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Charities Brace For Government Shutdown

By Mark Hrywna - October 1, 2013

On the same day that state health exchanges debuted, the federal government partially shut down for the first time in 17 years in a Congressional showdown over funding the Affordable Care Act (ACA).

Some nonprofits likely will face a surge in demand for services but how the sector as a whole will be affected likely will depend on just how long the shutdown lasts.

“It all depends: is it two days, two weeks, two months? If it’s two days, everyone presumes life will go on,” said David L. Thompson, vice president of public policy at the National Council of Nonprofits in Washington, D.C.

“When government backs out and government offices close, people turn to nonprofits. Churches and frontline nonprofits are going to gear up, alert staff and volunteers that the load going to increase,” Thompson said. “Business will stop working, nonprofits will keep going as long as they can.”

Road builders and defense contractors tend to shut down if they don’t know whether they’ll be getting paid, Thompson said, but nonprofits are not likely to kick clients out of mental health services or juvenile programs. “The nonprofit community most likely will tighten its belt and keep on trying to help each other out,” he said, suspecting that 2-1-1 call centers might see an increased volume during a shutdown.

The beginning of fiscal year, Oct. 1, also is the beginning of some federal contracts. When sequestration was threatened, some states didn’t sign deals until they knew how much they would get, Thompson said, so a January 2013 contract might be put off until June. “The same thing applies with a shutdown. State and local governments don’t know what, if anything, the federal government will pay, so they hold off on nonprofits,” he said.

Even if a deal is reached on spending, another showdown looms over the debt ceiling. The issue with the Oct. 1 deadline is the federal spending authority while the federal government’s borrowing authority becomes an issue in mid-October when the debt ceiling must be increased, Thompson said.

Thompson cited surveys by the Nonprofit Finance Fund (NFF) indicating how much cash in reserves charities hold. “Those are ones that most likely don’t have lines of credit or ‘fat-cat’ donors who can give in a pinch. Those are the ones most likely to furlough,” he said.

People frequently will presume that nonprofits can rely on an endowment if the government shuts down, however, most small organizations don’t have that option, Thompson said.

About 56 percent of nonprofits have three months or less of cash based on NFF’s data, according to Norah McVeigh, managing partner. “That’s running pretty thin, if you could only see out that far. I think many of them will be impacted” by a shutdown.

Organizations have to quickly start thinking about what they can do to better manage their cash, McVeigh said. “It’s just one of the hazards of perpetually running so close, there’s no cushion to manage these challenges that come along,” she said.

Three months of cash in reserve is the bare minimum, she said, and getting closer to six months can make an organization that much stronger. Below three months, and “that’s a tricky situation to be in.” Typically, just because of the way that nonprofits are funded they frequently do not have a lot of cash reserves.
Larger groups tend to have a little more cushion. Among those with budgets of $20 million or more, the proportion of organizations with three months of cash or less drops to less than half. For human service providers, however, that doesn’t hold, she said, and those are typically the ones paid via government. “They’re not able to build up those cushions to weather those storms as well. All those folks are vulnerable,” McVeigh said.

“If you have some cash on hand, you think you have some time, but once the spigot gets turned off that, that cash on hand starts to go pretty quickly,” McVeigh said. Charities that have been thinking about it and planning will be well positioned if they’ve been thoughtful about what expenses they can be cutting, what programs can be delayed or cut back.

If cash flow might potentially become an issue, McVeigh suggests “getting ahead of conversations.” Being armed with data and a plan will make it easier to go to a funder and explain which services face potential cuts, and they may be more willing to provide some short-term funding. McVeigh also suggested nonprofits talk to vendors to negotiate some terms, about specific needs and possible worst-case scenarios, and approaching banks about short-term financing.

“If you have loans with banks and have trouble paying because of cash flows, it’s better to be ahead of those conversations. They may be willing to work with you,” she said.

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