Hope, but Prepare


Prepping Your Nonprofit for a Potential Recession

On Wednesday, June 15, the Federal Reserve raised the interest rate three-quarters of a percentage point. The increase was the highest since 1994. The move was made to combat inflation, though some observers feel it may be a sign of economic difficulties to come, and possibly a recession.

About two years ago, we compared the pandemic economy to the recession following the 2008 economic collapse. The data from 2008 and the following years showed some interesting findings: Institutions of higher education and hospitals handled the recession better than other organizations. Human service organizations saw an early increase in contributions to their work, though this eventually leveled out. And while there was a slight increase in the number of charities that closed, a roughly equal amount of new charities were started.

The response to COVID has featured some similarities to 2008. For example, small charities faced a much greater loss in donors than large charities. Similar to the fallout of 2008, a lot of these large charities were universities and medical institutions. But human service organizations thrived, much like during the Great Recession. In areas hardest hit by COVID, donations were even more likely to increase.

But while large organizations and human service organizations did well during the pandemic, arts organizations took an especially hard hit, particularly in 2020. With the initial effects of the pandemic, it seems donors wanted to funnel their money elsewhere. However, that leveled out later in the pandemic, as a study from the University of California San Diego’s Rady School of Management found:

[W]e also did not see decreases in donations to any charity categories, such as education or environmental issues. . . . This contradicts some prior work suggesting that when people experience such financial scarcity, they act out of their own self-interest to acquire financial wealth. For example, there was a decline in charitable giving during the 2008 financial crisis.

It seems that the reactions of donors can vary depending on the specifics of each individual financial crisis.

I wish I could gaze into my crystal ball and predict what the economic future holds. But even trained economists and other pundits have a long history of being wrong about the economy. Paul Krugman, who won the Nobel Memorial Prize in Economic Sciences in 2008, memorably said in 1998, "By 2005, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's." Larry Kudlow, who was an economic adviser to President Trump, said in December 2007, "Despite all the doom and gloom from the economic pessimistas, the resilient U.S. economy continues moving ahead. . . . There’s no recession coming. . . . It’s not going to happen." Kudlow was proven wrong almost immediately, and Krugman was proven hilariously wrong in the decades following his pronouncement.

Economics was dubbed "the dismal science" back in the 18th century; the discipline has a degree of pessimism baked right in. But among the doomsayers, you'll also hear some voices saying that we can navigate our way through the current financial system without too much damage. Only time will tell which side is correct. Given the uncertainty, an old adage comes to mind: Hope for the best; prepare for the worst.

If we do fall into a recession, the attempts at recovery may end up being a bit—and we're going to use a highly technical term here—weird. The Washington Post noted that when we've had previous crashes in the stock market, "the Fed rode to the rescue by slashing rates and flooding markets with cash." While the market isn't the same as the economy, the tools to pull us out of a recession work on the same basis, and include tax cuts and interest rate cuts. However, tax rates are already fairly low as a result of cuts during the Trump administration. We just raised interest rates, meaning a cut in the near future is probably off the table. Some economic observers have placed a portion of the blame for inflation—one of the triggers for the rate hikes—on the government stimulus packages put out during the pandemic, meaning that a similar stimulus probably won't be discussed again, until it's a last resort. (Of course, bailouts for large corporations—as opposed to support for nonprofits, individuals, and families—will likely be as readily available as they have been in previous economically uncertain times.)

So any response from the government will have to be creative, as will the response from the private sector. Not only do we have the uncertainty of whether or not there will be a recession, we have the uncertainty of how we will react to a recession if it does come.

So what can your nonprofit do to prepare for a possible economic downturn? In February 2020, before the pandemic really took hold, PNC offered some advice on how to recession-proof your nonprofit:

  • prioritize your efforts based on efficacy;
  • exercise caution around major capital investments;
  • increase fundraising efforts;
  • reduce your spending/distribution policy;
  • stress test your operating budget sources; and,
  • take a defensive stance with your investment portfolio positioning.

While many nonprofit organizations, particularly smaller ones, don't have an investment portfolio to worry about, the rest of the advice applies to organizations of various sizes and missions. If you fear a recession is coming, focus more effort now on fundraising while the economy is still strong, and avoid any huge future monetary outlays, like starting construction on a new building. You want to put your organization in the best possible financial situation before times get tight. In addition, are there specific programs that are underperforming or perhaps not helping you achieve your mission as effectively as you would like? Where can you cut some of your spending? And lastly, how stable is your operating support? What can you do to ensure your organization can keep the lights on?

The Oregon Community Foundation also offers some advice (PDF). While a lot of their ideas focus on donors and fundraising, they also make one intriguing point: If corporations are struggling, they'll have less money for donations, making requests for sponsorships or underwriting more likely possibilities. How can that type of support fit into your organization's efforts? Are there any other non-monetary avenues of support that your organization can explore?

Ultimately, the big idea is this: Have a plan, and be ready to put it in place as soon as the moment calls for action. Do not let yourself be caught by surprise. The Nonprofit Finance Fund offers some guidance on forming a plan, and the aspects you should include. Remember that you should consider both short-term and long-term ramifications. For example, "After the 2008 financial crisis, some organizations made the difficult decision to cut infrastructure or fundraising staff as a way of minimizing deficits. While understandable, strategies like this made the long-term recovery much more difficult." It may make sense to cut fundraising costs to focus on programs in the short term, but that can make the return to a full-strength budget that much more challenging later on.

Whether or not we actually enter a recession, we at least—this time—have the benefit of a warning. Nonprofits have the ability to prepare themselves. If you put in the effort beforehand, you can weather the potential coming storm to the best of your ability.

Action steps you can take today