CDC Fiscal Health - where are we, where are we going?

Last Friday, at an event hosted by the Boston Foundation, the Community Development Innovation Forum released a new study by the Non Profit Finance Fund that looked at the fiscal health of the CDC sector.

Bill Pinakiewicz from NFF, highlighted the key findings of the study, including:

* Taken as a group, the twenty-six organizations represented in the study have become financially more vulnerable from 2003 thru 2008.  That means that the financial challenges facing community development corporations predate the 2008 recession.

* Unlike private real estate companies, CDC financial performance was not demonstrably better during the hot real estate market in the middle of the decade due to program limits on rents and profits, leaving little cushion when the market collapsed in 2008.

* The study did not find a significant difference among small, medium and large CDCs in terms of recent financial performance.

* CDCs were impacted by multiple factors – homeownership projects that came on line as the market collapsed, rental developments that were stalled or yielded inadequate fees, existing portfolios that generate little to no net cash flow to the CDC, cuts in government, foundation and corporate funding, and rising costs. The study period also covers the first five years following the elimination of the state’s CEED program, which had provided flexible funding to CDCs for more than 20 years.

* While all of the participating CDCs provided audits that fully comply with GAAP there is clearly a wide variation in financial reporting practices across the field that make it difficult to aggregate and compare data among CDCs.

We then heard from a panel including Geeta Pradham from the Boston Foundation, Jeanne Pinado from Madison Park DC, Phil Giffee from NOAH and Paul Juraschek the CFO at JPNDC.  The panelists pointed out that not all CDCs are struggling financially and that the true financial health of a CDC can sometimes be hard to discern from consolidated financial statements that include real estate properties and the core organization. The panelists described some of the tough decisions that CDCs have had to make to deal with the financial stress, including shutting down programs and laying off staff. They also noted that small changes in the real estate finance system with respect to developer fees, cash flow distribution and other rules could significantly improve CDC fiscal health and stability. There was also broad agreement that more consistency in financial reporting and more opportunities for CFOs and Executive Directors to learn from each other would be valuable.

MACDC, LISC and other partners in the Innovation Forum intend to follow up the study by renewing our efforts to improve the real estate finance system, to begin implementing Strength Matters in Massachusetts, to expand peer learning opportunities among CDCs, to support collaborations, mergers, and other ways to improve operating efficiency, and to continue researching trends to determine whether we are making progress in the coming years.

The structural flaws in the way that real estate is financed make it difficult for mission driven organizations to succeed, and this report underscores that point. Real estate development is a high risk economic activity and the affordable housing financing system makes it difficult for that risk to be adequately rewarded for mission driven organizations while not shielding them from the negative consequences of failure. It is also clear that the way all non profits are financed creates inherent challenges, including government contracts with little overhead, private philanthropy that is highly restricted and a lack of unrestricted operating funds that allow nonprofits to invest in organizational infrastructure, capacity building, research and development, and innovation. 

To me, a core problem is that too many funders are looking to simply buy services from nonprofit organizations at the lowest possible price and too many nonprofits play into this game at their own financial peril. Instead, we need more funders to think not just about the immediate program or project, but how their investment in that program or project will help the organization achieve lasting, sustainable community impact over the long term.

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Comments

This is very useful information as we all plan for the future.
I am interested in hearing from any CDC's currently going through a strategic planning process. Are you using this this information during the planning process?

Joe,
Ironically, the need and support for affordable housing throughout the Commonwealth is indicated by the increasingly pressure-packed number of One Stop applications at a 4:1 ratio. In addition to altering or tinkering with the overhead/fee issue, which would definitely help individual non-profits, it seems clear to me the system needs to:
* grow the equity pie. Simplify the state credit, increase bonding sources by $10-20M+. Liquidity/guarantees - yes. Increase Fed credits? Continue Exchange.
* increase predevelopment financing sources, which would relieve lengthy and debilitating cash flow pressures. Some may have to partner with private partners or even CEDAC on this one, but it could be done.
Yes, I know these would be difficult, but carving up a small and shrinking pie is becoming a system-wide threat to the production of housing in our cities and towns.
- Phil/NOAH

Ed,

Thanks for your posting. MACDC certainly supports and encourages such partnerships.

Joe

Phil,
From the private development and construction side of things we are seeing many non-profits and CDC's struggling to get adequate funding for their projects. We have had the opportunity to partner with a number of CDC's over the years and would welcome the opportunity to be one of those private partners you refer to if the project is deemed sustainable financially. We have the resources to make a difference in communities throughout the commonwealth and we are looking forward to working with organizations such as yours to increase the supply of affordable housing.
Ed Dann - Dellbrook/EAFish