The 2015 bankruptcy of FEGS (the largest social service nonprofit in New York City) has shaken the confidence of New York City’s nonprofits. Coming in the wake of the turmoil at Cooper Union and the collapse of the New York City Opera, many nonprofit trustees are asking new questions about the organizations they govern. What risks do we face? How risky are we in relation to our peers? Are we doing the right things to understand and mitigate our risks? How should we balance financial risk against programmatic reward? What should we do to reduce the potential hardships from financial distress? SeaChange Capital Partners is a merchant bank focused exclusively on the nonprofit sector and is itself a nonprofit. SeaChange assesses risk in all aspects of its business – mergers and collaborations, lending/investment, and advisory work – and has observed firsthand both the critical difference that risk management can make for nonprofits and the wide range of risk-related practices in the sector. This report is motivated by the recognition that nonprofits play a critical social role – improving education, alleviating poverty, providing economic opportunity, supporting our healthcare system, funding the arts – and that their health is vital to New York City. We hope to have contributed to the important discussion taking place, particularly in the wake of the bankruptcy of FEGS, about how to mitigate the likelihood of acute financial distress for nonprofits of any size or sector.
The new SeaChange / Oliver Wyman report provides vital data and financial analysis for New York nonprofits about their current situation, and a useful framework for risk assessment. We expect that this report will encourage thoughtful organizational leadership in nonprofits to identify and address significant business risks in a challenging timeJames Sheehan, Bureau Chief of the Charities Bureau of the New York State Attorney General’s Office
The recommendations in this report come from a study by SeaChange Capital Partners and Oliver Wyman which evaluated the major risks facing the nonprofit sector in New York, and identified practical risk management best practices which can be implemented to improve the financial health and sustainability of nonprofits. By “risk” we mean unexpected events and factors that may have a material impact on an organization’s finances, operations, reputation, viability, and ability to pursue its mission.
This study draws on:
• SeaChange’s 10+ years of experience in nonprofit merchant banking.
• Oliver Wyman’s 30+ years of experience advising the largest global financial institutions and regulators with respect to risk management.
• Rigorous analysis of the most comprehensive data set on the financial performance of New York’s nonprofits provided by GuideStar, the largest source of information on nonprofit organizations.
• In-depth interviews with more than twenty executive directors, board members, and funders involved with nonprofits in distress.
• Discussions with the Human Services Council and the Center for an Urban Future, both of which have undertaken related projects to understand and improve the state of New York’s nonprofits.
Nonprofits face an increasing number of risks, including rising interest rates, the move to value-based payments in healthcare, and increased real estate and labor costs. Organizations that don’t adopt better risk-management practices will find themselves in an increasingly precarious situationJohn MacIntosh, SeaChange partner
Very few nonprofits have formal processes in place to address financial risk management. Our research suggests that this can and must change.
• New York City nonprofits are fragile: ten percent are insolvent (eighteen percent in health and human services); as many as forty percent have virtually no cash reserves (margin for error); and over forty percent have lost money over the last three years. We believe that less than thirty percent are financially strong. Yet many trustees do not understand the financial condition of their organization nor how it compares to its peers.
• Distressed nonprofits have very limited ways to recover, so trustees must do all they can to reduce the risk that their organization becomes distressed in the first place. And they must take prompt, decisive action if it does.
• Practices such as scenario planning, benchmarking and self-rating, and setting explicit financial stability targets, can improve risk management. A few organizations are already doing these things. Most are not.
We believe that the nonprofit sector can make dramatic improvements in risk management over the next few years – and in doing so, can make vital programs more sustainable. Institutions ranging from nonprofit umbrella groups to regulators, such as the Charities Bureau of the Office of the New York State Attorney General, also support better risk management. In recognition of the report’s impact, the Human Services Council of New York City has named SeaChange Capital Partners and Oliver Wyman as “Advocates of the Year for 2016”.