More than a third of Hawaii’s human services nonprofits are operating on little to no charitable donations.
Of the state’s 300 community- based organizations, 35 percent report revenue of 1 percent or less from philanthropy, according to a recent study commissioned by Child & Family Service.
That is affecting their ability to invest in their staff and technology, advocacy and social services that help lift people out of poverty, improve their education and the overall health of the community.
“There’s no margin for error. They’re heavily dependent on grants and contracts, so any singular change in those grants and contracts could be highly disruptive for them financially,” said Susan Dreyfus, president and CEO of the Alliance for Strong Families and Communities, a Washington, D.C., network of 450 human services organizations. Dreyfus is speaking today at the first Hawaii conference convened by Child & Family Service to discuss ways to improve financial stability for nonprofits, which she recommends should generate at least 30 percent of revenue from charitable giving.
“It’s those unrestricted dollars that create the margins that give organizations the ability to make investments in capacity and be able to withstand changes in the fluctuations of grants and contracts.”
Nationally there are 218,000 organizations that spend about $200 billion annually on services that affect an estimated 1 in 5 Americans. Of that total, 300 local agencies spend roughly $650 million in the islands. However, 1 in 13 are insolvent — technically bankrupt — compared with 1 in 8 nationally, the study shows.
“They literally do not have enough cash to meet obligations. They’re just living month to month. It’s no different from a household that’s living from paycheck to paycheck,” she said.
The state mirrors the nation in that 40 percent of the human services agencies — compared with nearly half nationally — lack cash liquidity to meet short-term obligations, with a negative operating margin over the past three years.
While Hawaii fared slightly better than the mainland in some indicators, the risks are higher because of the state’s dependence on a limited nonprofit sector and the difficulty in starting up new organizations, Dreyfus said.
“There’s only 300 in Hawaii, which means you don’t have a lot of room for community-based organizations to fail. It means insolvency — in 1 in 13 — is going to be felt more in Hawaii,” she added. “As a state, because of your location … being so far from the mainland, your dependency on those 300 is quite large. Insolvency in any of them is something the state should be concerned with.”
Local agencies are also maintaining lower cash reserves than the advised minimum of four months, with 30 percent maintaining reserves that cover less than one month of expenses.
Seventy-five leaders in health and human services, government and other areas will examine the Hawaii-specific data at the “National Imperative Hawaii” conference to improve the climate for these critical agencies in the community, said Child & Family Service President and CEO Karen Tan.
“We can’t just say nonprofits are always struggling and that’s how it’s always been,” Tan said. “We’re isolated out here in our community, so we have to take care of each other. If another recession happens, which it will, we want to make sure our community is cared for.”
The study that examined nonprofit Internal Revenue Service filings with funding from the Hawaii Community Foundation also found organizations running persistent operating deficits, as well as unfavorable contracts that reimburse less than the cost of providing the required outcomes.
A separate national study by the Alliance for Strong Families and Communities identified five ways to help nonprofit solvency and to improve the well-being of the population. The recommendations that will be presented at the conference include collecting data to measure long-term outcomes proving recipients are better off; investing in capacity to do more of what’s working and finding new creative strategies; developing partnership models to increase resources; creating financial policies and practices to plan ahead for recessionary times and be willing to walk away from unfavorable contracts; and improving regulatory rules that are redundant and outdated to streamline administrative reporting.
“The heart of this report is about getting better results in systems that are very costly. The kind of results we want to achieve as a country is we want more children to succeed in education and go on to good careers; we want fewer people living in poverty. We know when people are healthy they have a much greater sense of well-being and are far more productive,” Dreyfus said. “Community-based organizations are critically important to achieving those results. For those community-based organizations to make their greatest contribution, they have to be financially strong and capable of making the necessary investments in themselves.”
ROAD TO RECOVERY
Ways to improve nonprofits’ financial health:
>> Measure outcomes: Collecting data to show the impact of services
>> Strategic partnerships: Working together to pool resources
>> Capacity for innovation: Doing more of what’s working with new creative strategies
>> Financial strategies: Planning ahead for recessions and market downturns, diversifying resources and being willing to walk away from unfavorable contracts
>> Regulatory modernization: Improving regulatory rules that are redundant and outdated to streamline administrative reporting
Source: Alliance for Strong Families and Communities
Number of human-services nonprofits in Hawaii
Percent of nonprofits that collect revenue of 1 percent or less from philanthropy
Estimated amount spent on social services
1 in 13
Number of Hawaii nonprofits that are insolvent (nationally it is 1 in 8)
Percentage of the state’s nonprofits that lack cash liquidity to meet short-term obligations (nationally it is about 50 percent)