David Heinen, Vice President for Public Policy and Advocacy
With staggering inflation and recent declines in the stock market, nonprofit leaders are bracing for the possibility of a recession. Based on recent history, a recession could mean a prolonged period of hardship for nonprofits. During both the major recession from 2007 through 2009 and the brief economic downturn at the start of the COVID-19 pandemic in 2020, recovery came much more slowly for nonprofits than for the economy as a whole.
Nonprofits’ Business Model
To understand the way an economic recession affect nonprofits, it is helpful to know a bit about nonprofits’ business model. At the most basic level, nonprofit operate on a business model with three key principles:
- Nonprofits provide programs and services to meet areas of need within their communities, not for the purpose of making a profit. This means that nonprofits typically offer services below cost – and often for free – and that they provide more services, at a greater financial loss, when needs increase.
- Nonprofits operate with an expectation of a balanced budget and make careful plans each year to generate enough revenue to pay for the amount of services they expect to need to provide.Nonprofits’ main sources of operating revenue include a combination of fees for services (e.g., child care fees, health insurance payments, and tickets to arts performances and exhibitions), government grants and contracts, individual and corporate contributions, and foundation grants. For most nonprofits, contributions from government, foundations, and individual and business donors are essential to making up the difference between the cost of providing services and the income derived from fees for service.
- No one “owns” a nonprofit, but rather they are required by federal law to reinvest any excess income back into their missions. Ideally, nonprofits have some years with a bit of extra revenue so they can build up financial reserves as a “rainy day fund” that can cover several months of operations in years when revenues are down or demand for services is higher than expected.
Impact of Recessions on Nonprofits
Economic recessions often include a combination of inflation, high levels of unemployment, and stock market declines. Each of these factors can take a significant toll on nonprofits’ operations and finances.
Inflation creates two major challenges for nonprofits. First, more people turn to nonprofits for basic services like food, rental assistance, subsidized health care and child care, and job training when their income doesn’t keep up with sudden increases in the cost of living. Second, rising prices of gas, food, and supplies also increases nonprofits’ own operational expenses. From an economic perspective, inflation increases both the number of people that nonprofits must serve and the cost of providing services without creating any new revenue opportunities for nonprofits.
As with inflation, high unemployment rates create increased demands for many services provided by nonprofits, as more people turn to nonprofits to help cover their basic needs. And when more people are out of work, state and local governments typically have to cut back on their grants and contracts to nonprofits to offset lower-than-usual income tax and sales tax revenue. Often, nonprofits will also have to lay off some of their own staff during recessions even while taking on more services. This can take a toll on remaining nonprofit staff and on volunteers.
Additionally, staff layoffs can create steeper and more immediate unemployment expenses for nonprofits than for businesses. Instead of paying state unemployment taxes, many nonprofits elect to reimburse the state unemployment fund for the unemployment benefits their former employees receive. Consequently, nonprofits that lay off staff to cut costs during a recession are often hit with steep bills for unemployment reimbursement payments from the Division of Economic Security at the NC Department of Commerce just as they are beginning to recover from the recession. As a result, many nonprofits can’t afford to rehire laid-off staff for years after a recession.
Even though charitable organizations are not publicly-traded businesses, fluctuations in the stock market can create stark challenges for nonprofits’ finances. Many nonprofits invest some of their net assets – either through endowments or through operating reserve funds – to create a cushion for years when revenues don’t keep pace with the cost of providing programs and services. Unfortunately, many of these investments are at their lowest levels at the times when nonprofits need them the most. To make matters worse, charitable giving also tends to decrease when stock prices fall, and donations to nonprofits often don’t pick up again until after the rest of the economy has pulled out of the recession.
Business leaders can help minimize the potential negative impacts of a looming economic downturn by reaching out to local nonprofits to find out more about the needs of their organizations and the people they serve and identifying ways to partner with nonprofits to ensure they can provide necessary services to the community if there is an economic downturn.