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Uncertainty over state revenues concerns beleaguered Delaware nonprofits

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WILMINGTON – With the state certain to lose hundreds of millions of dollars in revenue amid the coronavirus pandemic, Delaware nonprofits have some of the most urgent concerns in the business community.

The organizations run the gamut from health care providers to schools, veterans groups to arts and entertainment proponents, but many of them depend on public grants to survive. With many already operating on thin margins, the prospect of declining grants-in-aid allocations or an outright loss of funds amid tightened fiscal conditions may drive some nonprofits to close their doors.

Gov. John Carney warned nonprofits that losses in state revenues may impact them in the near future. | DBT FILE PHOTO

In an April 16 conference call with the Delaware Alliance for Nonprofit Advancement (DANA), an industry association that advocates for the state’s nonprofits, Gov. John Carney estimated that the state was already looking at a revenue loss of $500 million due to the pandemic’s impact on taxes, most of which depend upon businesses operating. If the crisis is prolonged, that loss could stretch upward of $1 billion – or about a fifth of the state’s annual operating budget, he said.

About 40% of the revenue sources in Carney’s original fiscal year 2021 budget proposal are likely to be those most affected by losses, including personal income tax, business gross receipt tax and gambling tax. Meanwhile, incorporation revenue, which includes taxes and fees impose in the creation of companies and businesses under Delaware’s favorable legal system, was pegged at 28% more. If the economy falls into a prolonged recession as many predict, that revenue could take a hit as well as business transactions slow.

“We’ll be in a dire situation in terms of our budget cash flow for the rest of this year,” Carney told nonprofit leaders.

The estimated revenue loss is a stunning turn from January, when Carney proposed the largest operating and capital budget in state history with a $200 million surplus in tow. As part of his FY 2021 budget, Carney had proposed $55.1 million for grants-in-aid, the most important public funding source for many nonprofits. That funding level matched the current fiscal year, which was about 5.5% more than FY 2019.

“There are agencies that do rely on an understanding of how the appropriations are going to work, including grant-in-aid and funding for some key programs. So knowing that that is still up in the air, and may be for quite some time, makes it harder for nonprofits even understand what resources they’re going to have going forward for some of the critical services that they provide,” Sheila Bravo, president and CEO of DANA, told Delaware Business Times.

Further complicating the recovery efforts, however, is the caveat that $1.25 billion in federal stimulus funds for the state be used only to reimburse virus-related expenses, and not to replace lost revenue or supplant typical annual budgets.

DANA CEO Sheila Bravo

Bravo said that she’s focused on ensuring that state contracts held by nonprofits for services are honored. She noted that some nonprofits, especially those in health or social services, are going above and beyond what contracted work calls for to serve people in need right now.

“It’s really important that they get reimbursed and it sounds like some of federal stimulus funding flowing to the state will do that,” Bravo said, noting DANA is encouraging nonprofits to carefully track expenses.

When asked whether contracted work could be prepaid in order to ensure a flow of funds, Carney said that couldn’t happen right now due to cash flow issues for the state amid the crisis. He encouraged nonprofits to be in contact with the state agency that holds their contract to try to work out funding concerns on a case-by-case basis.

Thankfully, nonprofits have received some relief from requirements under the state’s unemployment insurance program, which requires them to pay a fee when a laid-off employee files rather than a periodic income tax like larger employers pay. Nonprofits have received a 90-day reprieve from paying that fee, and federal stimulus funds will cover 50% of that cost.

“In that regard, that’s really good news, but we would like to see the other 50% waived,” Bravo said, noting the dramatic financial impact nonprofits are already facing.

A DANA survey of nonprofits two weeks ago found that at least 2,000 nonprofit employees have been laid off amid the pandemic, Bravo said.

Further frustrating many Delaware nonprofits was the uneven impact of the U.S. Small Business Administration’s Paycheck Protection Program, the first SBA program to ever be offered to them. That $349 billion program, meant to hold over small businesses by primarily covering payroll with forgivable loans, ran out of funds April 16, less than two weeks after it was launched. In a report on the fund’s allocation, Delaware ranked second to last of all states in PPP loan allocation and fourth to last in total value.

Bravo said that as of Thursday afternoon she was only aware of one Delaware nonprofit that had successfully obtained a PPP loan, but it wasn’t for the full amount requested. Meanwhile, all nonprofits have taken a financial hit through the cancellation of fundraising events that help to fill their coffers.

“In our survey, about a third of respondents reported having less than 10 weeks of cash on hand. We also had about 20% that didn’t know, which is also very concerning,” she said.

Bravo said that DANA is more concerned about mid-sized nonprofits that depend on such restricted funds than it is about smaller nonprofits that have more unrestricted funds.

“Nonprofit operating models are a little different, so you could have very small agency with no staff and because they’re all volunteers, they may actually be more resilient than a larger nonprofit that has staff, a facility and a lot of fixed costs,” she explained.

DANA is also acute worried about the future of arts and entertainment nonprofits because of the governor’s order to limit gatherings to very small numbers. Carney acknowledged the difficulties facing those organizations and said he was working closely with the state Division of the Arts and nonprofits to ensure stimulus funds earmarked for them are distributed appropriately.

It’s not the first time that nonprofits were threatened by uncertain financial support from the state. Three years ago, during Carney’s first budget deliberations, grants-in-aid were eliminated entirely to fight a $350 million gap in funding. Negotiations in the legislature on the last night of the session ended with tax increases on alcohol, tobacco, and home sales to save 80% of the grants-in-aid funding.

Carney told state nonprofit leaders that this time around, the loss will likely be worse.

“It’ll be significantly greater than [2017]. It will have a definitely negative impact on grant-in-aid, and all aspects of the budget,” he said.

When asked whether she believed that nonprofits maybe be in for another round of consolidation as directors look to contend with diminished revenues, Bravo said she believed it was still too early to be thinking of mergers, but added that the pandemic has forced nonprofits to once again look at how to stretch and share resources.

The essentially overnight move from in-office work to working remotely from home has allowed some nonprofits to find new efficiencies and ways to reach their clients, Bravo said.

“It may be that COVID-19 for some organizations is transformative, not because they’re contracting but because they see new ways that they can serve Delaware in a smarter and a more efficient way,” she said.

By Jacob Owens

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