This article was first published online on March 21, 2002.
Daycare and afterschool programs shut tight. Switchboards at hospitals and clinics were down everywhere—and patients couldn’t reach offices even if those health operations managed to open with skeleton crews. Meals on Wheels stalled. Volunteer recruitment—except for emergency relief—ground to a halt. Meetings, events, and fundraisers were canceled. Programs and buildings were destroyed. Workers were distraught or absent. And some of our neighbors died.
Yet, even before September 11th, New York City nonprofit organizations were not strangers to crisis. Whole sub-sectors of the nonprofit world exist to deal with other peoples’ crises—from poverty to political persecution, from hurricanes to heart disease. Organizations (and sometimes the whole sector) have learned from their own scandals and financial crises. But to what extent New York City nonprofit organizations were prepared to deal with the crisis of the attacks on the World Trade Center on September 11th was an empirical question that demanded immediate attention. Further, the lessons learned by New York City nonprofit organizations needed to be gathered to afford some semblance of precedent for a country and sector previously insulated from such terror.
As much of the American public rallied around the government, which rallied around the airlines and financial world, we wondered who would rally around the neighborhood-based nonprofits. We embarked on our own down-home, seat-of-the-pants study designed specifically to give voice to organizations often overlooked as victims themselves. What follows is a snapshot of New York City’s nonprofit organizations struggling to get back on their feet after the one-two punch of terrorist attack and free-fall economy.1
By design, it documents only the first two months of relief and recovery—beginning approximately two weeks after the Towers fell. This preliminary data offers tentative yet substantive suggestions for crisis management (and organizational damage containment) at the organizational, organizational network, and inter-sector levels. We started with the voice of immediate impact and will continue to track these organizations through the intermediate and long-term. We are hoping that now, and in the future, this voice will be heard at the table of re-envisioning and will inform discussions of organizational emergency preparedness.
The immediate organizational impact of tragedy was swift, hard, and widespread—almost every organization we contacted in the month after the attacks reported some level of impact. Our research suggested that financial and personal resources currently available to nonprofits are no insurance against or insulation from catastrophic events. Indeed, initial impact seemed impervious to organizational age, budget size, staff size, type of organization, sources of funding or revenue—whether government contracts or fee-for-service were prevalent, for instance. Almost 80 percent of responding small and medium-sized New York City nonprofits reported being impacted by the events of September 11th; just under a quarter of those responding had sites below 14th Street in Manhattan—right by Ground Zero.
Once we moved beyond the immediate impact (in both distance and time) we started to see signs of differential recovery and differential adjustment to the newly austere climate. Seventy percent of our small and medium-sized nonprofits (average age of 34 years, average size of 65 staff members, average budget of $5+ million) that were impacted saw signs of recovery within two months, yet some organizations closer to Ground Zero are still struggling to survive. For every news report of an American Red Cross or Salvation Army flooded with donations, we found small human service organizations flooded with new demands at the same time facing staff and hour cuts. For every large cultural institution rethinking major capital projects, we found small museums and arts organizations cutting staff and programming.
While the initial external shock of the attacks altered almost all organizations’ operating climates to some degree, the intermediary impact of the bleak economy is starting to have rather targeted effects. For the city’s large nonprofit institutions, continued public and private support is easing the transition to the new economic regime; for the small and mid-sized nonprofits, the safety net is less evident.
Inter-organizational Ties Prove Important
Contrary to popular press, some monies for recovery did become available relatively quickly. For nonprofits providing services, the September 11th Fund made both grants and loans available through three coordinating organizations with traditions of assessing organizational needs. The New York Community Trust, Seedco, and the Nonprofit Finance Fund were ready to cut checks for organizations with demonstrated need. But these resources were not highly publicized, so knowledge of such pools of funds became a critical factor in gaining access. One sure route to this knowledge was inter-organizational connections to those groups in the know—often umbrella groups.
Umbrella and other intermediary organizations immediately sent out communiqués to their networks through phone, fax and e-mail trees to assess damage and need. Umbrella organizations were able to match one organization’s needs (for temporary space, for instance) with another organization’s resources. Foundation grantees often had access to knowledge and additional funding from their foundation grantors. All of this left the unaffiliated small and medium-sized organizations still reeling from the immediate impact.
