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PA’s Economic Climate Challenges Nonprofits


‘Tis the season when many Americans donate to their favorite charity.  While leaders in the nonprofit sector remain firm in their conviction that they are best suited to deal with Pennsylvania’s social and economic challenges they are concerned that public trust in charities is not as high as it should be.  Those are among the findings of the 2016 Pennsylvania Charitable Organizations Survey conducted during the month of November by the Lincoln Institute of Public Opinion Research, Inc. in cooperation with the Pennsylvania Association of Nonprofit Organizations (PANO).

Among the participating nonprofits just ten percent said that public trust in charities is “high,” while 77% rated public trust as “medium.”  Nine percent felt public trust in charities currently is “low.”  Twenty-two percent of the nonprofit executives said the level of public trust in charities has gotten better over the past few years, but 31% said it has gotten worse.

Having said that, the nonprofit leaders feel their sector is best positioned to address Pennsylvania’s social and economic challenges.  Forty-five percent identified their own sector as best suited to address those needs; 22% think state government is most effective; while 6% cite the for-profit sector.  Just three percent said the federal or municipal governments can best handle those challenges.

“Public trust,” said Anne Gingerich, Executive Director of PANO, “is critical to the sustainability of any business – nonprofit, for-profit or government.  When one nonprofit fails to live up to the highest standards it can damage the reputation of all.”  She continued: “Unfortunately these stories overshadow the hundreds of nonprofits who give selflessly to ensure that lives are changed, not just during the holidays, but all year long.”

Like their counterparts in the for-profit world, leaders in Pennsylvania’s nonprofit sector say business conditions in the state have gotten worse over the past year rather than better.  Concerns over potential new federal regulations and the growing likelihood of another extended state budget stalemate feed concerns that the commonwealth’s business climate will continue to deteriorate during the year ahead.

The survey found 15% of the nonprofit executives view business conditions in Penn’s Woods over the past year as having improved, 22% say business conditions have gotten worse.  The majority – 63% – say the state’s economy has remained about the same.  But “about the same” is not good as business confidence, whether for-profit or nonprofit, has been low for the past two years.

By comparison, a September 2016 survey of owners/chief executive officers of for-profit businesses found only five percent saying the state’s economy has improved in recent months while 50% said it had gotten worse.

Looking ahead, a third of the nonprofit leaders expect the state’s business climate to get worse while 22% predict it will get better. Forty-four percent say the Pennsylvania business climate will remain about the same during 2017.

Despite their overall pessimism about the direction of the commonwealth’s economy, employment was up at a quarter of the nonprofits, and down at 16%.  That could be explained in part by some nonprofits stepping up hiring after having cut back staff during the budget stalemate of two years ago.  However, looking ahead 22% say they expect to add employees while 14% predict staffing cuts.

Federal Regulation

Hanging over all sectors of the economy including nonprofits are U.S. Department of Labor (DOL) regulations that would increase the minimum salary requirements for “white collar” workers from $23,600 to $47,476 per year.  The effect would be a significant increase in overtime costs.  This is perhaps more significant for the nonprofit sector in that employees at many smaller nonprofits view their jobs as being community service as much as employment and often put in hours well in excess of those for which there are paid.

The 2016 Pennsylvania Charitable Organizations Survey found that the new regulations would increase payroll costs at 43% of the responding organizations as well as increase the amount of time spent tracking employee hours.  The regulations are now on hold due to a federal court ruling, but should they go into effect 30% of the nonprofits surveyed said they would have to cut staff to pay for the increased costs of complying with the regulations; 11% would have to cut services and another 16% would respond by seeking additional volunteer help.

State Issues

Pennsylvania’s nonprofit organizations were among those most significantly impacted by the lengthy state budget stalemate of two years ago.  In light of that experience, 68% would support putting into place legislation that would incentivize lawmakers to adopt a state budget in a timely manner. Sixty-eight percent (some with board approval) said they would support legislation that would progressively penalize state lawmakers for missing the state budget deadline, with penalties increasing for each day past the June 30th deadline.

PANO’s Gingerich said nonprofit support of legislation penalizing lawmakers for budget stalemates is not surprising.  “Not only clients suffer as a result of the impasse, but nonprofits themselves had to lay off staff and borrow money to continue operations.  As partners with state government in providing mandated services, nonprofits should ask to be at the budget negotiation table.”

Unlike executives in the for-profit sector, nonprofit leaders are open to supporting a wide range of tax hikes.  Thirty-seven percent said they would support an increase in the state’s Personal Income Tax (PIT), while 22% said they would not.  Another 41% offer no opinion on the question.  Likewise 43% would support imposing a new natural gas drilling tax of up to 6.5% specifically to support human services.  Thirteen percent would oppose such a tax, and 43% offered no opinion.  Similar support levels were voiced for the imposition of a new public health tax (ie: sugar tax, soda tax) of 1.5 cents per ounce dedicated to human services.  The highest level of support – 50%  – is for dedicating a portion of taxes generated by Pennsylvania’s gaming industry to support human services.

