Most people know that nonprofit organizations (unlike for-profit businesses) operate to fulfill their mission, not to make money. But the common misperception that a nonprofit has to be profitless, and operate at break-even or at a loss, is far from the truth. There is no such legal requirement. In fact, Richard Hobish, co-founder and executive director of White Plains-based Pro Bono Partnership, a nonprofit which provides business-related legal services to other nonprofits, points out, “Many funders want to see that you create and maintain a reserve. A strong reserve is a very, very good indicator of a sound and strong [nonprofit] organization.”
Luckily for us, sound and strong nonprofits are plentiful here in Westchester County—a good thing for residents and the business community alike. In fact, two recent studies show that the nonprofit sector is the largest single driver of the local economy, employing more people than any other sector, accounting for nearly 10 percent of the county’s total payroll, and contributing nearly $15.8 billion to the community. (Yes, you read that correctly.) And while the sector by definition doesn’t make a “profit,” it produces a tangible return on invested assets and generates an even bigger benefit in terms of our quality of life.
Westchester’s nonprofits are the healthcare providers, educational institutions, cultural organizations, charitable foundations, non-government social-service agencies, and other groups that make the county eminently livable. By definition, they are exempt from federal taxation under the IRS Code Section 501(c)(3).
Just like businesses in any other industry, the Westchester nonprofit sector’s 5,000-plus organizations face management issues ranging from budgeting to hiring to strategic planning. They also deal with intricate tax laws, regulatory burdens, demanding investors, aggressive competitors, public perceptions, and employee motivation. And change; always change.
“You have to work smarter today,” says United Way of Westchester and Putnam President and CEO Alana Sweeny. When the economy tanked in 2008, she says, revenues in the nonprofit sector took a nosedive, too, while demand for services soared. “Nonprofits had to rethink what they were doing, how they were doing it, who they were doing it with.”
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That’s one reason many of them banded together to form Nonprofit Westchester (NPW), an advocacy and capacity-building organization with about 90 members ranging from larger organizations like Phelps Memorial Hospital Center and Family Services of Westchester to very small, “kitchen table” nonprofits like Yes She Can, which fosters job skills in girls and young women with autism through retail sales of secondhand American Girl dolls in the Girl AGain Boutique in Hartsdale. In February 2013, NPW commissioned a study by the Center for Civil Society Studies at Johns Hopkins University that details the sector’s role as a driver of Westchester’s economy.
“Many people are surprised when we tell them the nonprofit sector is the largest employer in the county,” says NPW Executive Director Joanna Straub. “We make a contribution to the bottom line of the economy in terms of taxes paid, payroll, and other business expenses. That’s in addition to being in the business of life. We support the lives of people in this community so that every business can benefit.”
While there are many similarities between nonprofits and for-profits, Straub’s comments underline the fundamental difference in goals between the two. Alan Trager, CEO of Westchester Jewish Community Services (WJCS), a nonsectarian agency that provides mental-health care, home healthcare, and other human services, puts it succinctly: “We want to provide more services. When McDonald’s sells more hamburgers, they make more money. When we make more money, it’s done to provide more services.”
Nonprofit Employment Dominates
Trager points out that, as a $38-million agency with 780 employees, WJCS is a major contributor to the local economy. When you consider the impact of the services it provides, however, WJCS looms even larger. “We serve 20,000 people a year,” he says, “so to the extent we help them get over their depression, work out their relationships, or address their particular disability and they become higher-functioning, more satisfied members of society, we have a clear impact on the economy. Those 20,000 people live and work in Westchester. They become more productive in the workforce.”
The Westchester Library System (WLS), a cooperative organization chartered to serve the 38 public libraries in the county, can directly quantify its economic impact, according to Executive Director Terry Kirchner. “WLS and its member public libraries are a great example of how economical cooperative activities and efficient shared services provide value to the communities and their taxpayers,” he says. The member libraries have about 780 employees and operating expenses of just over $70 million. WLS itself has an annual budget of about $6 million, funded by the member libraries, New York State, and Westchester County, along with donations from corporations, foundations, and individuals.
Among a wealth of programs that include adult literacy services, job-search assistance, and professional development, WLS provides computer services (including Internet access) to the libraries and their patrons, maintains the master catalog, and operates a delivery service that moves more than one million items between libraries annually. The total value of services provided by WLS and its member libraries? More than $157 million. That’s a pretty good ROI.
