The Urban Institute 2100 M Street, NW, Washington, D.C September Report Prepared for The Forbes Funds

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1 The Precarious Billion Dollar Sector: Nonprofit Human Services in the Pittsburgh Metropolitan Area By Carol J. De Vita and Eric C. Twombly Center on Nonprofits and Philanthropy The Urban Institute September 2003 Report Prepared for The Forbes Funds The authors wish to thank Jennifer Auer for her research assistance and statistical support. Thanks also to John Pierce, Allegheny County Department of Human Services, and Ron Gdovic, 3RC, for their insights into the nonprofit human service sector in the Pittsburgh metropolitan area. The views expressed here are those of the authors and do not necessarily reflect those of the Urban Institute, its board, or its sponsors. The Urban Institute 2100 M Street, NW, Washington, D.C

2 The Precarious Billion Dollar Sector: Nonprofit Human Services in the Pittsburgh Metropolitan Area Executive Summary by Carol J. De Vita and Eric C. Twombly Center on Nonprofits and Philanthropy The Urban Institute The thousands of nonprofit organizations in the Pittsburgh metropolitan area are a vital part of the region. They touch nearly everyone s life, providing essential services to local residents and fostering civic participation and social cohesion. Yet nonprofits today are facing serious challenges an economic downturn, declines in philanthropic giving, state budget shortfalls, realignment of government priorities, and homeland security issues. In this climate of uncertainty, many people are turning to nonprofit organizations to address community needs and public policy issues. Some nonprofits are also wrestling with an increased demand for their services while their own financial resources are strained and uncertain. With more being asked of nonprofits, it is essential to understand the capacity, management, and performance of the sector. This report examines the financial structure and fiscal health of nonprofit human service organizations in the Pittsburgh metro area so that local leaders can better plan and invest in their communities. Using data from the Form 990 that nonprofits file with the Internal Revenue Service, it examines six questions: 1. How many human service organizations operate in the Pittsburgh metro area? 2. How concentrated or diversified are their sources of revenue? 3. How much do human service organizations spend on management and administrative expenses as a percentage of their total budgets? 4. What is their average operating margin that is, do revenues exceed expenditures? 5. What percentage of human service groups end the year with positive net income? 6. What are the average end-of-year net assets do assets exceed liabilities? Findings Compared with other nearby metro areas, the size of the nonprofit sector in the Pittsburgh region is fairly typical. There are nearly 2,700 nonprofit organizations in the Pittsburgh metro area or about 11.1 organizations for every 10,000 residents. With revenues of $12.9 billion in 2000, the Pittsburgh nonprofit sector is roughly on a par with the nonprofit sectors in Cleveland and Baltimore metro areas of similar population size. Looking only at human services, Pittsburgh area nonprofits rank last in terms of per capita spending for residents in poverty. The 547 nonprofits that provide human services in the Pittsburgh metro area spent roughly $3,700 in 2000 for each resident in poverty. Compared with six other metro areas (Baltimore, Buffalo, Cleveland, Detroit, Indianapolis, and Philadelphia), the Pittsburgh nonprofit sector spent the least per capita on residents in poverty. It also had fewer human service providers per capita than most other metro areas in the study. This finding suggests ii

3 that when Pittsburgh area residents need assistance, they have fewer options than residents in other cities, and less money is spent on their needs. The nonprofit human service sector in the Pittsburgh area is relatively small, despite revenues and expenses of nearly $1 billion each in Human services account for about 20 percent of all nonprofit organizations in the region, but these groups have roughly 8 percent of the region s revenues and expenses and 6 percent of its assets. The average operating budget for human service groups is about $1.7 million, although the typical (or median) budget is much smaller about $463,000. Although several of the largest human service providers are located in the city of Pittsburgh, there are no significant differences in revenues, expenses, or assets between groups in the city and those in the surrounding suburbs or counties. Client fees are the single most important source of revenue for nonprofit human service providers in the Pittsburgh area. Government funding is second. Client fees accounted for 40 percent of revenue and government funds for 28 percent. Together, these sources of income represented more than two-thirds of human service income, compared with less than half for the sector as a whole. Human services received about one in five dollars from private donations and charitable giving. By 2000 one year before the high-flying economy tumbled nonprofit human services in the Pittsburgh area were facing precarious times. Nearly 40 percent of these nonprofits ended the year with a negative balance sheet. Revenues fell short of expenses. Human service providers had a 3 percent cushion in their budgets. This was less than half of what all nonprofits in the region reported. Human services had little room for operating errors. More than four of every five dollars went to program expenses. On average, there appears to be little fat in the budget to trim. The average net assets of human service groups were almost four times smaller than those of the other nonprofits in the region. Given their modest assets, these groups can be financially vulnerable in economic downturns. With the sector in flux, this is an opportune time to begin a public debate on the future of the nonprofit human service sector in Pittsburgh. For example, Can Pittsburgh s human service sector do more for people in need? What mix of funding will yield financial stability for human service providers? Can a consensus be built on how to strengthen and enhance the capacity of the human service sector? The challenges faced by nonprofit human service groups in Pittsburgh and elsewhere have no quick and easy solutions, but the financial portrait presented in this report can serve to open dialogue, inform debate, and guide the development of public and private policies to strengthen this vital part of our communities. iii

