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Nonprofits in Arizona are facing some terrifying scenarios when it comes to maintaining funding amid COVID-19. News stories continue to report on the loss of revenue to date throughout a variety of sectors, with some reports say as much as nearly $53 million. Nonprofits in Arizona are looking at a potential annual loss of over a quarter of a billion dollars, with over 90 percent of groups reporting a decrease in revenue, three quarters seeing a disruption of services and volunteers pulling back on their commitments. According to the ASU Lodestar Center, only 5 percent of nonprofits reported normal operations as the pandemic first unfolded.
All of the above points are concerning, and as Kristen Merrifield, the CEO of Alliance of Arizona Nonprofits said, “it is just the tip of the iceberg.” This statement is as foreboding as it is accurate.
The reasons for financial distress are simple; nonprofits traditionally run tight margins around their organizations to make sure their programs are funded. It is not easy to run surpluses. I have spent nearly 15 years in the nonprofit sector in Arizona and New York, and the groups I worked with have only run surpluses five of those 15 years, with an average of 1-2 percent net margins. For quick math, with a $10 million budget, that is $100,000 – $200,000 in net income to put away for a rainy day or, in today’s environment, a deluge of epic proportions. Without a long operating history or generous endowment, you can see how it would be difficult to weather a storm.
What are our options to survive and continue to serve our communities? The private sector employs several strategies we can learn from as an industry. Some are more realistic than others given the immediacy of the problems we are all facing together.
The first strategy is the diversification of revenue. ACCEL, the organization I am fortunate to lead, has four sources of domestic revenue and one source of international revenue. Two of the four domestic have been drastically affected by COVID-19, while the other two have allowed us to subsidize programming when needed to maintain both service levels and staff employment. This capacity can be difficult to build in the short-term without the utilization of other strategies, including merger and acquisition.
Merger and acquisition is the second and perhaps most impactful strategy: While not often used in the nonprofit sector, it is commonly used in the private sector in both good and bad economic climates as both a proactive measure and means for expansion. Combinations create value through more diversified revenue streams, larger and more resilient companies, and economies of scale in departments that are usually a disproportionate financial burden (finance, HR, administration, etc.) for small- and medium-sized organizations. The mechanics aren’t terribly complex for nonprofits, assuming missions are in the same ballpark, with the most difficult part being the integration of two cultures.
For years now, some of the most well-respected foundations have been pushing nonprofits to move outside of our silos, work together and combine resources and institutional knowledge. In a restatement: to combine. Mergers could be a tremendous opportunity for the nonprofit sector to better protect our ability to pursue our visions.
Another iceberg that is forming that will impact nonprofits is private companies are increasingly moving into our practice areas. For instance, I have had conversations with private sector CEOs in the behavioral health space across the country and many of them are gearing up for acquisitions and anticipating defaults and bankruptcies. Names of sophisticated and well-capitalized private equity groups have all begun to acquire and roll-up behavioral health companies, with no indication of slowing down.
I use the above example to demonstrate that the bridges nonprofits build to fill the gap in services could be disappearing. For instance, many for-profit behavioral therapy programs no longer accept certain insurances – like AHCCCS or Tri-Care (insurance provider for our military families.) This leaves people in need unable to access certain essential services because reimbursement rates are not attractive. No child should be devoid of these services because of their insurance status.
The impact of mission-driven organizations in our community cannot be diminished and may not be felt until it is no longer available. Our options may be narrow, but we do have them. I believe it requires us to pull together and work with one another to ensure that we are able to continue bringing necessary services to those who are most vulnerable; people who otherwise wouldn’t have any options.
Raymond Damm is the CEO of ACCEL, a nonprofit serving children and adults who have developmental disabilities, including autism spectrum disorder, cognitive disabilities and behavioral disorders. Damm has worked in the nonprofit sector for 15 years, with organizations in Arizona and New York. He also holds an MBA from New York University Stern School of Business.