Jeffrey Byrne, Co-Founder + CEO of Byrne Pelofsky + Associates, was interviewed by the Chronicle on Philanthropy for their 2020 series on critical events and trends affecting the nonprofit sector. Jeffrey gave his insights, based on 30+ years of fundraising experience, on how to prepare for and what to expect from a potential recession in the coming years.
If you have a Chronicle on Philanthropy account, click here to access the article. Or read on to hear Jeffrey’s thoughts on this important topic…
The Recession Wild Card
Jeffrey Byrne has been a fundraising consultant for 20 years, surviving two deep recessions. He’s learned that a weakening economy can quickly imperil big gifts. So he grew worried last summer as trade-war tensions between the United States and China spiked. “It seemed like the confidence of donors had soured,” he says.
But by November, those tensions had abated. The stock market was hitting all-time highs, and even in areas where he expected suffering, like the Iowa farm-belt region known as Quad Cities, wealthy donors and foundations were again feeling comfortable and ready to give.
“They’ve done well with their portfolios; their businesses are doing well,” Byrne says. “I do not hear from donor or nonprofits the same hesitancy about fundraising that I did three to six months ago.”
While talk of recession has faded after peaking last summer, most economists still think the American economy is due for one relatively soon after more than a decade of consistent growth. A recent survey of 54 business economists found that only 24 percent see a recession starting by mid-2020. But 69 percent believe a recession will begin by mid-2021.
Lack of Preparation
Experts who work with charities say organizations should take steps now to prepare for worse times. They advocate that nonprofits set aside enough money in reserves to sustain the organization for three to six months and develop a plan that details what they would cut if revenues suddenly dropped.
“These are steps that will give you a leg up if something does go wrong,” says Maya Winkelstein, executive director of the Open Road Alliance, an organization that makes grants and low-interest loans to charities facing unexpected challenges. “You’re building cash in anticipation of lost funding during a recession. If a recession doesn’t happen, great. Taking those actions will still make you more resilient against all risks.”
Despite the scars many nonprofits suffered during the Great Recession, few groups have embraced these ideas, experts say. A 2018 report by GuideStar and others found that about half of nonprofits did not have enough operating reserves to sustain their organizations for a single month.
And consultants say few nonprofits have contingency plans that detail what cuts would be made if their revenues suddenly dropped.
“Most nonprofits are not doing the type of work that’s needed to prepare for a potential economic recession,” says Maria Orozco, a principal at the Bridgespan Group. The consulting firm recently updated its widely read 2008 publication, “Eight Steps for Managing Through Tough Times.”
Orozco and others point out that inadequate preparation is often not for lack of will but rather lack of resources. Tim Delaney, president of the National Council of Nonprofits, notes that 92 percent of nonprofits have annual budgets of $1 million or less.
“It’s not like they have endowments sitting there or can go out and raise a few million on the side to prepare,” Delaney says. “Nonprofits live in a world of reality — not fantasy. They’re doing the best they can.”
Recessions aren’t disastrous for nonprofits. During typical recessions since the 1950s, giving has actually gone up on average, albeit by a modest 0.3 percent a year, says Patrick Rooney, an economist at Indiana University’s Lilly Family School of Philanthropy. That figure excludes the last recession, the worst downturn since the Depression.
“The Great Recession was an anomaly,” Rooney says. “If you take that out, the growth is virtually flat, but it is positive.”
Even that recession was not as bad for nonprofits as headlines suggested at the time. From 2007 to 2009, as businesses were shedding jobs, nonprofit employment actually grew, according to a 2016 report by the Bureau of Labor Statistics.
While overall giving dropped during that period, it rose for human-service groups, such as food banks and shelters, which were providing some of the most needed services. Donations to human-service groups increased 8.5 percent in 2008 and 1.8 percent in 2009, according to the annual “Giving USA” report.
But Delaney cautions that such statistics can be misleading. Even if they were raising more money during that period, shelters and pantries likely weren’t raising enough to cover the full cost of meeting surging demand.
“If they’re getting 10 percent more money but there’s 20 percent higher demand for their services, it’s still not equal,” Delaney says.