4 INTRODUCTION The thousands of nonprofit organizations in the Pittsburgh metropolitan area are a vital part of the region touching almost everyone s life young and old, rich and poor, those in need and those who are able to give and volunteer. These organizations provide arts and cultural events, education, health care, child care, job training, services for the elderly, emergency services, community development, and a host of other activities that benefit daily life. In addition to essential services, nonprofits also build relationships and trust among residents, foster civic participation and social cohesion, and generally strengthen and enrich our communities. But nonprofits today are facing serious challenges an economic downturn, declines in philanthropic giving, state budget shortfalls, realignment of government priorities, and homeland security issues. In this climate of uncertainty, many people are turning to nonprofit organizations to address community needs and public policy issues. Some nonprofits are also wrestling with an increased demand for their services when their own financial resources are strained and uncertain. With more being asked of nonprofits, it is essential to understand the capacity, management, and performance of the sector. This report examines the financial structure and fiscal health of nonprofit human service organizations in the Pittsburgh area so that local leaders can better plan and invest in their communities. The study includes the six counties that comprise the Pittsburgh metro area (Allegheny, Beaver, Butler, Fayette, Washington, and Westmoreland) 1 and analyzes resources by location, such as the city of Pittsburgh, and the remaining counties. 1 In the summer 2003, the U.S. Bureau of the Census added Armstrong County to the Pittsburgh metro 1

5 Human services are a highly visible part of the nonprofit sector in the Pittsburgh area. The field has such a diverse range of programs and activities that it is sometimes difficult to keep track of them all. After consultation with The Forbes Funds and the Allegheny County Department of Human Services, we classified the area s nonprofits into 10 categories that generally correspond to local funding programs and areas of interest, namely: (1) elder services, (2) emergency assistance, (3) family services, (4) group homes, (5) housing assistance and community development, (6) multipurpose nonprofits, (7) physical and mental health services, excluding hospitals, (8) preschools and child care, (9) work readiness programs, and (10) youth development. Definitions of these categories are provided in Appendix A. Data for the study come from the National Center for Charitable Statistics at the Urban Institute and are based on the Forms 990 that nonprofit organizations filed with the Internal Revenue Service (IRS) in These data provide detailed measures of the revenues, expenses, assets, and liabilities of nonprofit organizations, which together outline the financial structure and describe the fiscal health of the nonprofit sector. Because there is a lag in processing data, the year 2000 provides the most complete set of records for analysis. The data from 2000 can be regarded as a high water mark for the fiscal health of nonprofits, before the stock market declined and the economy softened. A description of the study s data and methodology is provided in Appendix B. The analysis was guided by six questions that are critical for understanding the basic financial strengths and weaknesses of the Pittsburgh area s human service sector and the challenges that it is likely to face in the months ahead: area. This addition could not be incorporated into the analysis that was already underway. 2

6 How many human service organizations operate in the Pittsburgh metro region? How concentrated or diversified are their sources of revenue? How much do human service organizations spend on management and administrative expenses as a percentage of their total budgets? What is their average operating margin that is, to what extent do revenues exceed expenditures? What percentage of human service nonprofits end the year with positive net income are they operating in the red or black at the close of the year? What are their average end-of-year net assets do assets exceed liabilities? The report has four sections. The first part provides an overview of the nonprofit sector in the Pittsburgh area and compares it with other metropolitan areas that are in close geographic proximity. The second section examines the financial structure of the human service sector in the Pittsburgh region, and the third section assesses the fiscal health of these organizations. Finally, the report raises several fundamental questions that can frame discussions on the future of the region s nonprofit human service sector. PITTSBURGH S NONPROFIT SECTOR COMPARED WITH OTHER AREAS How large is the nonprofit sector? This is an important question because it provides one measure of the sector s capacity to address community needs. Because the nonprofit sector encompasses a wide range of services and programs, runs the gamut from very small to very large organizations, and is quite dynamic with new organizations constantly forming and others going out of business, it is difficult to determine a precise number. Using data from the IRS, the Pittsburgh metropolitan area had 2,657 nonprofits that were registered with the IRS as charitable 501(c)(3) organizations and filed Form 3

