toffler’s Future Shock, these futurists wanted to warn us about the societal and technological changes that were about to occur. In hindsight, these studies provided a pretty accurate vision of the future.

Today, the future is less clear. But like those futurists, we have been monitoring trends, trying to predict what is next for nonprofits in Alaska. The Foraker Group and the Institute for Social and Economic Research (ISER) at the University of Alaska Anchorage will soon release the 2010 Report on the Alaska Nonprofit Economy. It confirms that the nonprofit sector in Alaska will face unprecedented change over the next decade. As a result, organizations will need to become nimble and rapidly adjust to these changes or go out of business. Those that survive will be the most prepared for change. Without the credentials of a Naisbitt or a Toffler, The Foraker Group, with the ISER report and other research from around the country, predicts three “megatrends” for Alaska nonprofits. In the next few years, these changes will be disastrous for some organizations, and will certainly have an impact on all nonprofits.

Three years ago we alerted community leaders about a potential crisis. I spoke to almost every Rotary Club, most Chambers, and with many nonprofit boards around the state about what that data showed. We provided advanced warning. Still, we failed to convince people that we were speaking to them. Nonprofit leaders nodded their heads like they heard the message, but for some reason they thought we were speaking about someone else’s organization, not theirs.

So this time, we will be more direct. The trends that comprise this tsunami will come in three waves and are inter-related. Each trend has its own truths to consider. While they will devastate some organizations, they will touch all, including the organizations you are involved with.

  • The first trend will be the “funding crisis.” The current funding mix for Alaska nonprofits is not sustainable. We must transform revenue streams – and fast! Alaska nonprofits must grow individual philanthropy and learn how to earn income. We have too little time to do each well, but we must try.
  • The second trend is what I call the “crash of the herd.” We have too many nonprofits for our “eco-system” or population. While the funding crisis could exacerbate this trend, the real culprit is a scarcity of the right people to serve on the boards and staffs of all these organizations. Even if we can adjust to the funding crisis, we can do little to avert the scarcity of people.
  • The final trend is a need to “restructure” how we do business. As a result of the first two trends, as well as other societal and technological changes, nonprofit organizations will need to find more adaptable business models. Merger, consolidation, integration, and cooperation are no longer nice thoughts. Enlightened leaders will seize this opportunity and begin discussions on what structure could work for them in the 21st Century. Others with a wait-and-see attitude will find they have few choices – they will be like those standing on the beach when the tide goes out. Most will either go out of business or find themselves merged into another nonprofit, not of their choosing.

In order to ensure the survival of your organization, the time to plan for change is now. Tomorrow will be too late!

The Data

In 2007, The Foraker Group and ISER published the first Economic Impact Report on the nonprofit sector in Alaska. The study’s main findings were:

  • Alaska had 6,000 nonprofit organizations – one for every 113 people and for every 80 adults at the legal age to serve on a board.
  • Alaska’s nonprofit sector had $3.4 billion in expenditures, $2.4 billion of that in 501(c)(3) organizations (charities).
  • Almost 11% of the state’s workforce was employed in the sector, as compared to 7% nationwide. In rural Alaska, that percentage was over 50% in many regions.
  • Alaska’s nonprofits received significantly more funding from government grants than the national norm — 53% as compared to 10% in the rest of the country.
  • Corporate and foundation giving was significantly higher than the national norm.
  • Donations from individuals were below the national norm.

The data from the 2010 ISER report showed little change. In fact, most data shows that in many ways our sector has become less resilient.

  • ISER’s best guess is that the number of nonprofits in Alaska grew by 17%. They now estimate over 7,000 nonprofit organizations exist in the state.
  • Total expenditures grew to $4.5 billion (33%) — $3.2 billion or 2/3rds of expenditures in charitable organizations.
  • The nonprofit sector workforce remained significant at 11% of the state’s total workforce.
  • The sector’s dependence on government grants was lower but remained high at 43% of total income compared to 9% across the nation.
  • Corporate and foundation giving continued to be disproportionately high compared to national norms.
  • Giving grew by 20% over three years (note that this data was gathered before the recession).

Unfortunately, most data on the sector is three years old. That was the case with the first study in 2007, and is still true with the 2010 report. We know much has changed over the past three years. Still, ISER economist, Scott Goldsmith, who produced both studies, has made well-grounded assumptions in this report. We are confident that the trends we observe in the research, combined with what we have learned from national studies, expose issues that warrant immediate attention.

