Human service organizations "tread water" in face of funding uncertainty

Many nonprofit organizations that provide human services to low- and moderate-income (LMI) clients are in a period of programmatic stasis due to uncertainty around government funding. Most of these organizations rely on a mix of federal, state, and local government grants for at least a portion of their income, but legislative budget wringing in response to the Great Recession has created unpredictability that is hampering their efforts to improve or expand their services.

“Right now we’re in a state of stagnation,” says Marcy Harris, the director of planning, development, and legal services for Community Action Partnership of Suburban Hennepin County (CAPSH). “We’re not able to increase existing programs where they’re needed and we’re not able to develop new programs that respond to some critical needs. From our perspective, there really aren’t a whole lot of funds out there for new program development or expansion.”

CAPSH and other human service organizations provide many of the safety net services that LMI clients call on for assistance—food shelves for sustenance, housing services for shelter, etc. Demand for these services surged during the Great Recession and continues to be high. Yet even as the economy gradually improves, many of these organizations—despite having multiple income streams, such as individual giving, service fees, and grants from private foundations—continue to contend with uncertainty over funding. For Kate Barr, executive director of Nonprofits Assistance Fund, a Minneapolis-based organization whose mission is to strengthen the finances of nonprofits, the source of the uncertainty can be summed up in three words: “Government, government, government.”

Uncertainty coincides with increase in demand

According to a national survey of organizations that provide human services, nearly 56 percent of respondents received federal funding or contracts in 2011, and nearly 69 percent received state or local funding. ^1/ Of those three sources, state funding has been the haziest in recent years.

“It’s painful right now,” Barr says. “Anything related to the state budget is the most challenging part of nonprofit revenue.”

The amount of state funding at stake is substantial. For example, in Minnesota, nearly $11 billion of the state’s $34.1 billion 2012–2013 biennium general fund budget is directed toward health and human services, the second-largest area of the budget next to education.^2/ It’s no wonder, according to Christina Wessel, deputy director of the Minnesota Budget Project at the Minnesota Council of Nonprofits, “that the health and human services part of the budget has a large target on it.”

The unclear revenue outlook poses considerable challenges for funding the actual operation of human service programs, particularly when those services have experienced an increase in demand. The survey mentioned above revealed that 89 percent of organizations experienced an increase in client numbers in 2011, with similar levels of increases anticipated for 2012.^3/

In suburban Hennepin County, CAPSH operates a range of programs geared toward advancing self-sufficiency. One such program, a transitional housing program for clients at risk of losing their homes or who are already homeless, has recorded a 40 to 60 percent increase in requests for services over the past three years. CAPSH received more than $4.2 million in government grants and contracts in 2010, or roughly 96 percent of its budget. “But because we haven’t received additional funding,” says Harris, “we haven’t been able to help these people.”

Similar service shortcomings are reported by organizations across the Ninth Federal Reserve District. In the Federal Reserve Bank of Minneapolis’ second quarter 2012 Ninth District Insight survey, which polled more than 470 Ninth District organizations serving LMI communities, nearly a third of respondents reported that their ability to meet the needs of clients seeking assistance decreased over the previous six months. In fact, just 10 percent of respondents believed their ability to meet the needs of clients increased.^4/

To cope with the dual challenge of demand increases and budgetary shortfalls, many human service organizations are cutting back on employee benefits and compensation, reducing services, and re-evaluating their program offerings.

“A lot of organizations are being very strategic,” reports Pam Kramer, the executive director of Duluth LISC (Local Initiatives Support Corporation), an organization that works with community development corporations on affordable housing and neighborhood revitalization issues. “Many groups have had to go back and look at what their core mission is and examine their programs. I’ve heard some organizations say, ‘We can’t do that any longer.’”

Kramer also notes that some organizations are merging and forging partnerships to deliver their services more effectively. One merger she describes, which happened in January 2012, involved two community development and housing-related organizations working on similar issues and in the same area. “They realized that the decline in funds to pay for basic operating support, the opportunity to bring strong staff together, and the recognition that they could build on each other’s skills made merging an obvious next step."^5/

The costs of operating without long-term funding

Regular and more predictable funding, of course, would help alleviate some of the uncertainty that executive directors have had to contend with while planning their program operations. Says Kramer: “Getting multiyear grants is critical. Many groups are seeing a huge surge in clients, and they need stable funding for operating support and capacity building.”

Despite the desire for longer-term funding, many organizations serving LMI communities feel pessimistic about their prospects to raise adequate levels of funding to staff and operate their programs. In the Ninth District Insight survey referenced above, just 12 percent of respondents indicated an increase in confidence in their organization’s ability to raise enough money. Three times as many, or 36 percent, said their confidence decreased.^6/

Furthermore, the outlook for government funding remains unclear. According to Jon Pratt, the executive director of the Minnesota Council of Nonprofits, “There are still some more shoes to drop regarding the state budget.”

In the meantime, he says, organizations that offer safety net programs will have to continue to trim their services. “A lot of what has been reduced is prevention as opposed to emergency support.”

CAPSH’s Harris understands the effects of this governmental budgetary belt-tightening all too well. “Without sufficient funding,” she says, “we lose the opportunity to make systemic and sustained change.”

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1/ The federal funding figure was calculated from a universe of 1,629 respondents; the state or local funding figure included 1,590 respondents. To view the survey and other responses, see http://survey.nonprofitfinancefund.org.

2/ Minnesota House of Representatives Fiscal Analysis Department.

3/ These figures were calculated from a universe of approximately 1,700 respondents.

4/ Ninth District Insight Report, Quarter 2, 2012. Ninth District Insight is a semiannual survey that asks community banks and service organizations for their perspectives on 17 key indicators related to the economic health of LMI communities. For more information, visit the Publications & Papers tab at www.minneapolisfed.org.

5/ Northern Communities Land Trust and Neighborhood Housing Services merged to form 1Roof Community Housing. See www.1roofhousing.org for more information.

6/ See footnote 4.