Does Milwaukee Have Too Many Non-Profits?

Hot and breathless, the messenger arrives from the Public Policy Forum, with a warning to us: Milwaukee has too many non-profits.

The message is considerably more dramatic than we’re used to from the sober minded Public Policy Forum, all the more so given the somnolent sounding title of its new study: “Give and you will receive; An analysis of nonprofit revenue trends and charitable giving in Greater Milwaukee.”

For that matter, the study itself, while it proves that the number of non-profits has grown greatly, is filled with caveats, ifs, ands and buts as to what it all means.

Yet, by the time the study was getting reported in the Milwaukee Journal Sentinel, the PPF’s lead author Philip Laper was warning that non-profits may have to eliminate or reduce services because of the competition for charitable dollars.  But this study doesn’t offer near enough evidence to justify that assertion.

The facts, as reported in the study, are these:

-Between 1989 and 2011, total revenue for public charities in four-county metro Milwaukee rose by 134 percent, to $3.68 billion;

-During the same period charitable donations to these groups rose by 193 percent, to $1.86 billion;

-Meanwhile, the number of public charities increased by 183 percent, growing from 824 to 2,333 organizations. This is a change from one organization per 1,603 metro residents to one organization per 646 residents.

-As a result, the average size of area non-profits has shrunk by 17 percent since 1989.

You’ll note at the outset that the growth in the number of non-profits of 183 percent actually trails the 193 percent increase in charitable donations during this period. So if their average budget size is declining, that seems to be mostly a function of declining revenue. Art groups, for instance, charge ticket revenue, hospitals charge insurance companies. Perhaps this revenue isn’t keeping up. But how long-term is this problem?

The study points to a 2011 survey of Wisconsin nonprofits which found that 38 percent of organizations planned to reduce or modify services. That might be bad, but it’s only a one-year picture and could simply be a lag effect of the economic meltdown, when both charitable donations and return on investments (the latter for bigger non-profits) temporarily declined.

The study, in fact, speculates that smaller might be better.

“On the one hand, greater competition for funds promotes greater efficiency in the nonprofit sector. The market will reward those organizations that can accomplish the most with the least amount of money and motivate nonprofit leaders to find new ways of improving efficiency.”

But the study also speculates in the opposite direction:

“On the other hand, increased competition means that these organizations must dedicate more resources to securing funding, wooing donors, and publicizing the work they do. Such activities can raise overhead costs and actually reduce the amount of money available to further the organization’s mission.

“Finally, as the number of organizations increases, it becomes more difficult for donors to determine where to dedicate their contributions… A truly meritorious organization may get lost in the shuffle.”

So which are we to believe? Is smaller better or worse? The study ultimately concludes the latter, suggesting policy makers and civic leaders should be worried about “the ability of individual nonprofit organizations to maintain an appropriate scale in the face of growing competition for funding.”

But the study hasn’t proven there is any cause for concern. It offers no comparison to national statistics, so we don’t know if the increase in non-profits is any different than here. I could find no such statistics going back to 1989, but since 2000, the number of non-profits grew by 50 percent, as USA Today reported.

Interestingly, that story quoted Tom Pollak, director of the Urban Institute’s National Center for Charitable Statistics, seeing this as a good trend: “Let a hundred flowers bloom, and if 98 of them die, at least there are two that are great.”

But there has long been a feeling among civic leaders in Milwaukee, particularly business people, that there are too many non-profits and they should be encouraged to merge.

Mergers and acquisitions are often seen as a good thing for private businesses, as a way to increase efficiency. But the reality is that most mergers fail. “Study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%,” the Harvard Business Review notes.

The Journal Sentinel story cited the example of Community Advocates as a non-profit that successfully absorbed other non-profits. I had to laugh at that. I wrote a story hailing the growth of Community Advocates, which took over several other non-profits, and readers rightly jumped on me, noting the resulting problems that occurred. I soon wrote a corrective  citing “significant growing pains for the agency: a September audit by the U.S. Department of Housing and Urban Development found Community Advocates had improperly administered $1.7 million in grants; an earlier county audit found problems with how the agency ran the Northside Crisis Resource Center and terminated the contract; and the Justice 2000 project, which had merged with Community Advocates, decided to separate itself once again, taking millions in funding with it.” Finally, its director Joe Volk, who oversaw all this growth, left the non-profit.

As with private company mergers, non-profit mergers can result in a bloated organization that becomes dysfunctional. That doesn’t mean it can’t work. But simply because there are more non-profits around doesn’t by itself mean mergers are either needed or would improve services.

The report says that smaller organizations have to devote a larger percentage of their budget to fundraising whereas a merger could reduce those costs. But I have seen examples of many big non-profits where the CEOs or executive directors get huge salaries, hiked up benefits packages and the like. It’s not a given that bigger groups spend proportionately less on fundraising, and this study offers no data whatsoever to prove this contention.

The study says that as the number of non-profits grow, “it becomes more difficult for donors to determine where to dedicate their contributions.” That has long been a complaint of business leaders because there are more groups beating on their door asking for donations. Hence the push to create groups like United Way or UPAF, so they can cut one or two checks and their charitable donating is done.

The idea that meritorious organizations will get lost in the shuffle as too many non-profits arise is certainly a concern, but the reality, as close observers of non-profits know, is that success isn’t just about providing good services but about assembling a board of notables who have connections to foundations and other funders that will help you get grants. Mergers of groups might help them with this process, but it might also lead them to lose sight of their original mission, which arose from a passion which had nothing to do with raising money.

I found this study helpful because the data gives us a good picture of quantitative trends in the non-profit sector. But there is always the push to deliver some sort of judgement, and in this case that results in a conclusion that amounts to empty speculation. Sometimes it’s better to remain cool and sober-minded, even if it results in less headlines.

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