Nonprofits, Risk Management, and Front-page Stories of “Failure”

Hazardous cliff” by Eric Fischer

April 12, 2017; Willamette Week

A rather vividly set up article in Willamette Week tells the story (or at least a story) of a relatively large nonprofit contractor covering three counties in Washington and Oregon. One of these counties, apparently, has placed the organization on a “get-well plan” financially speaking, and the article reviews the facts—or at least some of them:

Last July, Multnomah County placed Impact NW, one of its biggest nonprofit contractors, on a “get-well plan” because Impact’s financial situation was so dire.

Impact had just signed contracts to run the Schools Uniting Neighborhood program at nine public schools, for which it would be paid more than $7 million over the next five years. But the county was worried about the agency’s survival—and placed it on six months’ probation to rectify its finances.

Eight months later, according to records obtained by WW, Impact NW is still struggling.

“The monthly figures showed continued losses,” the reporter writes, “leaving Impact $260,000 behind target for the year to date. That’s a significant shortfall in an annual budget of $12.3 million.” He writes that despite cost-cutting measures made since July, the landscape is still not so good because of revenue shortfalls (emphasis ours).

“We’ve scaled back our management team, moved our office out of downtown and trimmed some benefits,” says Jeff Cogen, the new executive director. “I think we’ve made tremendous progress.”

[Cogen’s] long-standing relationship with the county complicates county oversight of Impact NW. Cogen served as county commissioner from 2006 to 2010 and chairman from 2011 to 2013, when he resigned after an affair with a subordinate.

Now, we really do not know Cogen’s character, competence, or integrity, but we must note that there is a very recognizable financial pattern here. According to GuideStar, Impact NW had a 2011 budget of just under $9 million, but by 2016, according to the paper, the budget was over $12 million. This is rapid growth for any organization and should be cause for concern about sustainability. When the majority of funding in the agency comes from government grants, however, some boards tend to figure sustainability is less of an issue—because the money will repeat year after year, maybe there is less to worry about. (Just you wait!)

NPQ has written before about the risk of growth in nonprofit organizations that are primarily funded by government. While grants and contracts do provide the solace of being renewable in many cases, what they often do not do is cover their full costs. In other words, the more contracts you have, the more you must raise to fill the structured-in gap between what you are paid and what it costs to provide the service over time. Thus, the more government money you have, the more nongovernment money you must raise, and at the front end of an expansion there are often unforeseen costs that come into play.

We cover these patterns more thoroughly in other articles.

While there may be room to cut in this organization, the solution of cutting administrative costs in such a situation may be just one more reenactment of a starvation cycle. Less administration can lead to less fundraising, which may lead to more scarcity built on the backs of contracts that don’t pay their own costs. We are not saying that this is the story here, but the whole deal sounds awfully familiar and that is how you recognize patterns and structures and avoid common traps.—Ruth McCambridge