7 990 returns in This number includes a wide range of organizations from arts and cultural groups to hospitals, universities, youth development programs, senior centers, and public safety and disaster relief services. It does not include many small organizations with gross receipts of less than $25,000 and most religious congregations. Organizations with revenues under $25,000 are not required to file a Form 990, and religious congregations are not required to register with the IRS, although some do. Taken together, the nearly 2,700 nonprofits in the Pittsburgh area raised roughly $12.9 billion in revenue, had $12.1 billion in expenses, and controlled more than $22 billion in assets in 2000 (table 1). Although many smaller nonprofit organizations are missing from this analysis, the study captures the vast majority of the sector s resources. Table 1. Size of the Nonprofit Sector in the Pittsburgh Metropolitan Area Compared with Six Other Metro Areas in 2000 Dollars in billions Number of Metro Total Total Total Nonprofits per 10,000 Metro Nonprofits Population Revenues Expenses Assets Residents Pittsburgh 2,657 2,400, Metros of similar population size to Pittsburgh Cleveland 2,893 2,300, Baltimore 2,826 2,600, Metros with smaller populations than Pittsburgh Buffalo 1,196 1,100, Indianapolis 1,789 1,600, Metros with larger populations than Pittsburgh Detroit 2,931 4,400, Philadelphia 5,470 5,100, Source: National Center for Charitable Statistics/Guidestar National Nonprofit Database and the U.S. Bureau of the Census, 2000 Decennial Census. 4

8 The Pittsburgh nonprofit sector compares very favorably with other nearby metropolitan areas. In terms of per capita measures, it is somewhat larger. With 11.1 nonprofits per 10,000 residents, the Pittsburgh metro trails only Cleveland (12.6) and Indianapolis (11.2) on a per capita basis. Baltimore, Buffalo, and Philadelphia have somewhat fewer nonprofits per capita, while the Detroit metro area has the smallest measure with 6.7 groups per 10,000 residents. In terms of financial resources, Pittsburgh is roughly on a par with Cleveland and Baltimore metro areas that are similar in size to the population of the Pittsburgh area. In 2000, nonprofits in these three metro areas had revenues between $12 billion and $14 billion, expenditures between $11 billion and $12 billion, and assets ranging from $21 billion to $29 billion. Smaller metro areas, such as Buffalo and Indianapolis, had far fewer resources, while Philadelphia, which is twice as large as Pittsburgh demographically, had nearly twice as many resources. Relative to its size, the Detroit metropolitan area has a disproportionately small number of nonprofit organizations and fewer resources to apply to its community needs. About one in five nonprofits in the Pittsburgh region are human service providers (table 2). This is roughly the same proportion as the other nearby metro areas, although Buffalo and Detroit have somewhat larger shares (one in four). The number of human service groups, however, does not measure the potential capacity against potential need. On a per capita measure, the Pittsburgh region ranks fifth (tied with Philadelphia) on the number of human service providers per 1,000 residents in poverty 2.2 human service agencies per 1,000 people in poverty. However, in terms of per capita expenditures, Pittsburgh ranks last among the seven metro areas, spending $3,712 for each person in 5

9 poverty. These data suggest that when Pittsburgh area residents need assistance, they not only have fewer options at least in terms of the number of agencies than residents in other cities, but also less money is expended on their needs. Table 2. Number of Nonprofit Human Service Providers Relative to the Poverty Population in Pittsburgh and Six Other Metropolitan Areas in 2000 Human Service Nonprofits Per 1,000 Residents in Poverty Human Service Expenditures ($) Per Resident in Poverty Metro Area Number of Human Service Nonprofits Human Services As a Percent of All Nonprofits Number of People in Poverty Pittsburgh , ,712 Metros of similar population size to Pittsburgh Cleveland , ,550 Baltimore , ,221 Metros with smaller populations than Pittsburgh Buffalo , ,108 Indianapolis , ,350 Metros with larger populations than Pittsburgh Detroit , ,915 Philadelphia 1, , ,855 Source: National Center for Charitable Statistics/Guidestar National Nonprofit Database and the U.S. Bureau of the Census, 2000 Decennial Census. The location of human service programs within an area can help determine access and use of the services. Allegheny County has about two-thirds of the nonprofit human service providers in the Pittsburgh area (table 3). Of the 547 human service groups in the region, about 41 percent of the providers (226 groups) are located within the city limits of Pittsburgh and another 24 percent (131 nonprofits) are located in the remainder of the County. One in three providers (190 groups) is sited in the other five counties. 6

10 Table 3. Distribution of Nonprofit Human Service Providers in the Pittsburgh Metropolitan Area by Type of Service, 2000 Pittsburgh Allegheny County Other Counties Total Type of Human Service N % N % N % N % Elder Services Emergency Assistance Family Services Group Homes Housing Assistance and CDOs a Multipurpose Programs Physical/Mental Health b Preschools and Child Care Work Readiness Programs Youth and Teen Programs Total Source: National Center for Charitable Statistics/Guidestar National Nonprofit Database. a Community Development Organizations b Excludes hospitals Note: Other counties include Beaver, Butler, Fayette, Washington, and Westmoreland. The relatively large number of human service agencies in the city of Pittsburgh is consistent with other research on the spatial distribution of nonprofits (De Vita, Manjarrez, and Twombly 1999; Twombly, De Vita, and Garrick 2000). Several reasons may account for this pattern: the availability of affordable space, the close proximity of other organizations, and the mix of clients and client needs in different jurisdictions. As table 3 shows, certain types of nonprofits are more likely than others to locate in the city. For example, work readiness providers, housing assistance, and emergency assistance organizations are heavily concentrated in the city of Pittsburgh, whereas elder service providers are more evenly distributed throughout the region. The placement of services, in part, responds to local needs. The city of Pittsburgh, for example, had a much higher poverty rate (20 percent in 2000) than most of the surrounding counties (generally about 9 or 10 percent). Older residents, on the other hand, are found in every jurisdiction. 7