It could also be argued that organizational networking and affiliation might have provided respite from the very uneven change in client participation that we discovered in our study. Just under half of responding organizations (46 percent) reported a change in client attendance or participation rate. Almost 30 percent reported an increase in client participation, while three-fourths reported a decrease in client participation (the numbers do not add up to 100 percent because some respondents saw increases in some programs and decreases in others). Organizational resources did not necessarily match the new needs—the organizations seeing the most new clients were not necessarily those with enough staff to handle the volume. Affiliation and communication with other organizations could have further matched client demand to organizational supply. Indeed there were some feelings of ill will when the Red Cross tried to recruit new caseworkers without first exploring options of partnering with neighborhood nonprofits that had caseworkers available.
The short-term costs of non-affiliation clearly included delayed or no access to recovery resources—including funding and extra staffing. The long-term impact of non-affiliation continues to plague these organizations in issues as diverse as contracting negotiations, supplier negotiations, knowledge sharing and leverage, and advocacy. A major implication of these observations is that nonprofit organizations need to consider the benefits of affiliation, federation, networking, and knowledge sharing so they do not have to face crises alone.
Further Limitations: Tight Margins and Contract Restrictions
So what does the economic future look like for small and medium-sized neighborhood nonprofits? It’s not pretty, according to the source. Almost 60 percent of the organizations in our sample agreed that the World Trade Center attack had had an economic impact on the agency. Another 28 percent weren’t sure (only 12 percent did not believe that the attacks had an economic impact). Almost 40 percent of organizations defined this economic impact as immediate loss of revenue, loss of fee-for-service, or low to no attendance. Decreased ability to fundraise was cited by 31 percent of organizations. Delays in funding and checks were cited by 33 percent of organizations—often leading to cash flow problems. Financial losses across our survey respondents were reported in the thousands, tens of thousands, and millions of dollars.
We should also note that since performance-based government contracts are reimbursed after services are provided, any interruption in such service can have tremendous financial impact. Two-thirds of the organizations in our survey stated they have such government contracts.2
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The dollar losses would be particularly hard-felt by those nonprofit organizations that operated on extremely tight margins even before September 11th. Most nonprofits (some by contract) have little or no cash reserves or fund balances from year to year. Many report yearly deficits. Indeed, deficit spending is too often a characteristic of a relatively healthy nonprofit in a healthy economy.
Deficit spending with suspended cash flow (due to the absence of fee-paying clients or inability to complete line-item budgetary requirements for client volume), no access to bridge capital, and a deteriorating economy are three factors that when blended are a recipe for disaster. That recipe has been mixed many times in the nonprofit sector in New York City since September 11th, with critical city human services at stake even as the demands from terror victims and recession victims grow.
Indeed, just over a third of our respondent organizations noted a new population in the community now seeking the organization’s services and over a quarter reported that these demands were for services not currently provided. These new clients’ needs include: jobs, housing, placement for orphans, counseling, mental health care, pastoral care, information, education, and resources in Spanish. With organizations unable to finesse the funds to cover the services, the big question becomes how to pay for services for which no likely contracts are forthcoming? Loans and grants have traditionally provided the answers to these types of shortfalls and both have become available from some of the September 11 funds. The Nonprofit Finance Fund expanded its mission to allow for direct grants to cover organizational loss. Of course, loans have been more plentiful than outright grants and may turn out to be quite dangerous for small nonprofits due to unforgiving reimbursement structures.
So what recourse should these organizations have under the terms of the contracts that bind them? For organizations to rebound from crisis, flexibility and organizational slack are keys to shock absorption. Contracts that stipulate by line items rarely allow the creative problem-solving necessary to respond quickly to turbulent environments and therefore end up leaving organizations vulnerable. Rethinking the structure of contracts to allow creative problem solving and the ability to respond to a rapidly changing environment is one concrete suggestion to come out of our inquiry. Couple this reform with increased access to forgiving loans, or better yet, pools of grant money, and nonprofits will find the road back to health a bit less daunting.
The Role of the Board in Crisis
Whose responsibility is it ultimately to get the organization back on the route to financial stability? That’s where the board comes in. Boards will likely have to consider the impact of the crisis on mission, programs, funding, and so on. In fact, the Alliance For Nonprofit Governance published a comprehensive checklist for boards in the face of crisis that was available on their Web site within a few weeks of September 11th.
Our survey results suggest that boards of our small and medium-sized neighborhood nonprofits may not have been as proactive as is recommended in times of crisis. While 38 percent of responding organizations responded that their boards had met as a result of the attacks on the World Trade Center, that leaves over 60 percent whose boards did not meet as a direct result of this crisis. We expected that more boards would have met. When can an organization call on its board for help, if not in a crisis? And if the board is to lead the organization through crisis, it must be there to help execute real-time decisions.
