Measuring the impact of the nonprofit sector

‘Funding pie’ is shrinking as more nonprofits open

Greg Winter, research director at Cornerstone Strategies, published a report in 2005 regarding the overall health of the county’s nonprofits and their impact on the local economy.

Dan Hiestand
   Just how do you measure the value of a homeless-housing program, or the friendship between a troubled youth and a positive role model? How about a community arts program, or a once-in-a-lifetime glimpse of an endangered species?
   It’s these kinds of inquiries that make the subsequent question so challenging to answer: What kind of an impact does the nonprofit sector make on the local economy?
   Arguably, one person who comes the closest to accurately answering this question may be Greg Winter. Winter is the research director of Cornerstone Strategies in Bellingham, a research firm that produced a report published in 2005 examining the county’s nonprofit economy. The document — widely considered to contain the most comprehensive research on the local not-for-profit sector — was commissioned by the Whatcom Community Foundation. It weighed a variety of issues, including the number of local charities — also known as 501(c)(3) organizations — in the county reporting to the Internal Revenue Service, as well as statistics on individual charitable giving.
   According to the report, public charities make up 60 percent of all nonprofits nationwide, and the remaining 40 percent include social-welfare organizations, labor organizations, social clubs, fraternal societies, credit unions and others that do not have tax-exempt status and cannot offer tax deductions for donations. Therefore, the report is somewhat limited in scope.
   While Winter said the report is valuable — from a hard information standpoint — the most telling data is hard to put into pie charts.
   “This issue of taking a look at the economic impact or the financial activity within the sector — which is what this report is about — taken by itself really does a disservice to anybody who is trying to look at nonprofits as a sector of Whatcom County,” Winter said. “I think the numbers that you will find in this report that are about actual financial transactions and financial activity are dwarfed if you were able to measure — in monetary terms — the economic value of the actual services that are created. So I think that is a really important distinction.”
   Regardless of how you look at it, the size of the sector alone undoubtedly makes an imprint on the local economy in plain dollars and cents. According to the report — which did have other self-admitted limitations, such as a lack of information on religious organizations and smaller nonprofits who could fly under the IRS tax radar — the number of reporting charities in Whatcom County increased 75 percent (from 112 to 196) between 1992 and 2002. The largest increases occurred in education, arts/culture, human services, philanthropy/grant making, religion-related, and health categories.
   Even more telling than the number of organizations, however, were the dollars involved. According to the report, public support, total revenue, net assets and expenditures of reporting public charities grew markedly between 1992 and 2002. During that 10-year span, revenue rose dramatically (46 percent) from approximately $116 million to $169 million in the sector (in constant 2004 dollars), while public support grew by 44 percent. Meanwhile, charity organization expenditures shot up by 50 percent and net assets more than doubled (110 percent).
   Now, nearly five years after this data was collected, are nonprofits still on the fast track? While there is no sector-wide data on the issue, the anecdotal evidence seems to indicate that many local nonprofits are alive and well — but also challenged to constantly find new income sources.

On the front lines
   If a recent survey is to be believed, nonprofits in Washington state had a solid year when it came to fundraising in 2006. The survey, administered by The Collins Group, a Seattle-based fundraising consultant to the nonprofit sector, polled 124 Washington-based nonprofits. Responses indicated that donor support grew or held steady for 68 percent of organizations cited in the state survey.
   Here in Whatcom County, getting a firm read on the financial health of local agencies is challenging because of the sheer size of the sector, said Moonwater, executive director at the Whatcom Dispute Resolution Center. She is also a member of the steering committee for the Whatcom Council of Nonprofits.
   “It’s hard to answer that because there is this spectrum of nonprofits — and we’re talking about very small agencies that do a lot with very little — and we’re talking about larger institutional nonprofits,” she said. “There is such diversity.”
   She said the sector seems to be doing well, but there are always challenges to be faced.
   “I would like to think it’s healthy,” she said. However, items such as the recent financial woes and closure of The Bellingham Festival of Music — a nonprofit organization which operated for 14 years and drew top musicians from around the world to play in Whatcom County — shows the potential hardships faced by nonprofits.
   “There have been some significant shifts,” Moonwater said. “There have been several events — natural disasters, 9/11 — which significantly impacted our county in particular. So much energy — and rightfully so — was being put towards supporting folks on this larger national level.”
   If out-of-area events require a sharp increase in giving, local nonprofits run the risk of being negatively impacted, she said.
   “One way of looking at it is that there is a fixed pie, and there is only so many resources that people can give to support agencies. And if those resources are being tapped by prevalent national issues, then that means there is going to be less of that pie here for local issues,” she said.
   Alice Clark, the executive director of the Whatcom Film Association, said this pie seems to be getting smaller as the community and nonprofit needs continue to grow.
   “What I see happening in this community is good, because we are growing and great projects are happening that will help the community when they are finished,” she said. “But there are a lot of projects that are happening at the same time, so when you have the projects happening simultaneously, and you feel like you have a limited pool of donors, it starts to be a real struggle.”
   The Cornerstone report cited that Whatcom County tax filers who itemize charitable deductions gave more than $65 million to charities in 2002, a number that rose 29 percent from 1997. Funding for Clark’s organization is particularly important in light of the group’s effort to build a new theater with a total price tag of $2.5 million.
   “Sometimes I think that this would probably be easier if we were a small group of investors and we could just take this business plan to a bank and get it done,” Clark said. “But, on the other hand, being a nonprofit, we can get those grants and that other kind of funding that we wouldn’t be able to (if the organization was for-profit). So it’s sort of a tradeoff.”
   While a large chunk of the project’s funding is coming from foundation monies and the state government, a large portion will be received from individual donors, she said.
   “It’s a huge endeavor,” Clark said. “I think that what has happened and what we all sort of talk about is that there is a core group of donors, and they get burned out. They get donor fatigue. A lot of those people want to support the arts, but they want to support other projects.”
   A lack of donor options doesn’t appear to be an issue. According to the Cornerstone report, the largest segment of the public charity sector was classified as providing human services (26 percent), which include a wide variety of organizations and activities such as senior centers, food banks and youth services. The next largest was education (19 percent), followed by arts, culture and humanities (14 percent); public and societal benefit (12 percent); health (12 percent); religion (10 percent); environment (5 percent); international (1 percent) and mutual benefit (1 percent).