Jean Newton, executive director of the Music Conservatory of Westchester, explains that nonprofits face multiple demands that for-profit companies often don’t. “We exist to serve our mission, but how that interacts with our business creates issues,” she says. “About 70 percent of our income comes from tuition for music lessons and contracted services we provide with some of our outreach partners. But those earned income streams don’t cover the full cost of what we do. We have to fill in those gaps with contributed income. Every decision that we make in terms of programming is guided by the mission rather than by income potential. That’s the fine line we’re walking.”
The Music Conservatory contracts with nine school districts, the Blythedale Children’s Hospital, Andrus Children’s Center, United Cerebral Palsy, and other community-based service organizations to provide music therapy and music classes. “These organizations are nonprofits too, so they pay a portion of the cost, and we fundraise the rest.” Additional income comes from leasing part of the facility to the Steffi Nossen School of Dance, Westchester Choral Society, and Faust Harrison Pianos. “It’s a complex business model,” Newton says.
Complexity is typical of revenue streams for organizations in the nonprofit sector. “[Raising] money is the biggest challenge for any nonprofit,” says United Way’s Sweeny, pointing out that United Way fundraises from just about every conceivable source. It provides services to government entities under contract, applies for grants, appeals to corporations and their employees, and actively solicits from individual donors.
While contributions are essential, more than three-fourths of the income for the nonprofit sector (excluding foundations) comes from program service revenue, according to “The Economic Impact of Westchester County Nonprofits,” a study released this fall by the Wilson Center for Social Entrepreneurship at Pace University. That revenue includes everything from payments by individuals and private insurers, to contracts with government units for a wide variety of services rendered.
Joseph Kenner, deputy commissioner for the Westchester Department of Social Services, points out that the county contracts with more than 50 nonprofits in his department alone, with all county departments spending nearly $80 million combined annually on services like domestic violence assistance, STEM (science, technology, engineering, and math) initiatives, youth development programming, housing assistance, employment/job readiness services for public assistance customers, and eviction prevention. “Our nonprofit partners provide these services at costs significantly lower than what could be provided by government,” Kenner says, “yet they still deliver the services with a strong commitment to those they serve with compassion and a high degree of professionalism.”
The county has also recently stepped up its support of nonprofits in several other ways. It adopted streamlined contracting procedures to ease the paperwork burden of doing business with the government; started Hire Westchester, a training program from the county’s Industrial Development Agency to help nonprofits cut employee training costs; and established a small bond issuance program through the county’s Local Development Corporation to help smaller nonprofits finance capital projects in the $1 million to $5 million range.
Government funding, however, isn’t the steady income source it used to be, according to Elizabeth Bush, adjunct instructor in public administration at Pace. Government money “is a real political football these days,” she says. “If you are dependent on government funding, you may need to find a new source of revenue. Doing business as usual is probably not a great strategy.”
Alan Trager of WJCS agrees. “The nonprofit community has taken it on the chin in the last few years,” he says. “There are fewer resources available from government, yet needs are greater than ever. It’s an overused expression, but you have to find ways to do more with less. Decreased resources force efficiencies. Sometimes, though, you reach a point where you can only do less with less.” Last year, WJCS was forced to end its early childhood intervention program because of a shortfall in operating funds.
Many nonprofits are looking at alternative funding sources. While the economy has largely recovered, government spending on the sector hasn’t. Individual philanthropy has rebounded somewhat, but corporate donations are subject to more restrictions than ever before. When you add the squeeze on payment for services in the healthcare sector, where many nonprofits operate, the need for non-traditional funding becomes apparent.
Nonprofit Income & Expenses
These new financing sources include for-profit operations like the Greyston Bakery in Yonkers, which uses revenue from its delectable products to not only hire and train the hard-to-employ but to provide housing, child care, education programs, and counseling for 2,200 community members annually. In 2012, Greyston registered as New York’s first benefit corporation, or “B Corp,” which officially makes it a for-profit entity obligated to deliver specific public benefits—and report on them. Unlike a traditional non-profit, a benefit corporation is not tax exempt, but it can provide a financial return to its shareholders, which opens up the potential for new capital.
Richard Swierat, executive director of Arc of Westchester, a nonprofit devoted to helping individuals with intellectual and developmental disabilities, reports a similar move toward alternative funding sources. “Over the years, 98 percent of our funding has come through Medicaid, New York Special Education Department, and other kinds of government organizations,” he points out. “We have discovered that the challenges we now face require us to rethink how we accomplish our mission and where we find the resources to do it.”