In a world where neighborhood-based nonprofit organizations increasingly operate close to or even over the margin, dependent on monies from on the one hand “clients” and on the other hand government contracts, it should not surprise us that these organizations were no more insulated from devastating market forces and concomitant rigid government demands and delays than their for-profit counterparts. Yet Congress has not been contemplating a bailout of the nonprofit sector. So what can be done short of a full-tilt government bailout? We recount our recommendations at three levels: organizational, organizational network, and inter-sector.
Our research suggested to us that resources available to nonprofits (the various funding streams and personal relationships) are no proof against catastrophic events. Organizations that had existing affiliations to a larger network of organizations certainly used the connections to find assistance. A key lesson then is that nonprofit organizations need to consider the benefits of affiliation, federation, or networking as well as active governing boards so they do not have to face crises alone.
From the vantage point of organizational networks (including the affiliated organizations and nonprofit intermediaries, such as funders) we can make further suggestions. The resources available to nonprofits to recover from such substantial revenue loss are quite limited. The enumerated limitations, however, provide a blueprint for potential management and policy changes to better ready the sector for future disaster. Nonprofits cannot easily raise prices, productivity, roots (to move to greener pastures), or even debt. Loans to replace losses will be neither forthcoming nor fortuitous until we can more generously account for the true assets of the organizations and the sector. Further, in critical times, we must acknowledge that grants, and not loans, may be the only way to get nonprofits back on the road to sustainability. Intermediary organizations (foundations, associations) serving individual nonprofits or networks of nonprofits need to recognize this circumstance and be prepared to offer grants to ensure recovery.
Finally, our survey of organizations in crisis is also quite revealing of these same organizations in stasis. In stasis these nonprofit organizations are increasingly structured between the poles of for-profit client contracts and performance-based government contracts—truly inter-sector. Our neighborhood nonprofits increasingly operate like businesses, with earned income generated through fees for service (almost two-thirds in our survey) and performance-based contracts (two-thirds). The government finances few of the services provided under these contracts up front, so cash flow remains an ongoing problem in the absence of reserves and the ability to borrow.
Many performance-based contracts are designed for harder to serve populations. Nonprofits are now seeing new clients who do not meet traditional qualifications and the resources that organizations have cannot be used to serve this newer population. If, for example, an organization is seeing new clients with depression and anxiety, yet it does not have the funding (often contracts) to hire mental health professionals to deal with these new populations, then the organization must either borrow from other program areas and less restricted funding, or turn away these newcomers. Yet these organizations are the last to turn people away. In serving this new population, organizations are competing against themselves and having to make choices that they should not have to make. When funds are diverted from existing programs to service new immediate demands, the existing programs are handicapped.
What recourse should these organizations have under the terms of performance-based contracts? Our final suggestion is to advocate for reforms in contracting regimes to afford organizations the critical resources to retool, recover, and respond quickly and creatively.
We hope that the information provided here will help inform the way we all think about building capacity within the sector—there is still much to learn. Just as management schools and theories are extolling the virtues of flexibility, networking, and organizational learning in readying organizations for quickly changing operating environments, nonprofits are finding themselves less able to adopt any of these practices. Certain characteristics of funding encourage and cause rigidity, such as the new performance contracting and the more longstanding traditions of providing highly compartmentalized funding and chronically overlooking the need for adequate organizational slack and infrastructure. As we have seen here, networking and flexibility keep organizations informed and more powerful with regard to managing the context in which they work.
- The full report, “The WTC Tragedy Ripple Effect Devastates Neighborhood Nonprofits,” covers study methodology, frequencies of impact, covariates of impact, and an extended discussion of lessons gleaned. We received 123 usable surveys by November 10, approximately two months after impact, for a response rate of about 20 percent. The profile that emerges is one of neighborhood organizations largely founded in the 1960s with substantial numbers of staff employed to manage and administer government and fee-for-service contracts, in the name of providing essential human services to communities.
- This survey is indebted to funding by the Packard Foundation and partnerships with New York’s Federation of Protestant Welfare Agencies, the Hispanic Federation, the NYC AIDS Housing Coalition, the Environmental Justice Community, Youth Organizations NYC, the Supportive Housing Network, and the Haitian American Alliance, all of whom gave generously of time and technology.