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Insuring against the next recession

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Ret Boney

Foundations and nonprofits lost a lot during the recession — assets, fundraising income, grants, government contracts.

But perhaps the greatest loss was a sense of security and optimism.

Many in the sector are emerging from the recession with deep financial wounds and an unsettling understanding of the arbitrary nature of a world based on the financial security and prosperity of individual and institutional funders.

In an ideal world, nonprofits would be able to insure against such a downside. After all, they can get reimbursed after car accidents, fires and other disasters.

“For the most part, it’s an uninsurable exposure,” says Melanie Lockwood Herman, executive director of the Nonprofit Risk Management Center, located in Leesburg, Va. “Most of the harm nonprofits faced during the recession were things for which there was no insurance.”

Because of competitive forces in the insurance industry, many nonprofits have solid coverage these days, with excellent policies offered for relatively low rates.
“The downturn hasn’t turned up any gaps in coverage, but it has exposed weaknesses in risk management,” says Herman.

The biggest gap revealed by the recession was a lack of awareness by nonprofit boards, which too often aren’t sufficiently aware of their organizations’ danger spots, says Herman.

“They need to step up and have greater awareness,” she says. “They need to learn to read financial statements. If you don’t understand what you’re looking at, you can’t discharge your legal duty of care.”

Herman defines risk management as “helping an organization better understand its range of risks, ranking its risks and formulating practical strategies for managing risks.”

To many cash-strapped nonprofits and volunteer boards, risk management almost sounds like if you have time to do it, that would be nice, says Herman.

But now that nonprofits know such tectonic shifts are possible, they ought to be better prepared to face, and recover from, future risks.

Often, organizations think seriously about risk management only in the face of a recent crisis or a near miss, says Herman, but that’s beginning to change.

“Now many people are seeing it as a more vital activity and moving it to the top of their list” out of a desire to be the best organization they can be, she says.

The first major component of being prepared for unforeseen risk is forecasting — thinking about all the things that could go wrong, like losing a grant that has been steady income for a decade or seeing individual donations dry up.

“Every organization faces the possibility that things will go wrong, no matter what they do,” she says. “You could have a great relationship with a funder and excellent services, but there could be a freak accident.”

After identifying those risks, the next major step is to work on “resilience,” the ability to bounce back after something goes wrong.

That means developing a “plan B” and even a “plan C,” Herman says, likening contingency planning to developing an escape route from a house in the event of an emergency.

“You can always come up with an alternate route on the spot, but it probably won’t be the best practice,” she says. “If you think about it in advance, it’s probably a better way to protect the mission of the organization.”

For nonprofits that now find themselves in the position of stretching fewer resources to meet increasing demand, that kind of planning may seem like a luxury they can’t afford.

And Herman concedes that many of clients are forced to scrape to come up with the money and time to fully examine their exposure to risk, an expense that can be difficult to justify.

In the case of the Prince George’s Child Resource Center in Maryland, however, not only is the organization planning ahead, it received foundation funding to cover the cost.

That funding was critical, given that the Largo, Md.-based organization, like other nonprofits, struggled during the recession, says Marti Worshtil, executive director of the Child Resource Center.

As a result of the downturn, the group reduced its staff to 37 from 45 and is keeping a wary eye on its government funding, which Worshtil says is most at risk.

To conduct a comprehensive risk assessment, the group received $15,000 from the Washington Area Women’s Foundation, a public charity that works to improve the lives of women and children in the greater Washington, D.C., metro area.

Created in 1998 to connect female philanthropists with women most need, the group has awarded at least $1 million in grants in each of the last four years to support the work of about 130 nonprofits.

And in response to the recession, the foundation in 2009 broadened the focus of its Open Door Fund to provide funding for current and former grantees to focus on organizational sustainability.

So funding a risk assessment for the Child Resource Center was logical, says Nicole Cozier, philanthropic education officer for the Women’s Foundation.

“It made perfect sense to incentivize organizations to look at how to move through this and actually thrive coming out of a downturn and into a recovery,” she says. “Recognizing the breadth of the community, we knew that some weren’t going to make it, and we wanted to make sure our grantees weren’t among the casualties.”

Having already done some work to identify and leverage opportunities to become a more sustainable organization, the Child Resource Center was looking to minimize potential losses.

“Nothing happened in the organization, but we want to make sure nothing does happen,” says Marti Worshtil, executive director of the Child Resource Center. “When you’re in crisis, you can’t meet your mission. This way, we can avoid any of those crisis situations.”

She hopes that outside view of the organization will turn up any vulnerabilities the organization had yet to uncover.

“It was very forward thinking,” says Jennifer Lockwood-Shabat, interim president for the Washington Area Women’s Foundation. “Rather than organizations coming to us in that moment of panic, they were thinking about sustainability in a very different way.”

Aside from helping the Child Resource Center improve its operations, the foundation believes the process will provide learning opportunities for its other grantees, showing them that it’s both possible and important to plan for tomorrow.

“For some organizations, the hurdle to overcome is thinking more long term,” says Cozier. “With limited resources, it’s hard to keep your eye on the right now and the long term at the same time.”

But that kind of analysis and planning perhaps is even more important right now than ever before.

“The economy can set wheels in motion where organizations are having to scale back staff and make cuts,” says Cozier. “By trying to trim expenses, it’s possible to put an organization in a situation where there’s higher exposure because they’re trying to do more with less.”

That’s a real risk, says Herman, noting that nonprofits will have to make some difficult decisions about what they can and can’t do in this new post-recession environment.

“When resources are constrained, organizations need to understand how to do less with less,” she says. “It’s time to be realistic. It’s not an appropriate response to do the same with fewer resources – quality and safety will suffer.”

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