The Financial Crisis

The most sustainable revenue sources for nonprofits are either earned revenue or individual charitable giving – this is not news. Earned revenue is generated when a nonprofit derives income from a mission related product or service – like buying a ticket to a show, or running a thrift store, or providing a medical service. Individual charitable giving is what it says – a nonprofit asks individuals to give cash. The ISER data shows that in Alaska we are not as good at either of these disciplines as we must become. However, on the positive side, the report shows that over the three-year period between reports improvement was found in both individual giving and in earned income. Since then, as a result of Rasmuson Foundation’s effort to establish Pick.Click.Give., and with many more nonprofits focused on individual giving and on earned revenue, both of these income streams have increased. On the other hand, the data shows that nonprofits still depend too heavily on revenue from non-sustainable sources such as government grants, foundations and corporate donations.

In the 2010 study, Alaska’s nonprofits received 43% of their income from government grants. While this is less than the 2007 study (53%), the national norm is only 9%. Since the 2010 study uses data from 2007, we should assume that we have already lost more ground. In ISER’s report, they suggest that drop was down to 38% by 2008 before a slight increase in 2009 that came as a result of the federal stimulus program.

We can assume that government grants will continue to decline. Attitudes at the federal level have changed – brought on in part by earmarks like Alaska’s infamous “bridge to nowhere” in 2006. The drop from 53% to 43% of total income from government grants could have resulted in part from this attitude change. Since that time we lost Senator Stevens and the mood in D.C. has become even more negative about earmarks.

On a brighter note, we made modest gains with revenue from government fees, including funding from the Bureau of Indian Affairs, Indian Health Service and all Medicare and Medicaid reimbursements. In the 2007 study, Alaska nonprofits received 14% of total income from those sources, and by the 2010 study that had grown to 17%. The national norm is 20%. Government fees, unlike government grants, are more sustainable because they are earned income. But with the recession, the deficit, and the mood in the country, even earned income from the government could be in jeopardy. The bottom line on all government funding is that we receive 60% of total income from the government and the norm is 29%. We can hope that we stay above the norm, but in the past, states that lost seniority in Washington, lost federal support.

Both ISER studies show that the Rasmuson Foundation alone provides almost the same percentage of funding in Alaska as all foundations combined provide in the Lower 48. And since other foundations fund in Alaska, our guess is that foundation giving is almost twice the national norm. Since the study, however, foundation giving decreased as a result of the economic downturn. Foundations are required to contribute at least 5% of the value of their assets each year (based on a five year average). When the market goes up, foundations have more to give, but when it declines as it did in 2008, giving goes down. The good news is that the markets are going up again so foundation support has begun to increase for now. Typically, foundations do not provide operating support, so we need to guard against relying too much on that source for daily operations.

The 2007 report showed that corporate grants in Alaska far exceeded the national norm. There was no change in that fact in the 2010 study. Nationally, corporations provide 5% of all philanthropic dollars, which includes in-kind support. In comparison, both reports found that the combined giving of just ConocoPhillips and BP was over 10% of all giving in Alaska – and that does not include their employee donations! So our guess is that total corporate giving may be three times the national average.

Corporate giving will go down; it has already declined. The economy impacts the capacity of corporate donors more than it does the giving of individuals and foundations. The economic downturn in 2008 obviously impacted corporate giving but there is another factor that impacted those donations in Alaska. The Charter Agreement between BP, ConocoPhillips and the state is no longer in effect. That agreement was developed for the BP and ARCO merger. Through this agreement significant contributions would be made to nonprofits and the University of Alaska. That agreement expired in 2009 and their giving has begun to decline. Before you judge, the fact is that their combined donations still exceed the national norm. They still contribute more than twice as much as before the Charter Agreement went into effect. Their funding has also been impacted due to the economy, less production on the Slope and a new tax structure recently imposed by the state. We can be confident that their giving, though substantial, could continue to decline. But we encourage all nonprofit leaders to be aware of how generous these two firms are. They have proven to the nonprofit sector that they are very loyal donors.

The Crash of the Herd

The only current data in both reports was the total number of nonprofit organizations in Alaska. That number grew 17% from 6,000 reported in 2007 to over 7,000 in 2010. We now have one nonprofit for every 98 Alaskans – probably more than any other state. This creates a major problem for all nonprofits. We do not have enough people to serve on all these boards. In addition, national experts have been sounding the alarm that the sector will face a staff leadership void in the next decade. Since we know that engaging the right people is critical to maintain sustainability, we need good boards as well as competent staff to lead the sector. We predict it is a matter of time, a very short time, before the number of nonprofits in Alaska will decline. The lack of funding will be one cause for this decline, but the continued growth in the number of organizations with too few likely candidates for the board and staff positions will have an even larger impact.

Another concern is the shift in generational values. This issue, in concert with the scarcity of warm bodies of the right age, creates a “perfect storm” in regard to having enough people to maintain the current nonprofit infrastructure. The younger generations, though as committed to their communities as their elders, demand a better work-life balance. Some predict that nonprofits will need to create new and more efficient ways to accomplish missions as a way to adjust to these changes. But in the near term, as long as we have boards and staffs and so many organizations, we will struggle to have enough of the right people willing to serve.