11 Mapping work already underway in the region can help assess how well the geographic location of providers corresponds to residents needs and potential demand for services. THE FINANCIAL STRUCTURE OF NONPROFIT HUMAN SERVICES IN THE PITTSBURGH METRO AREA Understanding the financial structure of the nonprofit human service sector is a critical component for planning and investing in the capacity of the sector. Each organization has its own unique circumstances, and each service area has its own particular characteristics. With so many different types of human service organizations, a generic plan to address the sector s financial concerns simply will not work. Strategic plans and investment choices must be tailored to fit the needs and capacity of the various service fields. There are, however, several distinguishing features that shape the sector s resource base and financial structure. The nonprofit human services sector in the Pittsburgh region is relatively small, despite revenues and expenses of nearly $1 billion in The 547 human service nonprofits in the Pittsburgh region generated $979 million in revenue and $926 million in expenses in 2000, and held more than $1.3 billion in assets. Despite these seemingly large sums, the human services sector in the Pittsburgh area is relatively small. It accounts for 20 percent of all nonprofit organizations in the region, roughly 8 percent of the region s revenues and expenses, and 6 percent of its assets. As table 4 shows, the average operating budget for these human service groups was about $1.7 million, but this average is inflated by the largest service providers. The typical or median budget is much smaller around $463,000. 8

12 Table 4. Operating Budgets in 2000 of Nonprofit Human Service Providers In the Pittsburgh Metro Area Dollars in thousands Average Median Type of Human Service N Revenues Expenses Revenues Expenses Group Home 20 4,716 4,668 1,784 1,744 Multipurpose Programs 101 2,663 2, Elder Services 63 2,652 2, Emergency Assistance 39 1,946 1, Family Services 25 1,771 1, Work Readiness Programs 45 1,796 1, Physical/Mental Health b 50 1,687 1, Youth and Teen Programs 35 1,624 1, Preschools and Child Care Housing Assistance and CDOs a All Human Service Nonprofits 547 1,790 1, All Nonprofits 2,657 4,864 4, Source: National Center for Charitable Statistics/Guidestar National Nonprofit Database. a Community Development Organizations b Excludes hospitals There are a handful of very large human service organizations in the Pittsburgh area. The largest was the YWCA of Pittsburgh, which reported more than $42 million in revenues in Other large groups include the YMCA of Pittsburgh and Goodwill Industries, with revenues of $28 million and $25 million, respectively. The largest human service provider outside the city of Pittsburgh was the Greater Pittsburgh Area Food Bank in Duquesne, which reported revenue of $23.6 million. In total, there were 26 human service nonprofits that received $10 million or more in revenue in Although several of the largest human service nonprofits are located in the city of Pittsburgh, there are no significant differences in revenues, expenses, or assets between groups in the city and those sited in the surrounding suburbs and counties. The financial 9

13 resources are spread fairly evenly among the various jurisdictions. This pattern differs markedly from the distribution for other types of nonprofits in the region. For example, among organizations that provide arts and cultural activities, education, environmental protection and beautification, and so forth, the ones located in the city have significantly more revenues, expenses, and assets than those in the remainder of the metro area. The human service pattern may be a double-edged sword. It suggests that resources targeted at human services are well spread across the region. But it also suggests that communities with high or entrenched levels of need may struggle to find sufficient funds to meet those needs. The size of operating budgets varies greatly by the type of service provided. The largest budget (residential group homes) is almost 10 times greater than the smallest (housing assistance and community development). The human service field offers such a wide range of programs that it is not surprising that the operating budgets of different types of service providers vary significantly. Some programs can be run with volunteers; others require staff with professional training and expertise. These factors affect the cost of running a program. However, the size of the operating budget alone cannot determine if community needs are being met effectively or efficiently. The adequacy, appropriateness, and quality of the service and the unmet demand for service must also be factored into an assessment of service capacity. As table 4 shows, the 10 human service fields in this study have a wide range of operating budgets. Nonprofits that provide residential care, halfway houses, and group homes had operating budgets, on average, of roughly $4.7 million in 2000, making them significantly larger than any of the other types of providers in the region. Among the residential care facilities, Passavant Memorial Homes in Pittsburgh is the largest with 10