One place that Arc—which serves about 2,000 people daily at dozens of locations with a staff of about 850 and a budget around $60 million—has found additional resources through establishment of eDocNY, a technical document management company the organization set up to provide employment for its clients, and generate profits to support other programs. The company digitizes a good part of Westchester County’s official documents, including many from the court system that need to be turned around within two hours. In the first year, 2005, revenue was $76,000. Today, eDocNY employs 80 people, and expects to gross $3 million this year. It recently landed a contract with the City of New York to digitize historical archives going back to 1866.
The for-profit operation isn’t just about money; it also fits within Arc’s mission. eDocNY employees are paid market rates, even though laws designed to encourage employment of the disabled allow employers to pay them less than minimum wage. “We want our clientele to be seen as contributing members of society. We’re not looking for handouts for them. We’re looking for investors,” Swierat says.
Like many nonprofits, Arc of Westchester is exploring partnerships with other nonprofits (and for-profits) to achieve economies of scale and open new income sources. “We’re jumping into the insurance market,” Swierat says. Arc of Westchester is one of five Arcs in the New York metro region in the process of establishing a managed care organization for its clientele. “We had to set up a corporation and establish governance, talk about investments, borrow to capitalize [the project], and bring in outside partners who know the field. It’s a huge undertaking,” Swierat says.
WJCS is taking that plunge, too. The organization helped form Coordinated Behavioral Health Services, an individual practitioner association, with eight other nonprofit agencies in the region in 2012, according to Trager. In addition to WJCS, the entity includes the Mental Health Association of Westchester, Human Development Services of Westchester, Occupations Inc., MHA of Rockland, Abilities First, New Hope Community Services, MHA of Dutchess, and Crystal Run Village. “We are in the midst of conversations with managed care organizations and primary care providers so that we can begin to provide services,” Trager explains. “This is likely a precursor to capitation and other risk-bearing models.”
The Nonprofit Economic Engine
The nonprofit sector contributes $15.8
• $7.1 billion Direct nonprofit spending
“The Economic Impact of Westchester County Nonprofits” was prepared by Rebecca Tekula, Farrokh Hormozi, Jordan Jhamb, and Joseph Morreale.
Impact investing (investments whose purpose is to generate both a financial return and a measurable social impact) is a related funding source that’s gaining popularity, notes Rebecca Tekula, executive director of Wilson Center for Social Entrepreneurship and an assistant professor at Pace University. “These are investments made by foundations and other institutional investors that support charitable activities but have a potential return of capital,” she explains. “Impact investing is a real game changer that goes beyond corporate responsibility.”
Tekula points out that foundations often sit on an endowment that is managed to protect or grow the principal while spending only the legally required 5 percent for charitable purposes (though Tekula notes most spend more than the required minimum). With impact investing, “we’re starting to see capital invested for social causes instead of purely monetary returns,” she says, noting that the potential is huge. “You’re talking about billions of dollars in Westchester. It’s money that lives in Westchester but doesn’t always work for Westchester,” she says. Foundations based in the county have $3 billion in assets, according to the economic impact study from Pace. The move by nonprofits to set up for-profit arms and benefit corporations will help them tap this funding.
Just like any business, a growing part of the way nonprofits operate today involves performance measurements. “We’re looking to show our impact and measure our effectiveness,” says Bryan R. Murphy, acting president and CEO of Andrus. The Yonkers-based organization has evolved from an orphanage to a countywide provider of children’s behavioral and mental health care. “Oftentimes in nonprofits there’s a tendency to look at compliance metrics rather than quality and impact metrics. The key is to instill accountability,” he says.
“We’re really trying to put a dollar figure on what we do,” Murphy adds. “What does it take to run a high-quality mental health facility? Or what is the cost per child? If you want others to invest in you, you have to tell them your story. There are a lot of causes out there that anyone can be passionate about. You have to show a cost-benefit analysis: If you invest in this program for this period of time, you’ll get these outcomes.”
“Just as in any business,” he continues, “you make choices between priorities. Do I fund this program in sensory therapy or do I buy a new math program? Or do I invest in a respite program to provide more intensive care on our campus?”
That’s not to say the whole story of Westchester’s nonprofits is in the numbers. It’s the delicate balance of using the numbers to complete the mission. Case in point: Murphy relates the tale of one child who wouldn’t speak when she first came to Andrus. “She had been physically abused and her story is horrific,” Murphy says. “Now, she is engaged and engaging—a real chatterbox.” The organization’s next job, he pointed out, is to see what it learned from helping this child. “It’s about being passionately accountable. It doesn’t take away from the mission or turn us into a business, but it protects our resources. You have to have the data to help you, but you shouldn’t be blinded by it.”