Money Crunches Push Non-Profits To Group Efforts

By KAREY WUTKOWSKI

Staff Reporter

Talk of consolidation is rippling through the non-profit sector, as decreased funding and higher costs of health insurance and workers’ compensation put an increasing number of organizations in financial jeopardy.

The prospect of significant state budget cuts in the health and human services area promises to exacerbate the shortfalls, which have prompted leaders in the non-profit world to urge service providers to find ways to share their resources.

About 40 percent of Los Angeles County’s 28,000 registered non-profits reported falling revenues and increasing expenses in 2003, according to a study to be released later this month by the Center for Civil Society at the University of California, Los Angeles.

For many of the non-profits in Los Angeles, that spells deficits and a questionable future.

“A lot of organizations look like they’re spending more than they’re taking in,” said Joe Haggerty, president of the United Way of Greater Los Angeles. “That doesn’t happen very long before they get into trouble.”

Haggerty, whose group channels corporate donations to non-profit groups, is among those who have been urging recipients to find ways to merge.

Although there have not been many mergers to date, some non-profit executives are actively considering the option.

“If I was approached by another credible, thoughtful organization to develop a regional merger strategy, I wouldn’t reject it outright,” said David Grunwald, executive director of L.A. Family Housing, which recently had to finance its deficit with a line of credit. “It seems like a smart approach. Mergers could provide more money for services instead of infrastructure.”

In the non-profit world, consolidation is not as easy as pooling funding sources and administrative tasks. Many non-profits are reluctant to give up their individual identities and missions. Then there’s the messy prospect of merging two organizations that have independent boards, management, clients and revenue streams.

“People are reluctant to partner with other people because they don’t know how to do it,” Grunwald said. “It’s difficult and it’s uncomfortable.”

Money woes

For the past two years, non-profits have been grappling with decreasing private donations, which often closely track the health of the economy. Now, just as the economy is rebounding and private funding seems to be looking up, government funding is about to be cut sharply.

Gov. Arnold Schwarzenegger’s January budget proposal for the 2004-2005 fiscal year calls for $2.7 billion in cuts from the state’s health and human services’ budget, which draws $24.6 billion from the general fund. The governor will revise his proposal in May, and with the state’s deficit worsening, all indications are that more cuts could be in store.

“For health and human services organizations, the government funding cuts are going to hurt and will probably wash out any recovery in private funding sources,” said Pete Manzo, executive director for the Center for Nonprofit Management in Los Angeles.

Non-profits are also facing rising costs, particularly workers’ compensation. According to a recent survey released by state Controller Steve Westly, California workers’ compensation costs at non-profits more than doubled over a three-year period. (In the private sector, by comparison, the increase has been nearly triple.)

Organizations such as the Institute for Multicultural Counseling & Education Services Inc. in Los Angeles, which offers educational and mental health services, have been cutting back on programming. The institute has stopped seeing some of its adult medical patients, and cut back the hours of many of its 30 employees, some by as much as 50 percent, said Tara Pir, its executive director.

“Within the last two years, there’s been a gradual decrease in funding, but now there’s the threat of losing it completely for some programs with the budget deficit,” Pir said.

Collaborative solution

Helmut Anheier, director of UCLA’s Center for Civil Society, said non-profits running negative financial balances must get more money or find some way of collaborating with other non-profits, whether it’s through joint programming or through full-blown mergers.

“We should look seriously into the way of consolidating or having small organizations work with larger organizations,” Anheier said.

Manzo said that mergers should be strongly considered.

“Say there’s an organization that has valuable programming, and they are looking at having to close their doors. If they are able to combine with another organization to maintain their programming, they should definitely do it,” he said. “I think we’ll see a fair amount of that in the coming years.”

Nevertheless, some strong resistance will have to be overcome. Pir said the Institute for Multicultural Counseling & Education Services offers a unusual set of services and rejected the idea of teaming with another non-profit, saying she could not find one with a complementary mission.

“Merging would not be in anybody’s benefit,” Pir said.

The promised savings can be elusive, said Mike Hoff, director of consulting services for the Center for Nonprofit Management, which has helped guide local non-profits through mergers.

“It’s usually a three- to five-year proposition before they start seeing significant financial impact,” he said. “Sometimes it never does come about.”

In January, the Boys’ and Girls’ Club of San Pedro completed a 10-month merger with its neighboring Wilmington club, which had been struggling with securing funding and maintaining its programs. The process was an arduous one, involving lawyers and negotiations between the two boards, said Mike Lansing, executive director of the new entity, the Los Angeles Harbor Boys’ and Girls’ Clubs.

The combined organization has attracted a tripling of demand in Wilmington and it needs more funding. The new group faces a $300,000 deficit for the 2004-2005 budget year.

The cost savings, he said, have been limited. But Lansing said the drawbacks of merging are outweighed by the benefits of serving more community members.

“It’s a good time, but it’s a scary fundraising situation,” Lansing said. “But I’m confident we’ll be able to fund the $3.5 million budget for the coming year.”

For non-profits that are unwilling to merge, another option is increasing collaboration with other non-profits. They could do this by consolidating back-office operations such as accounting and human resources or more joint programming, Hoff said.

That’s something Pir, at the multicultural institute, said she will consider. “Collaborating to save money to not duplicate services is in everybody’s benefit,” she said.