Economic drivers?
   Hart Hodges, director of Western Washington University’s Center for Economic and Business Research, said determining what impact the nonprofit sector has on the local economy depends on what the agencies can accomplish.
   “When describing the economic value of nonprofit organizations, people often point to the number of workers employed at nonprofits and the amount of money donated (by individuals, foundations, etc.),” he said. “Sometimes you see people adding up workers at various nonprofits and talking about the value of the nonprofit sector. I don’t think there is a meaningful nonprofit ‘sector,’ and I’m not sure why people feel it necessary to try to describe nonprofits as economic drivers.”
   Hodges thinks many people focus on employment numbers and contributions for two reasons.
   “First, they really believe their favorite nonprofits are important and they want to be able to demonstrate that fact with numbers,” he said. “Second, it is difficult to quantify the value of the goods and services produced by many nonprofits. In other words, people take the numbers they can get relatively easily to defend something they like, even if the numbers don’t tell the right story.”
   Economic worth really comes down to the value of goods and services produced by nonprofits, not the inputs provided to nonprofits, he said.
   “If we focus on the outputs, I think the conversation changes. At issue isn’t whether nonprofits are really drivers in the local economy so much as whether they — like any business — are well run. We want charitable contributions to nonprofits to help the community as much as possible,” he said. “I don’t give money to the United Way because I think it is a real driver in the local economy or because I think the local economy needs a stimulus of some sort. Nor am I particularly interested in how the value of meals provided by the food bank compares to, say, the value of the output of a local dentist. When I make a contribution to the United Way I am thinking about the social safety net and the overall health of the community.”
   Peter Theisen, president and CPO of United Way of Whatcom County, said output is the most important criteria his organization uses to determine which local agencies receive funding. United Way, the largest single funding source for local nonprofit agencies (outside of government funding), gave approximately $1.2 million to 29 agencies and 50 agency programs last year, Theisen said.
   “No. 1, the bottom line has to be that they are making some kind of change in the community — that there is some way to demonstrate a measurable benefit from all the work they do,” said Theisen of agencies that are most often funded by his organization. “What our donors tell us is that if they are going to give us money, we have to guarantee that it makes a difference.”
   For the most part, Winter agreed with this assessment. Output is what matters.
   “Imagine if people didn’t have the option to take advantage of certain nonprofit services, such as some art offerings and events,” Winter said. “You may never find — in (the Cornerstone) report — any evidence of transactions that are based on options that might occur in the future, or that might have occurred, or the value that you might be able to assign to somebody that would feel a sense of loss if the Mount Baker Theatre were to fold.”

Expanding the pie
   From his vantage point, Theisen said, the local nonprofit sector seems to be healthy overall.
   “There are lots of caveats on that,” he said. One involves donor giving, he said.
   “Individual giving in Whatcom County was below average for the state, and below average for the nation,” he said, citing the Cornerstone report. The numbers seem to back that up: According to the 2002 statistics, Whatcom County ranked 13th out of 39 state counties in terms of donor participation (82 percent), a figure that trailed the nationwide rate (89 percent). The average Whatcom contribution also trailed the national average ($3,461 to $3,220).
   With that said, Theisen said The United Way is currently experiencing strong growth, and revenues have increased in the past few years.
   “Our kind of fundraising mirrors the general economic climate of the business community,” he said. “So if a business is doing well, then they are happy to have us come in and talk to their employees and their employees feel good about writing a deduction from their payrolls because they’ve just gotten a raise.”
   However, the sector needs to be careful when it comes to duplication of services, he said.
   “We are all paying attention to the amount of nonprofits being created in Whatcom County each year,” he said. “We, as a community, need to be really careful about creating new programs and creating new infrastructure and new overhead costs at the expense of existing programs and agencies that could maybe expand.”
   To stay on top of funding issues, nonprofits need to make sure their income sources are diverse, Theisen said.
   Jenny Burkhart-Gelhar, a board member with Brigid Collins Family Support Center, agreed. “We find that our government funding is changing, and we need to pull in more of that support from our community — from our corporate and business community and from private citizens — to help evolve into an area where we can bring in a better mix of funds,” she said.
   The importance of local business support cannot be stressed enough, said Karen Ekdahl, executive director of the Bellingham Childcare & Learning Center.
   “Locally, we have to look at support from our businesses to help fund these programs in some fashion,” Ekdahl said.
   It all comes back to the pie, Moonwater said.
   “Nonprofits have gotten very creative about how they expand the pie. And there is a variety of different ways that Whatcom County and the folks here have been able to support nonprofits,” she said. “It’s not just financial contributions — which is critical to us — but there are more ways the community has been able to demonstrate support for nonprofits. And that comes across in the incredible volunteers that we have, the interns from higher-education institutions, board members from local businesses — a whole variety of ways that people can help build capacity and support the efforts of nonprofits.”



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