How will COVID-19 impact the nonprofit sector? Johnson Center research offers insights

As the novel coronavirus continues to spread throughout the United States and the rest of the world, financial implications on employees and businesses are profound.

Impacts are being felt across the economy, and the nonprofit sector is not immune. Researchers at Grand Valley's Dorothy A. Johnson Center for Philanthropy have analyzed IRS 990 form data and have identified trends in the nonprofit sector that nonprofits can expect to contend with as the pandemic evolves. 

The research was led by Jeff Williams, director of the Johnson Center's Community Data and Research Lab, and is based on an analysis of the financial vulnerabilities of nonprofit organizations.

Williams said models can help nonprofit leaders make educated decisions about their organizations, especially as it pertains to project management, disaster response and using solid data.

The Community Data and Research Lab identified three trends that leaders can use to inform decision making.

1. Before things get significantly better or worse, leaders can expect to see things 'get weird.'

Williams said in times of crisis when we are looking for certainty the most — even if it's bad news — is when events are most likely to be unexpected in terms of magnitude, order and topic. 

"Adopting a mental posture of flexibility is key," Williams said. "Being open about the impending storm in communications with service beneficiaries, clients and staff is essential for maintaining staff morale, too."

2. Nonprofits are facing three distinct financial threats at the moment, each of which will impact different nonprofits in different ways. 

As entire segments of the economy falter and the stock market tumbles, different types of nonprofits will see decreases in revenue in three very different ways: decreasing revenue from annual campaigns and gifts, dropping demand for services and/or changes to contracts, and decreasing value in investments and stock market fluctuations. Most nonprofits, for example, receive very little investment income, so stock market fluctuations will not be their primary concern.

Williams said a clear understanding of the different types of revenue declines is important because nonprofits are businesses that pay salaries and rent, and purchase supplies and equipment just like any other. However in the big picture, nonprofits serve a broader public mission. Williams said nonprofits should remember to secure their operations first, much like the instructions given to passengers on airliners about oxygen masks: Always secure your own mask before assisting others.

"While businesses are closing and people are at risk of losing employment, there is likely to be an increase of demand for safety net agency services, many of which will be met by nonprofit organizations and their staff," Williams said. "But if a nonprofit cannot meet its business obligations, it will not be in a long-term position to assist its community in a time of need."

The full report from the Community Data and Research Lab explores in depth the different financial problems nonprofits of different sizes and categories may face due to COVID-19. The report is available at JohnsonCenter.org.

3. The process of restoring normalcy isn't a linear process. Multiple stages of recovery often exist, involving different sectors of the nonprofit world at different times. 

Williams said while some disasters are a singular event, like a tornado or tsunami, others happen more slowly and recovery often takes many stages. When society works to recover from the pandemic, the nonprofit sector will see those stages take shape. 

Right now, nonprofits are focused on immediate needs, like health care and direct emergency assistance, especially food. However, over time, as the situation stabilizes, the nonprofit sector will need to shift to education, housing and human services. 

Once the virus is well contained, job training, workforce development and other economic and productivity concerns will come back to the forefront. 

Finally, when people feel confident making longer-term plans to return to normal life, nonprofit operations will also return to a more normal activity level.

Upcoming research

Over the next several weeks, the Johnson Center will use additional IRS data to explore other financial aspects of the nonprofit sector, including cash on hand, changes in revenue sources, and what past economic shocks tell us about nonprofit organization creation and failure rates.

For more information, visit JohnsonCenter.org.