Organizational Issues

Despite their overall negative assessment of the direction of Pennsylvania’s business climate, more of the nonprofits participating in the 2016 Pennsylvania Charitable Organizations Survey said funding for this calendar year has increased than have seen decreases.  A third of the nonprofits said funding is up, a quarter reporting funding has dropped and 43% said their funding levels have remained about the same.  Looking ahead to 2017 about half of the nonprofits predict funding levels at their organization will remain static; 30% say they expect funding to increase; 20% are braced for funding to decrease.

By a two-to-one margin nonprofits have seen state funding levels decrease over the past five years.  Twenty-one percent said funding from the state had dropped during that period of time while ten percent saw an increase in state funding.  The other half of the organizations said funding from state government has remained about the same.  Likewise there has been a slight drop in federal funding.  Sixteen percent said their organization’s funding from the federal government has dropped over the past five years, 12% said federal funds have increased.  Federal funding remained about the same at the remaining 45% of organizations surveyed.

Property tax exemption challenges remain a concern at some nonprofit organizations.  Seven percent report having had their property tax exemption challenged over the past two years and 13% are concerned their municipal or county government may challenge their exemption next year.

Nonprofit organizations are not participating in lobbying activities in a major way.  Just six percent say they have someone from their organization registered as a lobbyist under the Pennsylvania Lobbying Disclosure Act. Twenty-two percent have lobbied on a public policy issue at some level of government over the past year.  Twenty-seven percent expect to lobby government at some level during the coming year.  Gingerich urged nonprofits to engage in more lobbying activities.  “Nonprofits must understand that not only can they lobby, but they are not doing their jobs if they do not.  Together, the collective voice of the nonprofit sector has powerful, yet untapped power.”

Methodology

The 2016 Pennsylvania Charitable Organizations Survey was electronically conducted during the month of November 2016.  A total of 177 nonprofit organizations responded to the survey invitation.  Complete numeric results are available at http://www.lincolninstitute.org.

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Results of the Public Opinion Focus Group on Educating for Opportunity and Social Impact Financing on November 19, 2014


Compiled by Erik Randolph on behalf of the Lincoln Institute of Public Opinion Research, Inc.
Revised February 2, 2015

ABSTRACT: With the assistance of the Pennsylvania Association of Nonprofit Organizations, the Lincoln Institute of Public Opinion Research convened a public opinion focus group on the issue of social impact financing (SIF) as an innovative approach to using private dollars to fund increases in public programming and reduce the need for costly social services in the future.

 

Social impact financing, also known as social impact bonds or pay for success financing, is an innovative financing mechanism whereby private investors finance social programs with the objective of increasing positive outcomes and decreasing public dollars spent on remedial measures. If the programs are successful in meeting benchmarks specified in the contract and verified by an independent third party evaluator, the investors receive a return on their investments based on the public sector savings. Discussion points included the following:

 

* What is Social Impact Financing?

 

* What types of programs are best suited for Social Impact Financing?

 

* What is the government’s level of involvement?

 

* What levels of government can successfully use Social Impact Financing?

 

* What happens to the savings that are realized through social impact financing programs?

 

* What other non-monetary benefits can result from social impact financing projects?

 

o The use of an independent evaluator can help service providers effectively quantify their programs and benefits and can help public funders reduce wasteful spending to ineffective programs.

 

o The level of collaboration necessary for a successful Social Impact Financing Program requires improved efficiency and collaboration among government agencies and service providers.

 

* What is currently being considered in Pennsylvania and where are we in the process?

 

Public Opinion Focus Group: Beyond Poverty-November 19, 2014 Session 1: Educating for Opportunity: Social Impact Financing: 10 a.m. – 12 noon

 

Background

During the 2013-2014 legislative session, the Majority Policy Committee of the Pennsylvania House of Representatives created the Empowering Opportunities: Gateways-Out-of-Poverty Initiative. This Republican Caucus initiative recognizes that current efforts to address poverty are in need of revision and subsequently searches for opportunities to address barriers that entrap individuals in impoverished conditions and to replicate outcome-based solutions.

 

The initiative is divided into five broad areas for the development of policy and legislative proposals: Outcomes That Matter, Life Skills 101, Benefits That Work, the Essentials, and Educating for Opportunity. With the assistance of the Pennsylvania Association of Nonprofit Organizations, the Lincoln Institute of Public Opinion Research convened a focus group on proposals in the areas of Educating for Opportunity and Outcomes That Matter.

