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Washington-Area Nonprofit Operating Reserves

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Document date: June 24, 2009
Released online: June 24, 2009

The text below is an excerpt from the complete document. Read the full report in PDF format.

Abstract

This report, funded by the Meyer Foundation, looks at the operating reserves—the cash and other liquid assets—of public charities in the Washington Metropolitan area. Using IRS Form 990 data, the report found that 57 percent had reserves insufficient to cover three months of expenses, a level that many experts consider the minimum necessary for financial stability. This leaves them especially vulnerable to the rapid declines in revenue or increases in expenses that occur in economic downturns like the present. A substantial perecentage of all types and sizes of organizations lacked adequate reserves.


Introduction

Imagine having expenses of $2,000 and take-home pay of $2,100 every month. You are living hand to mouth in good times. Then your employer cuts your hours by 30 percent to keep its business afloat. If you have some money in the bank—an operating reserve—you can survive. If not, you could be in dire straits.

In addition to serving a growing elderly clientele, Medicare and Medicaid face soaring health costs per beneficiary. Historically, per capita health costs have grown by somewhat more than 2 percent per year faster than incomes per capita. Over the long run, excess health cost growth presents more of a budget problem than the aging of the population, but there is an important aspect of aging that is not much discussed. The average age of the population is growing both because there are more old people and because there are relatively fewer young people. The baby boomers did not produce enough little potential taxpayers to support them well in their old age. If baby boomers had had as many children as their parents, tax revenues would be growing more rapidly and the long-run budget problem would be much less serious.

This is the current predicament faced by many public charities in the Greater Washington area. Major foundations lost a median value of 28 percent of their endowments between 2007 and 2008. State and local governments in Maryland, Virginia, and the District of Columbia are all cutting back, most likely resulting in fewer grants and government contracts to public charities. In addition, private donations and fees, whether from tuition, patient fees, ticket sales, or other sources, are also likely to be down as unemployment rises and the economy continues to weaken.

Operating reserves are an important indicator of an organization's financial health. They provide organizations with a cushion to either maintain their services or enable a relatively smooth reduction in staffing and services if faced with unexpected funding delays or revenue shortfalls. This study, the first of its kind, provides a snapshot of the financial well-being of Greater Washington's locally focused charities during a time of economic stability (i.e., 2006). The data also suggest some conclusions about the vulnerability of these organizations during the current economic downturn.

In addition to providing a snapshot of the financial health of these charities in 2006, the study also looked at operating reserves trends for the subset of public charities that filed an IRS Form 990 in 2000, 2003, and 2006 to assess the use of operating reserves during the economic slowdown after the September 11, 2001, attacks.

(End of excerpt. The entire report is available in pdf format.)



Topics/Tags: | Nonprofits | Washington D.C. Region


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