14 revenues that exceeded $20 million. As a whole, residential care facilities have a disproportionate share of the human service resources. Although they comprise just 3 percent of all nonprofit human service groups in the Pittsburgh region, residential group homes accounted for nearly 10 percent of the revenue. In contrast, nonprofits that offer housing assistance and community development had average operating budgets of about $500,000. Groups with very small budgets can sometimes find it difficult to balance their books at the end of the year. The Turtle Creek Development Corporation in Allegheny County, for example, had revenues of $2,633 and expenses of $17,362, leaving an operating loss of more than $14,000 in Housing assistance and community development organizations were more likely than other types of human service nonprofits to report negative balance sheets at the end of the fiscal year. The assets of nonprofit human service providers in the Pittsburgh area are relatively small. Elder services reported the highest assets; preschools and child care facilities the lowest. Nearly all of the human service groups in the study (533 of 547) reported holding some type of asset although compared with the sector as a whole, the asset holdings of human services groups are relatively small. On average, human service groups have assets of $2.4 million compared with $8.5 million for all nonprofits in the Pittsburgh region. Similar to operating budgets, the value of assets ranges widely and is concentrated in a few fields (table 5). Elder service providers, on average, had the most assets in 2000 ($6.2 million) nearly double the size of the next largest holder, multipurpose groups ($3.2 million). There are several very large asset holders in the elder service field, including the Jewish Association on Aging in Pittsburgh ($41.5 million in assets) and Presbyterian Seniorcare in Oakmont ($39.3 million). In total, elder service 11

15 providers, which represent 12 percent of human service groups in the Pittsburgh area, held more than $390 million in assets in 2000 or about 30 percent of all assets in the area s human service field. Table 5. Type of Nonprofit Human Service Provider in the Pittsburgh Metro Area Rank Ordered by Size of Assets in 2000 Dollars in thousands Type of Human Service N Average Median Elder Services 63 6,200 1,176 Multipurpose Programs 101 3,257 1,017 Group Homes 20 2, Youth and Teen Programs 35 2, Housing Assistance and CDOs a 124 2, Family Services 25 1, Emergency Assistance 39 1, Work Readiness Programs 45 1, Physical/Mental Health b Preschools and Child Care All Human Service Nonprofits 547 2, All Nonprofits 2,657 8, Source: National Center for Charitable Statistics/Guidestar National Nonprofit Database. a Community Development Organizations b Excludes hospitals Client fees are the most important source of income for nonprofit human service providers in the Pittsburgh area. Nonprofit organizations rely on a variety of revenue sources to support their activities private donations, government grants and contracts, client fees, and many others. The mix and importance of these sources generally varies by type of activity provided. Human service providers in the Pittsburgh area, for example, are much more reliant on client fees and government support than is the average nonprofit in the region (table 6). Combined, client fees and government support account for more than two-thirds of 12

16 human service income compared with less than half for the sector as a whole. 2 Table 6. Sources of Revenue in 2000 by Type of Nonprofit Human Service Provider In the Pittsburgh Metro Area Average Percentage Type of Human Service N Donations Government Client Fees Other Elder Services Emergency Assistance Family Services Group Homes Housing Assistance and CDOs a Multipurpose Programs Physical/Mental Health b Preschools and Child Care Work Readiness Programs Youth and Teen Programs All Human Service Nonprofits All Nonprofits 2, Source: National Center for Charitable Statistics/Guidestar National Nonprofit Database. Note: The number of cases (N) is reduced because information on sources of revenue is not available for EZ filers. a Community Development Organizations b Excludes hospitals Client fees are the single most important source of revenue for nonprofit human service providers in the Pittsburgh area. Forty percent of income for human services in 2000 came from client fees. Such charges include the fees paid by parents for child care, registration fees for job training programs or youth camps, and fees for family 2 It is difficult to obtain a precise measure of government support from the Form 990 data because it can be recorded in two places. Income for services that specifically benefit a government entity (such as a nonprofit that provides food services in a government building) should be reported as program service revenue, that is, fee-for-service. Revenue for services that benefit the general public, a set of clients, or individual recipients should be reported as government contributions or grants for example a nonprofit that has a youth development program. In practice, however, there is some confusion. Income from vouchers, for example, may be reported incorrectly as fee-for-service rather than as a government contribution. As a result, client fees may be overestimated, while government contributions may be underestimated. Although the extent of this problem is unknown, the analysis suggests that it is not a major problem. Service providers such as emergency assistance that were reasonably expected to receive substantial government funding did so, while services such as child care were heavily reliant on fee income. 13

17 counseling. On average, fee income amounted to $914,000 per human service agency. The typical or median human service nonprofit received $93,000 from fees. Preschool and child care programs were especially reliant on fees, with nearly three of every four dollars coming from clients. Of the 41 preschool providers that filed with the IRS in 2000, 24 received at least 90 percent of their revenue from clients. In contrast, emergency assistance groups are the least dependent on fee-for-service income. These groups include homeless and domestic violence shelters, food pantries, and services for abused or neglected children. Many of the clients who receive emergency assistance are able to pay only a small fee or nothing at all. Government is also an important source of support for human service providers in the Pittsburgh area. More than one-quarter of their funds (28 percent) comes from government, and some groups such as emergency assistance providers, job training programs, and group homes rely on government for about 40 percent of their revenue. Although private donations from individuals, corporations, foundations, and federated campaigns represent a smaller share of income than client fees or government, they nonetheless account for one in five dollars, and for some groups (such as emergency assistance, and youth and teen programs), this source of revenue is closer to one-third of their budgets. Other sources of income, such as the return on investments, membership dues, and the sale of t-shirts or other items, generally play a minor role in human service budgets. In the Pittsburgh area, about one in ten dollars comes from these sources. 14

