June 2003

The funding crisis for nonprofits is severe and getting worse. Major foundations, corporations, and individuals have already cut back their support for nonprofit organizations. And federal and state funding, by far the largest source of dollars for nonprofit organizations, is being reduced. If you think things are tough now, the prognosis for 2004 and beyond could be even worse. Some analysts predict that most states, already facing the worst deficits since World War II, could see their collective shortfalls reach $70-90 billion in fiscal year 2004. Add to that the fear that the recently passed tax cut will increase federal budget deficits and will put pressure on Congress to further reduce spending for human services.

Several VPP investment partners report that they have already incurred major cuts in their funding, forcing them to reduce services and reassess their plans for the future. And these are some of the very best community-based organizations in our region. Unfortunately, those applying the funding cuts often do not take into account the high performance and the positive impact that these organizations have on their communities.

Fortunately, most of our investment partners are already taking aggressive steps to respond to the challenges by reducing programs and expenses and pursuing new funding sources. They are also exploring creative options such as real estate refinancing, public/private partnerships, and fee-based services.

To complement those yeoman efforts, we are stepping up our efforts at VPP to help our investment partners respond to the short- and long-term funding challenge by:

• Supporting our investment partners to build up their fund development capacity to help them develop financial sustainability for the long-term. These efforts include helping investment partners add new members to their boards, recruit experienced senior management to lead fund development, connect them with funding specialists, and provide guidance on marketing, branding, and communications;



• Helping our investment partners pursue federal funding. The law firm of Patton Boggs is providing counsel and advice to six of our seven investment partners. We will enlist the help of key people in our network to write or call members of Congress to make them aware of the excellent work of our investment partners;
  


• Leveraging our contacts in local and state governments to bring our investment partners to their attention, to seek potential funding for them, and to help remove bureaucratic obstacles that impede their work; and
  


• Planning a pilot effort with The Finance Project, an organization that assesses the financing options of nonprofits, to see how they might help our investments partners develop stronger, long-term financing strategies.

In addition to these tactical activities, we are learning as much as we can about the funding environment to guide our efforts and those of our investment partners. On June 3, McKinsey & Company, a strategic advisor to VPP’s board, hosted a workshop on “Implications of the Changing Funding Environment for Community-Based Nonprofits Serving Children of Low-Income Families.” The day-long session brought together 18 experts in the fields of federal, state and municipal financing, regional and national foundation funding, charitable giving, high-net-worth donors, and public policy. The purpose of the workshop was to understand what the leaders and supporters of community-based nonprofits might do to help their organizations survive and respond to the increased demand for their services in the face of an extremely challenging funding environment.

The discussion confirmed that community-based organizations serving low-income families are facing the most serious funding challenges that the sector has seen in decades. Furthermore, participants concluded, even if the US economy turns around by sometime in 2004, the funding environment for community-based nonprofits serving children of low-income families would, at best, not see recovery for several years, if at all. An even more serious problem, however, is the declining financial health of working poor families across the country. Even though the discussion identified numerous actions that could improve this gloomy outlook, the consensus was that the ultimate remedy for both of these challenges lies in public policy changes that support children of low-income families. Participants further agreed on the strong need for more thoughtful and aggressive efforts to influence public opinion and public policy to create financial relief and employment opportunities for working poor families, as well as to support and strengthen the nonprofit sector that provides many essential education, health, and human services.

We are still sorting through the findings of this session, and we will publish the results in the weeks ahead. The session underscored how radically the playing field on which Venture Philanthropy Partners was created has changed in the past few years. Despite those changes, the role of community-based organizations has never been more important, nor has the risk to their survival been greater. The hope for many children here in our region lies in the remarkable people in our communities who are leading high-quality community-based organizations and applying workable approaches to many of the most difficult social problems and needs facing children today.

Nonprofits have weathered tough storms before. The best organizations have learned to be resilient and optimistic. But they can’t stay afloat without significant support. These tough times require bold leadership and meaningful action. We encourage all of you who care about children and nonprofits to do what you can — from making a donation or sponsoring a table at a fund-raising event, to contacting elected officials to make the case for supporting organizations that are indeed the safety net for children and families in this region.

—Mario Morino