For profit nonprofits: Red Cross loan request sparks debate.

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Author: Townes, Glenn1

While some nonprofit agencies provide mostly "minority" communities with the bare necessities during times of hardship and disasters, many have found it necessary to establish or increase their fees for services to clients in order to survive tough economic times.

The issue of profits and community service became a hot button issue late last year when the American Red Cross announced that it had to borrow about $340 million in order to replenish its coffers in the wake of relief efforts in the mostly "minority" communities of the Gulf Coast following hurricanes Katrina and Rita. However, some philanthropic experts contend that the loan request was excessive and paved the way for the agency to increase some of its fees for services to clients.

Daniel Borochoff, president of the American Institute of Philanthropy in Chicago (a charity watchdog organization that monitors how charities spend their funds), says the Red Cross request hints at sloppy and poor management of funds.

They have funds on hand to use," Borochoff said, quoting the Red Cross' most recent IRS reporting form as evidence of the group's approximately $700 million in available funds, and that a sizable portion of their profits come from fees charged for various services. For example, the Red Cross generates more than $2 billion in annual revenues for fees charged to individuals in its biomedical division, blood donations, collection and processing.

However, the $3 billion charity sharply disputes Borochoff's assertions and justified the need for a loan in a recent posting on its web site: "We cannot spend funds for disasters that are committed to specific funds or other longer-term investments. Our decision to borrow is a more fiscally responsible approach than liquidating assets; we can borrow money at under four percent interest, rather than liquidate investments that are earning more than eight percent."

Marc Morial, president of the National Urban League in New York, said his nonprofit service organization continues to provide about 90 percent of services free to its clients, and that the number of fees for services provided has not changed in the wake of the storms in the Gulf Coast. In addition, financial resources for the Urban League come from government grants, private donations, benefactors, endowments and other resources.

"Most of the profits that we generate are from corporations or private companies that pay us to run their job training program and not necessarily from fees for services from individual clients," he said.

Morial said while many nonprofits are indeed finding new ways to generate revenues in light of government cutbacks, nonprofits should not pass all of the cutbacks and reductions on to the communities they serve.

"Charging exorbitant fees for some services to indigent populations may defeat the purpose of a nonprofit service organization," he said.

He continued that the Urban League provides a number of free services to mostly AfricanAmerican communities across the country and the fees charged to individual clients are nominal. For example, one of the few services the Urban League charges clients for is a money management training course, "a nominal fee" of $30 for a 6-week course that will assist participants on how to better manage their personal finances.

However, Yolanda Mazyck, executive director of Safe Horizons in Washington DC, said it has become increasingly difficult for nonprofits to maintain some programs without charging fees. In addition, Mazyck said nonprofits that have benefactors or an endowment may view fees for services as unnecessary because sustenance of the organization is often not an immediate concern.

"Important factors are that the fees are reasonable and there is some type of assistance or service program in place for those who are truly in need," she noted. Mazyck said her organization has about 58 beneficiaries, "mainly African-Americans who are all on some type of public assistance such aa Supplemental Security Income (SSI) or Medicaid. The nonprofit agency manages more than $700,000 in a special needs trust fund. Some profits are generated by fees that the agency charges clients to manage their funds.

But some financial industry experts contend that in addition to the humanitarian ambitions, long-term survival and financial security should be the ultimate goals of every nonprofit agency.

Mary Schmidt, president of Mary Schmidt & Associates and a co-founder of Strategic Reality Group in Albuquerque, New Mexico, said any nonprofit agency has a double bottom line: "financial health and the quality of life for the community it serves." Schmidt and her partners work with several nonprofit agencies in order to help them run like an effective small business.

"Nonprofits need money to operate, and the only way to get that is to sell," she said. "The challenge is wrapping the dogooder perspective around the idea of having to market, sell and close a deal."

Finally, Schmidt and others agree that there is no longer such a thing as "free" and that somebody, somehow, is going to have to pay either in the short or long term.

So, it's to the benefit of everyone involved, the nonprofit, clients and the community, "if the non-profit learns to operate like a for profit small or large business," she said. "Nonprofits need to be allowed to [work towards] profitability and maintain a healthy cash reserve."

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By Glenn Townes, Special to the Amsterdam News