18 More than four of every five dollars spent by nonprofit human service providers in the Pittsburgh metro area go to program expenses. In today s tight economy, donors often want to see their dollars spent directly on programs rather than on administration, fundraising, and overhead costs. Human service providers in the Pittsburgh area have a good track record in this regard. Compared with all nonprofits in the region, they spent significantly more of their budgets on programs and less on administration and management in On average, human service groups reported about 82 percent of their budgets going to programs and 15 percent to administration and management (table 7). Fundraising represented about 2 percent of human service budgets, compared with roughly 3 percent for the sector as a whole. Table 7. Average Share of Expenses Devoted to Program Costs in 2000 by Type of Nonprofit Human Service Provider in the Pittsburgh Metro Area Average Percentage Type of Human Service N Program Expenses Administrative Expenses Fundraising Expenses Other Preschools and Child Care <1 Youth and Teen Programs <1 Multipurpose Programs Elder Services Housing Assistance and CDOs a <1 Physical/Mental Health b <1 Emergency Assistance Work Readiness Programs Group Homes Family Services <1 All Human Service Nonprofits <1 All Nonprofits 2, Source: National Center for Charitable Statistics/Guidestar National Nonprofit Database. Note: Percentages may not sum to 100 because of rounding. The number of cases (N) is reduced because information on types of expenses is not available for EZ filers. a Community Development Organizations b Excludes hospitals 15

19 These data illustrate the tremendous emphasis that nonprofit human service providers in the Pittsburgh area place on the delivery of services. But they also suggest that groups may not be building the necessary infrastructure to expand their capacity or weather uncertain financial times. Research shows that organizations with higher administrative and non-program expenses have a greater chance of surviving in tough financial times because they can trim more fat from their budgets before decreasing program spending (Chang and Tuckman 1993; Hager 2001). Accordingly, nonprofit preschool and child care providers in the Pittsburgh area may be at risk. With administrative expenses at 9 percent and fundraising costs at 1 percent, there is relatively little wiggle room to adjust to a decline in revenues without affecting the quality or quantity of their services. On the other hand, of the 10 human service categories in this study, family services allocated the least to program activities (less than 75 cents of each dollar). It spent about 11 cents of every dollar on fundraising costs an amount that is nearly six times the average for the entire human service sector. Administrative costs cover a variety of expenses payroll, insurance, rent, utilities, and many more. As table 8 shows, these costs vary among types of human service providers. Although residential group homes had the highest average costs ($586,000), this expenditure represented about 16 percent of the total budget proportionately on a par for the human service sector as a whole in the Pittsburgh region. As a percentage of their budgets, work readiness programs and elder service programs had the highest administrative costs 19 percent and 17 percent, respectively. 16

20 Table 8. Average Administrative Costs in 2000 by Type of Nonprofit Human Service Provider in the Pittsburgh Metro Area Ranked by Share of Total Budget Dollars in thousands Type of Human Service N Average Amount Spent As % of Total Budget Percentage of Groups Spending 30% or More on Administrative Costs Work Readiness Programs Elder Services Group Homes Physical/Mental Health b Emergency Assistance Family Services Housing Assistance and CDOs a Multipurpose Programs Youth and Teen Programs Preschools and Child Care All Human Service Nonprofits All Nonprofits 2, Source: National Center for Charitable Statistics/Guidestar National Nonprofit Database. Note: The number of cases (N) is reduced because information on types of expenses is not available for EZ filers. a Community Development Organizations b Excludes hospitals High administrative costs are less likely in the human service field than in Pittsburgh s nonprofit sector as a whole. Only 11 percent of human service organizations spent more than 30 percent of their budgets on administrative expenses, compared with 16 percent for all nonprofits. In fact, none of the 69 agencies that focus on preschoolers or youth and teens spent more than 30 percent of their budgets on administration. While nonprofits with high management costs may have the capacity to trim their budgets in tight financial times, these groups risk negative publicity, an erosion of public trust and confidence, and being called wasteful. 17

21 THE FISCAL HEALTH OF NONPROFIT HUMAN SERVICES IN THE PITTSBURGH METRO AREA Given the underlying fiscal structure of the nonprofit human service sector in the Pittsburgh region, how well are these groups doing financially? Do they end the year with a positive balance sheet, and does the value of their assets exceed their liabilities? Are an organization s location, size, or sources of income potential indicators of financial health? The answers to these questions provide basic measures of the financial well being of nonprofit human service providers and reveal which areas of the sector are struggling and which are on firmer financial ground to sustain their operations. Nearly 40 percent of nonprofit human service providers in the Pittsburgh metro region lost money by the end of Although nonprofit organizations cannot distribute profits as for-profit firms do, they should have positive operating margins (i.e., revenues exceed expenses) to remain financially viable. Even in 2000, before the events of 9/11 and the economic downturn, a sizeable portion of nonprofit human service providers in the Pittsburgh area were struggling financially. Of the 547 human service organizations in the Pittsburgh area, 205 (or 37 percent) had negative balance sheets at the end of the year a higher proportion than nonprofits in the region generally (33 percent). One in six providers (94 organizations) posted losses of 10 percent or more. Habitat for Humanity, for example, reported revenues of $669,000 and expenses of $950,000, for a net loss of $281,000. On the other hand, about one in five human service providers (112 organizations) did particularly well, reporting operating margins of 20 percent or more. The Beaver County YMCA, for example, reported income of roughly $3.3 million and expenses of $1.4 million, yielding an operating margin of $1.9 million. 18

