What to Do When Alaska’s Nonprofit Funding Assumptions Change?
The headlines in Alaska cause concern. Our Congressional delegation is under scrutiny that could overshadow the good they have done for our state for so many years. This scrutiny could have a negative effect on the delegation’s capacity to advocate for the concerns of Alaskans, including its nonprofit sector. Federal funding has made such an important impact on our sector’s activities for so long, we have perhaps become overly dependent on our delegation’s dedication and unique ability to support Alaska’s priorities.
We hope the investigations conclude soon and that our elected leaders can return to issues facing Alaska. Given the current situation, however, we think this is a good time for the sector to intensify its discipline to become more independent and sustainable with less help from the federal government. Regardless of the eventual resolution of current issues, our recent ISER study on the economic impact of the nonprofit sector provides some useful insight into the challenges a loss of federal support could create.
The Foraker Group is almost seven years old. Since its founding, Foraker has encouraged organizations to think strategically and work toward sustainability. Under the Foraker definition of sustainability, organizations should exist as long as it takes to accomplish their mission. For some organizations, like museums or universities, that timeline could be quite long – for others it could run just a few years. Regardless of the duration, we have encouraged organizations to embrace a holistic approach toward sustainability.
Part of the sustainability picture is about revenue. National statistics show that the charitable nonprofit sector receives 40% of all income from earned revenue (those fee-for-service programs we provide), 35% from government grants, and 25% from philanthropic support (including corporate, foundation and individual giving). In Alaska, the ISER study confirms that total income for the charitable sector is $2.4 billion dollars. Of that, 34% is earned, just a little below the national norm. But the data that is most revealing shows that our sector in Alaska receives 57% from government grants and only 9% from philanthropic support – out of balance according to the national norm.
If we were to take those Alaska numbers for charitable and government support and “normalize” them with the national percentages, government grants would decrease over $500 million. If we tried to match the national norm of 25% philanthropic support, we would need to raise an additional $350 million — an increase of 250% over 2005 contributions!
We don’t anticipate such a dramatic loss in federal support. With many established and positive public-private partnerships, especially in healthcare and tribal organizations, Alaska will likely loose some support, but could continue to receive a larger percentage of federal dollars than the norm. Nor do we predict that charitable giving could possibly grow by $350 million in the near term. Yet we can and should do everything possible to maximize philanthropic support. We also need to make sure we work to increase mission-related earned revenue.
Because of these concerns, we want to share, once again, a summary of the factors we have learned that foster nonprofit sustainability. They can provide a useful lens in decision-making within your organization especially as you contemplate major changes.
Factors of Sustainability:
- Focus – Focus is a clear and succinct understanding of why an organization was formed and where it envisions going over the long term. Sustainable organizations plan at least five years into their future and have a vision with a 20-year horizon. Focus clarifies core purpose, or the core business, as well as the core values, or the passion that drives the organization. Focus also involves a strategic plan that sets long-term goals. Organizations derive sustainability from focus when everyone involved lives the purpose, values and goals.
- Board/Staff Balance — In most cases volunteers create nonprofits. However, at some point during an organization’s development, volunteers realize they need full-time, paid staff to accomplish the mission. Once staff is added, the board must enter a mutually agreed upon partnership with that staff. The Foraker Group compares this relationship to a marriage-like partnership, and we’ve found many examples to prove the concept. While legal roles exist for each partner in either relationship – other roles are just as important. Partners must learn to work together, respect and trust each other, support each other, not take each other for granted, do their share, not make assumptions for each other, and accept appropriate boundaries. Managing this factor of sustainability requires an ongoing commitment from both the board and the CEO.
- Unrestricted Cash — Nonprofit organizations need unrestricted cash to be sustainable. The amount depends on historical and projected cash flow. There should also be sufficient unrestricted cash to fund the capacity envisioned in the strategic plan. The dilemma for most nonprofits is that unrestricted and sustainable cash only comes from two sources. One is mission-related earned income generated when the organization has a product or service that has value in the marketplace. The only other is charitable giving from individuals. During 2006, American foundations, businesses and individuals donated $290 billion to the U.S. nonprofit sector. Of that amount, 74% came directly from individual gifts, with an additional 9% from individuals through bequests – that leaves less than 20% from corporations and foundations. This tells us that relying on these entities for sustainable funding is unrealistic. The answer is to create infrastructure that helps build sustainable relationships with individual donors. t’s a process that takes time, talent and resources from the board and staff. And it takes a commitment to your organization’s mission. The goal of development is creating those relationships that result in benefits for both the donor and the organization.
- Collaboration — The first three conditions of sustainability are the same as those needed in for-profit organizations. While The Foraker Group believes that many of the best practices in the for-profit world make sense in our work, one major difference exists. In the for-profit world, competition usually benefits the consumer. In the nonprofit world, competition can jeopardize the organization’s relationship with partners and funders. We believe that collaboration is a more productive route to take. Collaboration overlays the other factors we’ve just outlined. We find it practiced by sustainable nonprofits at the organizational level, within programs, between staff and/or board, and around the use of locations and resources.
We encourage board and staff members in every Alaska nonprofit to better understand these factors and work toward sustainability. We have been and are still here to help. We want to do all we can to assist nonprofits on this journey. Our concern is that some people get tired of hearing about our model, hoping there is an easier way. We have never tried to provide insight based on convenience. Instead we try to deliver the most helpful message, even if that message may not be what some want to hear. If you have a success story, please share it with us, or others. Together, we can build the best nonprofit sector in the country.