A study conducted by the Bridgespan Group in 2006 concluded that as “baby boom” executives retire, over 60,000 new nonprofit executive directors would be needed every year for the next ten years to fill those jobs – a number they see as unrealistic throughout the country. Since we have a higher ratio of nonprofits, we can only assume the problem here will be worse. This shortfall has been created because of the perceived “workaholic” nature of baby boom nonprofit leaders. Emerging leaders in Gen X and Y do not aspire to those positions. “If I have to work that many hours, neglect myself and my family, I do not want that job.” It’s a hypothetical quote, but just say it in front of a next generation leader and note the agreement.

So as a result of a funding crisis and the inevitable lack of enough board and staff leadership, we will either have to change the way we do business or many, many organizations will go away. When an eco-system becomes over populated and not enough resources exist to sustain life, “the herd crashes.” The rapid growth of the sector and over abundance of organizations has been hotly debated around the country for years. Some have called for action to stem the growth of the sector, but find it difficult to take action. Animal control is a controversial issue. Nonprofit control seems to be an even greater taboo.

The Need to Restructure

The August 2010 Foraker newsletter article was on organizational restructuring. For those who did not see that article, or for others who did but want a refresher, here are the major points we covered:

More than a decade ago, David La Piana, founder of La Piana Associates, a management consulting firm in northern California, published a study on the need for nonprofits to consider new structuring options. Published in 1997 for the James Irvine Foundation, Beyond Collaboration presented the following observations:

  • Many nonprofits are considering a fundamental change in organizational structure because of economic pressures such as increased competition from business, government and other nonprofits; a shrinking supply of experienced leaders willing to remain in the sector for inadequate wages; and increasingly urgent and complex community needs.
  • Those interviewed for the study suggest that a heightened interest in strategic restructuring is natural as the nonprofit sector matures, but that nonprofit leaders need assistance as they undertake significant organizational change – assistance that funders are well positioned to provide.
  • Nonprofit organizations attempting to restructure through mergers, back-office consolidations, joint ventures or fiscal sponsorships must overcome perceived threats to autonomy and board and staff member self-interest, as well as potential culture clashes.
  • Since the concept of strategic restructuring is still evolving, additional research is needed to analyze factors leading to success or failure, to develop best practice guidelines and to compile and disseminate information for chief executives and board members.
  • By sponsoring educational activities intended to raise overall awareness in the sector, funders can introduce nonprofit organizations to strategic restructuring options, without requiring consideration as part of a grant agreement.
  • Funders can provide direct assistance to organizations involved in strategic restructuring by sponsoring workshops, training consultants or providing direct financial support.

Unfortunately, not much restructuring happened after that report. The primary audience was funders. But most funders continued their long-held tradition of funding anything “new,” such as new programs and organizations. Most funders did not encourage nonprofits to face this new reality by thinking differently or by offering strategic incentives for consolidation. So as a follow up, La Piana tried again in 1999, with a publication called The Nonprofit Mergers Handbook, in an attempt to better define restructuring options and directly address nonprofit leaders. In that book he stated that most people understand the concept of a merger – but the other restructuring options include:

  • Back-office consolidations – where multiple organizations combine internal support services like finance or human resource,
  • Joint ventures – where multiple nonprofits formally cooperate to provide a new or enhanced service, and
  • Fiscal sponsorships – where a nonprofit with a broad mission serves as the fiscal agent for a new initiative or nonprofit.

Back to today. As a result of the 2010 ISER Report, we have identified troubling trends for Alaska’s nonprofits. Developing new structures is now an imperative. We must find the 21st Century solution for how we conduct business. There are many examples of new ways to structure in Alaska.

Two-thirds of the expenditures and employees in our sector are in the health field. Health nonprofits are leading the way to develop new structures. Providence Alaska has merged with some smaller community hospitals, but has also remained flexible and provides other partnership options for communities. Merger is not always the answer. The Alaska Native Tribal Health Consortium has become a model for the nation. There, every tribe and region in the state is working together to provide the best health care possible for Alaska Natives. Another example of a new structure is the Mat-Su Health Foundation and the Valley Hospital. Their structure combined an existing 501(c)(3) with a for-profit health care provider. The nonprofit owns 25% of the new, for-profit hospital. They use revenue to sustain the hospital but also to provide funding, like a foundation, to organizations in the Valley that improve their citizen’s health. We think the trend toward the blurring of boundaries between the nonprofit and for-profit sectors will accelerate. Many for-profits have adopted social impact strategies and as we have already stated, nonprofits must become better at earning revenue. Nonprofits must learn how to make a “profit” and understand what that means for their ability to carry out their mission.