22 Within the human service field, nearly half of all nonprofit housing assistance groups were in the red at the end of 2000 (table 9). Many other types physical and mental health programs (excluding hospitals), youth and teen programs, preschool and child care programs, work readiness programs, and residential group homes also struggled to get by. Emergency service providers had the best financial track record with only one-quarter of the groups ending the year with a negative balance. Table 9. Operating Margins in 2000 of Nonprofit Human Services Providers in the Pittsburgh Metro Area % of Nonprofits Margin as % Amount of Margin with a Negative of Total Type of Human Service N Balance Average Median Revenue Housing Assistance and CDOs a ,000 2,000 2 Physical/Mental Health b ,000 3,000 0 Youth and Teen Programs ,000 2,000 3 Preschools and Child Care ,000 6,000 1 Work Readiness Programs ,000 4,000 2 Group Homes ,000 11,000 1 Family Services ,000 10,000 3 Elder Services ,000 13,000 6 Multipurpose Programs ,000 23,000 3 Emergency Assistance ,000 28,000 8 All Human Service Nonprofits ,000 8,000 3 All Nonprofits 2, ,000 11,000 7 Source: National Center for Charitable Statistics/Guidestar National Nonprofit Database. a Community Development Organizations b Excludes hospitals Overall, human service organizations had a 3 percent cushion in their budgets less than half of what all nonprofits in the Pittsburgh area reported. Operating margins for human service groups averaged about $103,000, compared with $320,000 for the sector as a whole. These margins ranged from -$3,000 for physical/mental health services 19

23 (excluding hospitals) to $247,000 for emergency assistance providers. However, all of these operating margins were below the average performance for the entire sector. Only elder services and emergency assistance services had financial cushions that were proportionately similar to the sector average 6 and 8 percent, respectively. The other providers were operating with virtually no room for error. The average net assets of human service groups were almost four times smaller than those of other types of nonprofits in the region. In tough financial times, nonprofits may look for sources of income that can tide them over for a period of time. An organization s net assets (that is, its assets minus liabilities) can sometimes serve this purpose. Assets sometimes can be sold or used as collateral for loans. In the Pittsburgh region, 88 percent of human service organizations had positive net assets, which, on average, equaled $1.3 million, but these measures were considerably below the norm for the nonprofit sector as a whole. For all nonprofits in the Pittsburgh area, 91 percent ended the year with positive net assets, which averaged $4.9 million (table 10). Community-based health services (excluding hospitals), and housing assistance and community development organizations were least likely to report positive net assets and had some of the smallest average balances. These groups have very little to draw upon in times of financial need. In contrast, elder services and multipurpose groups were relatively well positioned compared to other human service organizations, reporting net assets of more than $2 million. But these averages are less than half of what other types of nonprofits in the sector reported at the end of In short, human service organizations with their relatively limited assets may be quite vulnerable during economic downturns. A closer study of the types of assets held by nonprofits is needed to 20

24 determine the liquidity of these assets for getting through a financial emergency. Table 10. Average Net Assets in 2000 by Type of Nonprofit Human Service Provider in the Pittsburgh Metro Area Dollars in thousands % of Organizations with Positive Type of Human Service N Average Median Net Assets Elder Services 63 2, Multipurpose Programs 101 2, Youth and Teen Programs 35 1, Family Services 25 1, Emergency Assistance 39 1, Group Homes Work Readiness Programs Housing Assistance and CDOs a Physical/Mental Health b Preschools and Child Care All Human Service Nonprofits 547 1, All Nonprofits 2,657 4, Source: National Center for Charitable Statistics/Guidestar National Nonprofit Database. a Community Development Organizations b Excludes hospitals Human service organizations located in the city of Pittsburgh were significantly more likely to have experienced financial problems than groups in the suburbs. Nonprofits located in the city of Pittsburgh were more likely to run operating deficits in 2000 than other groups, after controlling for the type of provider, size of the organization, net assets, and reliance on various sources of income. In fact, nonprofits in the city were twice as likely as groups in the remainder of Allegheny County and the outer suburbs to post losses of 10 percent or more. 21

