0.13 Chapter ten: the complexities of nonprofit financing  (Page 2/10)

Although it is possible that there are purely internal explanations for the Society's rising costs, it is likely that the causes are primarily external. The strongest evidence for this is the fact that other nonprofit institutions share this tendency toward inexorable expenditure growth. A recent study of thirty-two prominent nonprofit institutions found that total expenditures rose at a nominal rate of 10.6 percent between 1972 and 1992.

Further evidence supporting this assertion emerges from the Society's 1992-1993 financial crisis. Facing mounting deficits and a growing threat of bank­ruptcy, the Society cut operating expenditures by 17 percent in fiscal 1992 and by 20 percent in fiscal 1993. To accomplish these cuts, the Society reduced its total workforce from a peak of 125 employees in the 1980s to a skeleton staff of just 35 employees in early 1993. The Society closed its galleries and suspended all public programs. There is a limit, however, to how much an organization can cut, year after year. For organizations with valuable collections and fixed assets, overhead and other fixed costs exist that cannot be avoided. Even though the Society had drastically reduced programs and services, its total operating expenditures in 1993 were still $5.3 million.

Such austerity measures have consequences. Most important, it is extremely difficult, if not impossible, for an institution like the Society to generate significant contributed income while it is inactive. Such institutions are expected to offer exhibitions, public education programs, and community outreach services. After a certain point, reductions in expenditures decrease the capacity to generate revenue, both earned and contributed. In the case of the Society, the 1992 and 1993 cuts did not balance the budget; in fact, the deficit actually increased in 1992 and was still $1.5 million in 1993.

The implication of the unremitting pressure on costs is clear: if institutions like the Society are to remain financially viable for the long term, their revenues must grow steadily—and presumably faster than the overall inflation rate.

Revenues

Generating revenues that keep pace with an ever-expanding expenditure base is made more complicated by the fact that all nonprofit revenues are not created equal. Unlike the for-profit sector, where dollars received can be used for whatever purposes management and the board may choose, nonprofit revenues often come with strings attached. A donor may stipulate that funds given to an institu­tion be used only for a specified purpose, spent over an established period of time, or retained in perpetuity as capital. The types of revenues generated by a non­profit institution can be as important as the absolute dollar values, especially in a time of crisis.