 

The focus group consisted of leaders from the non-profit sector who provide human services to alleviate social problems associated with poverty. The Honorable Todd Stephens, State Representative for the 151st Legislative District of Pennsylvania, presented on the topic of Social Impact Financing (SIF) for early childhood education programs as part of a developing legislative proposal.

 

Social impact financing, also known as pay for success financing, is an innovative financing mechanism whereby private investors use private dollars to fund increases in public programming in order to reduce the need for costly social services in the future. For example, if a program meets specified goals as measured by an independent third party evaluator, then the governmental entity responsible for funding that program pays the investors a return on their investment. If the SIF-funded programs are successful in producing the desired outcomes, governments save money through the averted future costs, more efficient implementation, or both. If the programs do not meet the negotiated benchmarks that result in reduced government spending, the government does not pay a return on the investment.

 

Social impact financing is a fairly new concept. While examples of its implementation are relatively few, they are increasing steadily throughout the United States across a variety of programs. The focus group was presented with some examples, including details describing how New York and Massachusetts utilized the social impact financing mechanism to help fund job training and rehabilitation of former convicts as a way of reducing recidivism. By reducing recidivism rates, the states save money on their criminal justice and prison systems, and a portion of those savings are used to repay the investors.

More pertinent to the legislative proposal being considered for Pennsylvania, Salt Lake City and Chicago have utilized social impact financing to fund early childhood education programs. According to materials provided to the focus group, the Utah program provides early childhood education services to 3,500 children and the Chicago program provides early childhood education services to 2,600 at-risk children.

Make-Up of Focus Group

The leader of the discussion was Rep. Todd Stephens. The session was moderated by Lowman Henry, chairman and CEO of the Lincoln Institute of Public Opinion Research, Inc., and recorded by Erik Randolph, Erik Randolph Consulting. Staff in attendance were Brianda Freistat, Research Analyst, Majority Policy Committee; Ashley Grimm, Legal Counsel for the House Republican Caucus; Jenny P. Stanton, Executive Director, House Majority Policy Committee.

The participants were as follows:

* Anne Gingerich, Executive Director, Pennsylvania Association of Nonprofit Organizations (PANO);

* Blair Hyatt, Executive Director, Pennsylvania Head Start Association;

* Daniel Leppo, Director, Grants Management, Community Action Association of Pennsylvania;

* Caryn Long, Executive Director, Feeding PA;

* Ashlinn Masland-Sarani, Policy and Development Director, ARC of Pennsylvania;

* Britton Miller, Director of Public Policy and Civic Engagement, PANO;

* Michelle Sanchez, Director of Program Evaluation and Reporting, Maternal and Child Health Consortium of Chester County;

* Eric Saunders, Executive Director, New Hope Ministries.

Discussion Points

The following summary is a compilation of the points made during discussion of the focus group and does not necessarily reflect the opinions of all participants.

The concept of social impact financing was generally well-received as a potential new source of funding, and the participants were interested in learning about the idea.

After an overview of the social impact financing concept, a discussion was had on the benchmarks that would need to be met in order to repay investors. There was some concern that some of the benefits that service providers provide to those in need of their services are difficult to quantify.

However, it was noted that many funders have already been requiring service providers to quantify the benefits, and as a result many non-profits have been moving toward greater quantification of the benefits of their services.

Representative Stephens and his staff explained that social impact financing programs can be used at all levels of government, including state, county and municipal governments. Any government that realizes a reduction in future costs by investments in preventative measures is able to structure a social impact financing program. Many questions from the participants focused on who would be responsible for repaying the investors in the benchmarks were achieved. Representative Stephens and his staff explained that the government who was ultimately receiving the benefit of reduced special education costs (in the early childhood education context), would be responsible for repaying the investors at the end of the program.

Social impact financing requires a significant government commitment to make it successful. The legislature is necessary to pass enabling legislation and provide for the appropriations necessary to cover the cost of the repayment if the benchmarks are achieved. The executive branch is necessary, because the agencies are administering the government programs and are contracting with service providers to provide the needed social services. In the difficult economic climate that Pennsylvania finds itself, the participants were concerned that social impact financing programs could be used as a way to divert traditional state funding away from programs to fund other areas of need rather than be used to supplement the traditional state-funding to expand the programs. Some of the participants suggested that any money saved by the government ought to be reinvested back into the same program areas and not diverted for other uses. There was also some concern about whether the government would be able to set aside a yearly appropriation in an amount that would cover the Commonwealth’s liability if the benchmarks were met under the contract and a repayment to investors was necessary. Potential solutions may include creating a mechanism to set aside the money, such as a revolving fund. These were also discussed in depth.