25 Small and mid-sized human service groups were particularly vulnerable to budget swings. The financial picture of human service providers tends to be mediated by the size of the organization. Small groups with revenues of less than $100,000 and mid-size groups with revenues between $100,000 and $2 million were more likely than larger organizations to experience either large gains of 20 percent or more or large losses of 10 percent or greater. The acquisition (or loss) of just one large contract or charitable gift can create volatile swings in the budget of smaller organizations. Smaller groups also have significantly fewer net assets than larger groups, suggesting that net assets may provide some financial stability to organizations. Reliance on client fees does not necessarily provide financial stability for human service groups in the Pittsburgh region. Although client fees represent the single most important source of income for human service providers, they do not necessarily provide financial stability for these organizations. Groups that relied heavily on client fees were no more able than other groups to stave off large financial losses of 20 percent or more and were significantly less likely to post large gains. Fee-for-service income is not a panacea for solving the financial problems of human service organizations. It should be considered in relation to all sources of income in an organization s portfolio. Private philanthropy and government funding help provide financial stability and fiscal health to the human service sector. Nonprofits that received the bulk of their income from charitable contributions are significantly more likely than others to operate in the black, when controlling for other factors such as the size of the organization, type of service, and location. Government support also helps mitigate financial losses. When government funding is the major 22

26 source of support, human service groups are somewhat less likely to lose money and significantly less likely to experience large percentage drops in their budgets when controlling for other factors. While private philanthropy and government funds tend to play lesser roles than fee income in supporting the Pittsburgh area s human services, they provide an important underpinning for the financial health of the sector. CONCLUSION At a time when communities face a host of social and economic challenges, there is a pressing need to take stock of the resources and institutions that are available to address local concerns. The nonprofit sector with its myriad groups and activities is a vital part of the infrastructure that is being called upon to tackle problems, craft solutions, and strengthen our communities. Yet it faces financial challenges that could undermine the effectiveness of its work. Getting the most out of scarce resources is a sign of efficiency. Getting the most out of a $1 billion sector is essential to assist people in need. By 2000 one year before the high-flying economy tumbled nonprofit human services in the Pittsburgh region were facing precarious times. Two in five human service providers operated with a financial deficit, and most groups had very little slack in their budgets to meet unexpected demands or emergencies. The majority of funds went toward programs, with relatively little spent on administration or fundraising. In addition, these groups had only modest net assets that might be used as a reserve. Over time, such budget scenarios will affect both the quantity and quality of services in the region. 23

27 To strengthen the nonprofit sector and build capacity within the community, it is essential to take a hard look at the sector, identify its salient characteristics, and devise strategies for addressing both immediate and long-term needs. Based on this study, three important questions stand out: 1. Can Pittsburgh s human service sector do more for people in need? On a per capita basis, the Pittsburgh area has relatively few nonprofit human service providers, given the number of residents in poverty. Both Cleveland and Baltimore (metro areas of comparable size) have more nonprofit human service agencies and spend more per capita on their human service programs. Although these numbers do not measure the quality or effectiveness of services, the data suggest that more could be done to target resources at nonprofits that serve low-income and at-risk residents in the Pittsburgh area. 2. What mix of funding will yield financial stability for human service providers? Client fees are the most common type of revenue supporting nonprofit human service providers in the Pittsburgh area, but fee-for-service income does not produce greater financial stability for organizations. Nonprofits that are reliant on client fees are no more likely than other groups to avoid financial losses, and even if they end the year with a positive balance sheet, they are very unlikely to post big financial gains. Private philanthropy and government support appear to be shoring up the financial stability of the human service sector. The strong reliance on client fees raises a broader issue of the purpose and mission of the charitable sector. Does the strong reliance on fee income undercut the ability of nonprofit organizations to serve low-income people who cannot afford to pay? 24

28 A study by the Urban Institute of Pittsburgh s nonprofit sector in the mid-1980s found that nonprofits were increasingly using fee-for-service income to offset declines in government revenue and private philanthropy (Salamon, Altschuler, and De Vita 1987). Although the data in this report are not fully comparable with the earlier report, client fees apparently have replaced government funding as the most important source of financial support for human services in the Pittsburgh area, and private philanthropy has had very modest growth. Further reliance on fee income is likely to hurt the most needy members of the community. A public dialogue on how to fund the human services sector may be long overdue. 3. Can a consensus be built on how to strengthen and enhance the capacity of the human service sector? Building the capacity of nonprofit organizations requires attention to detail. Because organizations have different needs, capacity-building strategies should be tailored to address those differences. While some nonprofits may need to strengthen and build their infrastructure, others might be encouraged to seek collaborations that would enhance their overall capacity. Additionally, for some nonprofits that may be too weak to survive on their own, a merger or acquisition may be the right step. In essence, the sector must decide how to achieve a balance between enhancing the capacity of individual organizations and strengthening the sector as a whole. Because the sector is in flux, this is an opportune time to begin a public debate on the future of the nonprofit human service sector in Pittsburgh and around the country. As a community, what priority should we place on the delivery of human services and helping people in need, and how should financial resources be structured and allocated to address those needs. The challenges faced by nonprofits in Pittsburgh and elsewhere have 25