Welcome to 2015! Predictions That (Unfortunately) Have Come True
In the October 2011 newsletter, we questioned when to expect Alaska’s next economic recession. It may have been too early to ask, but it was the right question.
While Alaska may not have felt the full force of the “Great Recession” of 2008, by 2011 there were glimmers that it was beginning to ease in the Lower 48. Having moved to Alaska at the end of the 1980’s recession, I heard that “when the Outside is in a recession, our economy is good. When the economy improves Outside, we go into recession.” The national economy has taken longer than usual to bounce back, but recent reports indicate that the national economy is finally improving. That good news caused me to reflect on my cautionary question a few years ago. Then, I remembered what I learned the week before Thanksgiving.
I was called, along with many former and current Foraker board members, to participate on the transition team for the new administration. While I had been asked for advice from past transition teams, this was my first time to be fully engaged in the process. I hope that the transparent format and diverse participants provide Governor Walker and Lt. Governor Mallott the energy they will need to face the challenges our state may soon confront.
At the opening session, some of our state’s most respected economists read from the same script. When the last state budget was approved, oil was at $105 a barrel. The night before the transition team meeting, the price of oil dropped to $75 a barrel. Since then it has dipped below $50 a barrel. Ninety percent of the state’s unrestricted revenue, the money that funds much of education, capital, and many of the services that we have grown accustomed to, is from the oil and gas tax.
The message at the transition meeting was that regardless of the oil and gas tax structure, the current and foreseeable price of oil will not be sufficient to cover current and projected state revenue demands. And it is important to understand that the price of oil is out of the state’s control. Unless the price goes back over $100, which none of the economists think will happen in the foreseeable future, the budgeted deficit for this fiscal year will significantly increase! And, if the state can’t raise revenue from other sources, or cut expenses, and if the budget continues to stay at the level we have grown accustomed to, the state’s budget reserve will be depleted much sooner than anyone foresaw. The economists agreed that in order to minimize the impact on the economy, we must cut expenses and maximize revenue as quickly as possible.
Foraker has delivered a consistent message since we were founded: any institution with most of its unrestricted revenue from one source takes a big risk. As a state, we need to address our fiscal issues. Most politicians have known about this pending financial crisis for years but were afraid to act. They knew that citizens would not like any of their limited solutions. Unless something dramatic happens, now the state’s leaders will have no choice but to make the hard decisions that many constituents will not like.
While the question we asked about a recession was premature in 2011, anyone that listened to presentations or read what Foraker learned from our 2010 nonprofit economic report could have or perhaps did start to prepare for the reality of the trends we predicted, including the “funding crisis” (an over reliance on government funds), the “crash of the herd” (too few board and staff to meet the demands of the sector), and the need for “new structures” (thinking beyond a single mission to create greater community impact).
Not all of our messages have been cautionary, anticipating the worst. We have provided hope for how nonprofits could become more stable, in the form of the Foraker Nonprofit Sustainability Model. And recently we wrote about the need to adapt to the complex challenges we face. (November 2014)
In 2001, when Foraker started, its founders understood that the abundance of funding the sector benefited from at that time would be hard to maintain forever. Back then the Denali Commission was distributing hundreds of millions of dollars. The Charter Agreement had significantly increased support from BP and ConocoPhillips – but there was a planned sunset for that funding. And during that same period, oil was on the way toward $100 a barrel – a level that it maintained for most of the last decade and that fueled the state’s budget. Foraker’s founders knew that at some point those realities would change. Foraker was created for today. We hope our sector is prepared.
We have worked with our Partners, which we believe to be the most proactive-creative-well managed nonprofit organizations in the state, and have learned from each other about what it takes to thrive. Now we need to take all that we have learned and support each other through the coming years.
In the January 2009 newsletter we suggested strategies for surviving those tough economic times – for the “Great Recession.” The points we made then are relevant today, so here is an excerpt from that article:
Unfortunately, nonprofits have a tendency to spread themselves too thin. When funding is limited, we must re-think what is truly most important. It will serve no one to assume that we must do more with less. Instead we suggest that to best serve constituents we must do the best with what we have. We must muster the discipline to not over-extend. If we make wise decisions, identify and then pursue the most important functions, we can actually improve our overall performance during a crisis.
A few strategies to consider:
- Develop the right financial tools.
- The most important tool is a month-to-month income/expense analysis that compares the current month and year-to-date status for each line item as compared to the past few years’ performance. If revenue does not come as expected or expenses are too high, make timely, better-informed decisions on what and when to reduce.
- Make sure financial reporting complies with the Rasmuson Foundation’s guideline where unrestricted cash is clearly displayed. This is the perfect opportunity to dig deeper into your data to monitor unrestricted cash and create information for decision making and a critical time for transparency on the true cash position.
- Engage in frequent conversations with significant funders; determine any trends in funding as soon as possible.
- During any crisis, enlightened leaders help everyone by staying calm. Keeping one’s cool does not negate the fact that tough decisions must be made. Here are a few ways leaders can keep centered during tough times including:
- An appropriate sense of humor.
- Accept that while we all must do all we are capable of to survive, some things are out of our personal control.
- Connect with peers – communicate with colleagues. Stay focused, positive, share strategies, and engage in discussions centered on potential solutions; stay away from unproductive whining sessions.
- Keep appropriate work-life balance – you will not help our organizations nor constituents by doing more than any individual can sustain.
- Develop financial scenarios (at least two) for the yearly budget. If scenario planning is new to you, here are few steps to get started:
- Speak with major funders – define a worst case and a best-case scenario for total support to anticipate.
- Review purpose/mission – reflect on what must be done to meet it.
- Review all programs – rate the programs and determine which ones best address what must be done as compared to those less critical to core.
- Review staff positions – identify employees that must be kept in order to support core programs. Review open positions and re-think relative importance.
- After other expenses are determined – review other items such as rent, travel, training, memberships, benefits, etc. These expenses are reviewed last not because they should be the last to cut, but one will make a better decision of which of these items are truly critical in order to maintain core staffing and mission. For example, if your mission requires ongoing certification for staff and you cut the training budget, you may not be able to deliver on the mission.
- Present the scenarios to the finance committee and then the full board. Request feedback on all the assumptions made by staff, and adjust the scenarios as needed.
While the tone at the Governor’s transition team meeting was sober, no one was panicked. All remained optimistic that together our state can and will weather this storm. I am also hopeful that we will make the right decisions and come out stronger and more sustainable.
I am grateful when a nonprofit leader tells me that he or she reads this newsletter. We hope that those loyal readers, or those that listened to our presentations, feel better prepared to face whatever challenge they may soon encounter.
Frankly, I am glad that our state will have the right conversations on how to best support services that we agree are the most important and that we can also make the hard decisions about what we can live without. If we make wise decisions today, it will initiate positive momentum for the future of our state – for future generations. Work with your staff, board, constituents, funders, and elected officials to make sure that into the future we create the state that we want.
In 2015, we will do all we can to help the sector minimize the impacts we will face. Here are a few suggestions to help with this transition.
- Make sure you do all within your power to support Pick.Click.Give. Every time you have the ability to speak to three or more people, remind them to give. Use the information provided from the trainings that were offered to promote giving.
- Plan to attend the 2015 Foraker Leadership Summit scheduled for April 20-21. It will focus on change. We think it will provide you with insights that will help you energize for action.
- Don’t panic. We have survived other downturns and the most focused and competent will survive.
- Continue to work collectively to address challenges. Together we are always better.