Discussion points included that unless the government realizes an overall drop in the demand for funding of a program, it is unclear where the money would come from to pay the investors for their return. Consider the starfish analogy, whereby throwing a starfish back into the ocean will help that particular starfish, but there are thousands of other starfish stranded on beaches. In other words, while a government program might help a select group of people, there are still many others who still need help from that same government program, thus the demand for the government program funding may not be reduced.

In response to the starfish analogy, it was stated that an independent third party evaluator would use data to verify savings specific to the definitions and terms that are set forth in a contract whereby the government would be a party to that contract. Also, if the program doesn’t achieve those specified outcomes, the risk is on the investors who would lose out and the governmental entity would not be liable to pay the return to the investors.

Besides, there are several examples today where these contracts are being implemented. Nonetheless, it is important to note that a willing government partner is a crucial component of any social impact financing arrangement.

The ability to develop the necessary metrics to make the concept work appears to be a challenge. Although some non-profits do a good job at program evaluation, many others do not. Additionally, the nature of the populations may contribute to the difficulty because the populations tend to be transient, thus, among other things, making the ability to do longitudinal metrics arduous, especially without additional funding. These concerns would again be addressed at the discretion of the investor/third party intermediary as a negotiating party.

Furthermore, some aspects of providing human services are very difficult to measure. In some cases, good metrics just do not exist. These programs may not be a good fit for social impact financing. Finally, there is a difference between priorities of human services and those aspects of human services that are conducive to measurable outcomes. Subsequently, social impact financing may not be applicable to all social programs, meaning that it may be suitable only for those areas that can be easily measured. Social impact financing bases the repayment on quantifiable measurement. If a program is unable to quantify its data, social impact financing is not the right funding model. That is why it is important to use social impact financing as a supplement to traditional state funding rather than to repay it completely.

However, as was presented, from the experience of several social impact financing deals now being implemented in the United States, representatives from those nonprofit organizations were amazed at what they could measure when an expert was brought in to help with their quantification systems. While it was significant work to upgrade those data systems, the nonprofit organizations indicated it was well worth the effort.

Additionally, the metrics for measuring program outcomes are evolving and improving with time. For example, Goldman Sachs sponsored a social impact financing deal in Salt Lake City, and it recently financed another deal in Chicago. For the subsequent deal, Goldman Sachs revised the metrics for repayment based on lessons it learned from the Salt Lake City deal. The second deal was increased by a substantial hike in investment amounts, climbing from $7 million for the first investment in Salt Lake City and secondly $17 million, in Chicago.

Follow-Up Comments

Bringing in private investors to fund social programs raises fascinating questions. Why is it that government often cannot make programs or assets work financially when for-profit companies using those same assets can? Is there perhaps not some other way for government to become more disciplined? While these questions were left unanswered, social impact financing may be a way to bring discipline into the system, enabling government to become quantitatively-based with measurable outcomes. And once those systems are in place, it may no longer be necessary to continue social impact financing for that specific program.

Representative Stephens introduced a co-sponsorship during the last legislative session and has spent the last seven months touring the Commonwealth to meet with social service providers, school districts, philanthropists and investors. Representative Stephens explained that it was his intention to sponsor legislation that would enable a social impact financing pilot program in early childhood education to take place in Pennsylvania. He suggested that the proposed pilot program have pilots in each of the following areas: Philadelphia, Pittsburgh, a third class city, and a rural setting to evaluate the ability to replicate social impact financing programs throughout Pennsylvania.

About the Author:

Erik Randolph is an independent researcher who specializes in evaluating government policies, programs, budgets, and legislation, quantitative analysis, and fiscal and economic modelling. As a consultant, he has provided assistance to organizations, legislators, and governments in four different states in the areas of welfare policy, budgeting, transportation policy, and criminal justice.

Erik has twenty-seven years of extensive experience in government and for seventeen years taught principles of economics for the Harrisburg Area Community College. He developed the first microeconomic model to test how welfare benefits influence behavior when he was a special assistant to the Secretary of Public Welfare for the Commonwealth of Pennsylvania, and he led a chartered team at the department to evaluate the problem of economic disincentives. Prior to his service to the department, he spent nineteen years as an analyst for the Committee on Appropriations of the Pennsylvania House of Representatives. While working for the Committee, he evaluated and forecasted costs for legislation, worked on and analyzed state budgets, handled analysis of special fund revenue and capital budgeting, researched and wrote legislation, and conducted special research projects for the chairman.

In the early part of his professional career, Erik worked in the field science and technology policy for the U.S. General Accounting Office (since renamed the Governmental Accountability Office), New York State, and the Commonwealth of Pennsylvania.

Mr. Randolph has a Master’s Degree from the College of Humanities at Rensselaer Polytechnic Institute in science and technology studies, where he concentrated on the economics and policy of science and technology. He has two Bachelor degrees from the Pennsylvania State University, one majoring in mathematics and the other in political science.

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