The financial crisis of 2008 will have a serious negative effect on the nonprofit sector in New Jersey in 2009. The sector is comprised of many organizations that are often taken for granted until they are no longer there: after-school programs, food banks, homes for children with aids or organizations that either build affordable housing, protect the rights of renters, assist home owners who are in foreclosure. And there are those that contribute to the quality of life of the state, like arts organizations, universities, conservation groups that also part of the nonprofit sector. There are almost 25,000 nonprofit organizations in New Jersey, with combined total income of $34 billion and assets of $58 billion.
Over the last half century, the sector has experienced unprecedented growth. The state and federal governments have ceded more responsibilities to nonprofit organizations by contracting for services and the income from the contracts have been supplemented by the generosity of those individuals, corporations and foundations that contribute to the nonprofit organizations to keep them sustainable.
Contrary to its name and to what many believe, the nonprofit sector is not non businesslike; in fact, compared to government and the commercial sector, nonprofits are better managed and more efficient. Yet, by providing services that would otherwise be unaffordable in the marketplace, the sector relies on contributions and grants and it is this that makes the sector vulnerable during the financial crisis.
Contributions by individuals to the sector have already begun to decline and in 2009 there will be an even more a precipitous fall. Uncertainty over the economy, unemployment, a significant loss in the value of stock portfolios will all reduce the contributions made by individuals. While lower Manhattan is the center of the financial service industry, many of those employed in the industry reside in Essex, Union and Hudson counties.
And consolidation in industry is already reducing the number of corporations that would make contributions to the sector — Merrill Lynch, Wachovia and others will likely combine their contributions departments, and corporate contributions in general will be reduced significantly. Foundations — whose endowment income provides some 10 percent of the funding to the sector — are already feeling the effect of the stock market tumble.
Because foundation contributions are directly related to the size of assets, those contributions will fall next year and likely in the year following. And the larger nonprofit organizations, in the arts, health care and higher education who rely on income from their endowments and on individuals purchasing services, like tickets to concerts, elective medical procedures or tuition will experience declines in these two forms of income. And with massive state and federal budget deficits, government contracts for service will continue to decline.
The results are predictable: organizations — particularly the smaller nonprofit organizations— will simply go out of business.
Others will be forced to reduce services and their workforce with both short-term and longer-term dire results. Expansion, strategic innovation and the confidence that allows nonprofit leaders to pursue new ideas are already diminishing meaning that the recovery, when it comes, will be slower and more difficult.
Are there any bright signs? Depending on how the Obama administration chooses to stimulate the economy, nonprofits could benefit by increases in the number of contracts, particularly for health care and early child hood education and social programs.
What can be done? Belt tightening must
be done strategically. This is an opportunity for organizations to revisit their mission and evaluate those programs and activities that remain relevant, keeping them accessible to their constituents while eliminating all other activities. Organizations that offer duplicate programs have a responsibility to merge or cooperate for better efficiency. And while personnel cuts are inevitable, organizations should look to alternatives to firing good employees, like offering employees shortened work weeks for less pay, avoiding a decline in the quality of services and more importantly, retaining the best employees rather than hiring and training a new workforce in the future.
Organizations must become closer to their stakeholders. Individual contributions may decline, but donors must continue to feel appreciated because when the economy recovers, donors that have an emotional connection to an organization will increase their giving.
While foundations have a longterm obligation to preserve their endowments, these extraordinary times require the leadership to increase foundation giving, because the ultimate obligation of the foundation is to contribute to a healthy, civil society.
With the potential for an infusion of major federal funding, the sector will compete with commercial entities for government contracts. Nonprofits must dedicate resources and import expertise to ensure that they receive their share of federal funding.
And this is a propitious time for the state of New Jersey to alter its tax laws. New Jersey is one of 22 states that do not provide a tax incentive for individual contributions. Studies have shown that state income tax incentives for contributions stimulate more additional contributions to nonprofit organizations.
And this is the time where leadership is most needed. Boards, volunteers and paid executive must demonstrate courage, faith, expertise and dedication to the sector now more than ever. Strong ethical leadership, and a dedication to the greater good, will lead to a stronger sector and a healthier civil society in the state.
James Abruzzo is managing director of the nonprofit DHR International based in Newark.