And it’s not clear that individual donors will step up to support nonprofits in the next recession. The share of households that give to charity has dropped significantly — 13 percentage points — since 2000. Rooney and others say they wouldn’t be surprised if statistics show another drop in 2019.
Millions of Americans learned last April that tax-law changes mean it no longer makes sense to itemize their taxes — and as a result they no longer have a financial incentive to give. In addition, the growing popularity of direct cash gifts — popularized by nonprofits like GiveDirectly and by presidential candidate Andrew Yang, not to mention crowdfunding sites like GoFundMe — may lead to changes in how people respond during the next downturn.
“In a recession where there will be stories of need, will people give to nonprofits, or will they go to online platforms and give directly to a family that needs something?” says Shena Ashley, vice president for nonprofits and philanthropy at the Urban Institute. “People may feel like they don’t need the middle man anymore.”
There is another bright spot in individual giving. Two researchers recently found that people with donor-advised funds played an important countercyclical role during the financial crisis a decade ago, by maintaining their giving even as the economy weakened.
The uncertain support from individuals during the next recession makes the role of foundations all the more important. But they can also contribute to a nonprofit’s downward trajectory if they fail to provide promised funding or pay promised grants in a timely manner.
The Open Road Alliance, which since 2012 has provided $28 million in grants and low-interest loans to charities that have encountered roadblocks, recently analyzed all the applications it had received since its inception to determine the main causes of the problems the charities faced. More than half were caused by foundations.
Typical problems include a foundation that fails to follow through on a verbal promise of financial support (perhaps due to a leadership change) or a foundation that delays payment on a grant.
“It’s not necessarily going to be the next recession that hurts nonprofits,” she says. “It’s going to be the funders’ response to it.”
Smart grant making during good times can help nonprofits build resilience, Winkelstein says. Foundations that provide multiyear grants and unrestricted funding give nonprofits the flexibility to build reserves.
She thinks foundations should also reassess now how they will approach grant making during the next recession. Will they hunker down to preserve assets, or will they distribute more than the 5 percent of assets required by law to help struggling nonprofits?
“If you’re a foundation whose goal is to reduce hunger in America, that’s your goal,” Winkelstein says. “It’s not to exist in perpetuity or to grow assets over time.”
City and state governments should also consider short-term loan funds, says Thad Calabrese, a New York University scholar who has written about inadequate operating reserves at charities. Governments often rely on nonprofits to provide services like foster care and elder care that are required by law.
“Some of these organizations are 90 to 100 percent government funded,” Calabrese says. “If they failed because of a recession, the government doesn’t have the capacity to deliver these constitutionally mandated services.”
Calabrese and Delaney say small nonprofits have developed informal ways to cope with downturns. A nonprofit without an operating reserve might have a plan to borrow against the value of its primary building, Calabrese says. And a small nonprofit without a contingency plan will still likely have some idea of which programs are most expendable, Delaney says. “Every CEO has that in the back of their head — what they would jettison first — even if they don’t have a formal plan.”
However, off-the-cuff decision-making presents risks, cautions Bridgespan’s Orozco. In an era when nonprofits say they value diversity and racial equity, cuts to staff and programs can’t be based simply on measures like seniority or revenue generation. Bridgespan’s updated article on managing through tough times has new language about the importance of deliberately including racial-equity considerations in every decision.
“Tough times are not an excuse to let that focus slip,” the paper says.
When a recession hits, organizations also need to decide how hard to push supporters for gifts, says Byrne, the fundraising consultant. He says his nonprofit clients kept in touch with major donors during the dark days of late 2008 but didn’t ask for money. “We let them know that we felt their pain and that we had our own pain,” he says.
By the end of 2009, “the pain had lifted for some donors, and they came back to the table and negotiated gifts,” he says.
But for now, Byrne sees no reason to hesitate while times are still good.
“It’s a fool’s errand for fundraisers to be backing off because of the anticipation of a recession,” he says. “Guess what? Your competitors are not backing off. They’re talking and aggressively pursuing gifts.”
For more on this subject, feel free to contact Jeffrey directly at firstname.lastname@example.org