Nonprofits Hit With Expenses Increase

January 1, 2008       Mark Hrywna      

Nonprofits were hit with increases in expenses last year that were two and three times the rate of inflation, driven by a hike in the federal minimum wage and the ever increasing cost to raise a dollar.

The cost of raising more money — usually through capital campaigns — contributed to rising expenses as charities look to develop new, alternative revenue streams. The rate of inflation was more than 2.5 percent last year and about 3.25 percent during 2006.

The 14-percent hike in the federal minimum wage that went into effect in July automatically raised labor costs for nonprofits. Hardest hit were those involved in retail operations, where employees usually earn at or around the minimum wage.

Some of the biggest charities saw expenses jump 25 to 40 percent between the Fiscal Year Ending 2005 and 2006. A look at organizations in the NPT 100, The NonProfit Times’ annual study of the nation’s largest nonprofits (Nov. 1, 2007 issue), shows that total expenses for all 100 groups increased nearly 9 percent. In many cases, jumps in revenue also drove increases on the expense side, while in others the opposite also was true. The largest average increase among the 100 charities was in the category of program expenses (9.2 percent), followed by fundraising (6.7 percent) and administrative (6.7 percent).

The cost of labor

With almost 43,000 retail employees nationwide, Goodwill Industries International was among the hardest hit by the federal increase in the minimum wage last year. For the first time in a decade, Congress last spring approved a minimum wage hike that boosted the hourly pay 70 cents in July, to $5.85. The hourly wage will continue to rise 70 cents each summer, until it reaches $7.25 per hour in 2009.

With many Goodwill employees at or near minimum wage, the federal increase was the biggest single reason for a rise in expenses, said David Barringer, vice president of member relations, at Goodwill’s member services center in Rockville, Md. “It’s a direct impact when the law changes. When people make a dollar more than minimum, they probably go up too,” he said.

“It’s an immediate hit. We can’t raise used clothes prices right away, so it hits the bottom line right away,” Barringer said.

Goodwill’s North American retail stores had $1.7 billion in revenue last year, with labor accounting for $673 million of costs. “Labor is a big part of any business, but for retail especially.”

Goodwill stores range from 3,000 square feet to 25,000 square feet, and in one case 40,000 square feet. During the past five years, the number of stores added has not changed much, maybe opening 50 a year. But, the size of stores has been getting bigger. “We’re replacing 6,000-square-foot with 12,000-square-foot stores,” Barringer said. “Your employees don’t double when you do that but there is a significant (expense) increase obviously.”

Energy costs will have a huge impact when you’re talking about 2,000 stores. Goodwill transitioned away from home pickups toward donation centers starting during the 1970s and the initial oil crisis. “We realized we have to change our business model,” Barringer said. Now a donation component is part of most every store.

But if donations to Goodwill can’t be used, the charity has to deal with the cost of trash removal. “Community by-community, government is changing the way it’s charging for trash disposal,” Barringer said. “When you’re unable to re-sell, some percentage still goes to trash, so we continue to look for ways to reduce that” as tipping and dumping fees are increasing.

Increased expenses = good news?

Revenue and contract work is up at Goodwill’s thrift stores, Barringer said, and that’s good news as it shows up as expenses after the nonprofit puts those revenues into services.

Susan G. Komen for the Cure, headquartered in Dallas, had expenses jump by 8 percent (from $200 million to $218 million), including 15 percent more in program expenses (roughly $150 million to $172 million). Other support categories such as administration and fundraising, dropped from 2005 to 2006. “That’s part of an ongoing strategy” of prioritizing based on mission and expenses, said CFO Kevin Speirits, a concept several nonprofits echoed.

The pattern repeated itself during 2007 with total expenses rising 23 percent — from $218 million to $269 million. While most of the increase again was in program expenses, supporting services also rose 18 percent, from $46 million to $55 million, according to Speirits.

The additional expenses in the last year have been driven by a couple of things, Speirits said, including the sheer growth of the organization and a rebranding initiative for its 25th anniversary.

During the next three to five years, Komen seeks other areas to grow, including expanding globally, Speirits said. “We really want to try to become a global leader in health awareness in breast cancer,” he said, which will require investments domestically and overseas.

Memphis-based Ducks Unlimited (DU) is in the business of wetlands conservation and receives donated land easements, the appraised value of which is revenue but on the expense side counts toward program services. Such donations can swing significantly from year to year. A dip in donated easements caused a 22-percent drop in total expenses ($200 million to $165 million), 27 percent in program ($173 million to $136 million) during FYE 2006. Figures for 2007 and 2008, however, are expected to reverse course considerably in both revenue and expenses.

It takes money to make money

For many nonprofits, the story is no different than for corporations: diversifying revenue streams. And, that can cost money.

Driving upwards on the revenue and expenses for DU in FY2007 and beyond is a greater focus on major gifts, said DU Controller Bob Mims, as part of its comprehensive campaign, Wetlands for Tomorrow. “Related program expenses correspond to the growth in major gifts to accomplish more wetland habitat conservation,” he said.

“Each nonprofit struggles with balancing accomplishing more and more of their program while managing the financial position (balance sheet) of the organization,” Mims said. “Most nonprofits that struggle during tougher economic downturns try to maintain their programs and freeze compensation or cut/reduce personnel expenses.”

Organizations with large endowments have fluctuating investment income based on market results, Mims said, but also can weather economic pressures better than those with no endowments for operations.

“We’d like to expand our revenue sources from a number of areas,” Komen’s Speirits said. Most of Komen’s revenue comes in small donations, from events like Race for the Cure and its cause marketing efforts and one area they hope to expand into is planned giving.

As investments are made toward planned giving and global expansion, Komen also expects to invest within the organization to keep up with its growth. “We’ve been growing phenomenally,” Speirits said, with revenue at a compounded rate of 22 percent during the past five years. To keep pace with that growth, the organization will boost the dollars it spends on infrastructure. “Some of our infrastructure, IT capabilities, finance capabilities haven’t kept pace,” Speirits said, with investments expected mainly in and around securing hardware capability, and a need to upgrade software applications. With 125 affiliates nationally, “the demands and growth have been fantastic.”

Asking donors for cash contributions is routine for a typical nonprofit, but at Goodwill, it’s actually an avenue for another revenue stream. Fundraising is a very small percentage of revenue, unlike most other large charities. “We’re getting more wills and bequests,” Barringer said. “It’s not that uncommon for someone who has given us clothes for years and years to leave us money in their will.”

Most affiliates didn’t have any programs except for the occasional capital campaign, said Barringer, but these days are putting more resources behind fundraising. “We’re asking a different audience to provide us with financial support. It’s a new set of expenses for a lot of Goodwills,” he said. “Communities really like what we do. They want to support us, we just never asked.” NPT

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