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Commentary: Unintended Consequence of Unduplicated Services

When a restaurant, souvenir shop or t-shirt store goes bankrupt in Door County, it’s certainly unfortunate that a few people lose their jobs, but the loss of the service the business provided doesn’t usually have repercussions for the larger community. Typically, there is always another restaurant, souvenir shop or t-shirt store ready to take its place.

Were a child care center, food pantry or after-school program to go bankrupt in Door County, not only would a few people lose their jobs, the loss of the service the organization provided will often place an enormous strain on our community.

Door County’s charities care for our children, feed the hungry, educate our children, and protect our environment. The services many nonprofits provide are critically important to our quality of life and there’s usually no other charity that can easily replace it.

That’s because we, as donors, don’t like it when there is a “duplication of service” among charities. We don’t want to have to pay for two different organizations to do similar work.

I wholeheartedly agree with this sentiment. However, there is a dangerous unintended consequence of all this. By insisting that nonprofits avoid a duplication of service, we also create a concentration of risk. For when an unduplicated charity goes belly-up, there is no other organization readily available to take its place and provide that critical community service.

All this came to mind as I read a report that was just released titled “The Financial Health of the United States Nonprofit Sector.” It’s based on research conducted by the global management consulting firm Oliver Wyman. They used their extensive business acumen to conduct a comprehensive study of the economic health of the charitable sector. What their work uncovered was truly unnerving.

About 1 out of every 13 charities in our country is technically insolvent. Solvency is a simple concept that compares an organization’s total assets to its total liabilities. Put in human terms, this basically is how much you are worth. For roughly eight percent of America’s nonprofits, the total value of their checking accounts, investments, equipment, real estate, etc. is less than what they currently owe their creditors. Eight percent of charities in our country not only have no net worth at all, collectively their debts exceed their assets by as much as $50 billion dollars.

Nearly one out of every three charities faces a liquidity issue. Liquidity refers to an organization’s short-term assets relative to its short-term liabilities. A charity might have more than enough assets in terms of real estate, equipment, etc. so that it is solvent, but those kinds of assets cannot be used to pay the electric bill, cover payroll, or purchase the supplies needed to run their programs. For about 30 percent of our country’s nonprofits, their short-term liabilities exceed the cash they have on hand to meet their operating expenses.

Nearly one out of every three charities had a negative three-year net income margin. Net income basically measures an organization’s surplus (what the for-profit world calls “profit”) – how much money they made relative to how much they spent. The research found that during the last three years, about 30 percent of charities spent more money than they brought it. No organization can survive for very long if they cannot generate enough revenue to cover their expenses.

About one out of every two charities has an operating reserve of less than one month. In human terms, an operating reserve is essentially an emergency savings account. It is a pool of money set aside to protect against short-term disruptions to an organization’s income stream. Imagine that government is late in paying the charity for a contracted service (something that happens all the time), a key donor moves on and doesn’t make the usual annual gift, or it just happens to rain on the day of a big outdoor fundraising event. The operating reserve is used to ensure that the charity has the short-term cash on hand to continue delivering its programs to the community during an unexpected disruption in income. For roughly 50 percent of organizations in our country, their operating reserve isn’t even sufficient to sustain them for one month.

This financial crisis in the world of charity, combined with our desire to avoid a duplication of service among nonprofits, has created an alarmingly high concentration of risk.

Of course, the absolute wrong solution would be to encourage charities to duplicate services. Too many existing organizations already face enormous challenges in meeting their current operational expenses. At the Door County Community Foundation, we get approached all the time by people who have good ideas and want to start a new organization. In all but a handful of occasions, we encourage these folks to integrate their ideas into an existing nonprofit as a program rather than to create yet another organization.

But if we’re rightfully going to continue to insist that charities not duplicate their services, we then need to ensure that the unduplicated organizations are vibrant and financially strong. For if the unduplicated charity fails, there’s no other organization readily available to take their place.

The problem is that we as donors have an aversion to paying for “administration” or “operating” expenses. Instead we love to donate to the shiny new building that is being constructed. We prefer to fund “scholarships” to help individual people. We want our gifts be restricted to specific, narrowly targeted projects. Generosity in any form is a wonderful thing, but none it really matters unless the charity can pay the electric bill, cover its payroll, and buy basic supplies.

If we’re going to accept the concentration of risk that is inherent when charities avoid a duplication of services, then we as a community need to make our gifts as unrestricted as possible. We need to ensure that our favorite charity can cover its basic administrative and operating expenses and has enough of a surplus to create an adequate operating reserve as protection against the short-term surprise expenses that are a part of life.

The vast majority of Door County nonprofits play an essential – and unique – role in our community. When one of our charities fails, we don’t just lose a few jobs, it hurts the people the organization served and diminishes our quality of life.

Bret Bicoy is president and CEO of the Door County Community Foundation. Contact him at [email protected]

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