High expectations

Federal and state government funding cutbacks are causing concern in the not-for-profit sector. Domini Stuart considers what this means for the boards of many organisations.

At the turn of the century, the global not-for-profit (NFP) sector had been relatively stable for close to 400 years. Then everything started to change.

“The global financial crisis (GFC) placed governments around the world under significant financial pressure, while citizens continued to expect the same level of service delivery,” says Dr Matthew Turnour FAICD. Turnour is the chairman of Neumann & Turnour Lawyers, chair of the Queensland Law Society’s sub-committee for the not-for-profit (NFP) sector and a director of the Australian Charity Law Association. 

“The rise of international terrorism triggered a demand for higher levels of supervision of the distribution of funds. Technology made it possible to measure as we have never measured before. For the first time, governments saw the scale of the sector and the value it represents,” he says.

The sector is, indeed, enormous. It employs around eight per cent of the total Australian workforce and the Curtin charities 2013 report recorded a combined total income of more than $100 billion. “This figure came from the NFPs registered with the Australian Charities and Not-for-profits Commission (ACNC) which had submitted an annual information statement by 30 June 2014,” says Rachel Sloper, a solicitor at Neumann & Turnour Lawyers who works with a number of NFPs.

“This isn’t even all of the 60,000 charities registered with the ACNC, and the total number of charities nationwide has been estimated at 600,000.”

A different approach

As governments look for ways to spend less, private sector finance is playing an increasingly important role. “We’re seeing particular interest in areas with a tangible asset base, such as housing,” says Bruce Linn FAICD, chairman of Anglicare SA and principal of Bruce Linn & Associates, a governance and strategic management consultancy firm. “But, as private financiers require a return and NFPs do not, this is not a natural fit – it requires careful financial engineering and value assessment. 

“Governments are keen on this strategy because they see it as a way to offload some of the financial obligations and risk associated with providing services to the disadvantaged in society. The ethical question for NFP boards is who benefits?” he says.

Private sector involvement can also be self-defeating says Turnour. “Taking employment as an example, a commercial operator will be obliged to focus on the people who are most likely to get a job and stay in it in order to generate the biggest profit,” he says. “Charities support the people least likely to do either, and that’s what society needs. So for-profits could drive charities out of business – and the commercial operator’s profit isn’t sustainable either because they’re actually creating a more deeply-entrenched unemployed community.”

One innovative alternative is social impact bonds (SIBs). “These are designed to raise private capital for preventative programs by promising attractive financial returns when stated outcomes are achieved,” says Turnour.

“The New South Wales government launched Australia’s first two SIBs in 2013 and they appear to be going quite well. For example, the Newpin social impact bond, which funds the expansion of a program to keep children out of care, is targeting a financial return of 10-12 per cent per annum over its seven-year term.”

Meanwhile, the NFPs which fund disability services are bracing for a transformation. “The national disability insurance scheme will change the funding model completely with a move to client-centric care,” says Sally Freeman GAICD, national partner in charge of risk consulting at KPMG Australia and a director on two NFP boards.

“A lot of the money will be delivered straight to the clients, and I’m not sure all of the NFPs are prepared for the shift from pure service delivery to direct client engagement,” she says.

Increasing pressure

Diminishing government funding is a prime concern for most NFP boards. “We expect the federal government to continue increasing the pressure on the non-government sector, and also on state governments to pick up more of the load,” says Linn. “While most of the funds ultimately come from the federal government, the states distribute them because they are responsible for the delivery of programs such as social services and social housing. Unfortunately, this division of responsibilities adds another layer of bureaucracy to the process of getting money to the people who need it urgently.”

As funds decrease, more people are seeking help. “Anglicare SA delivers a range of services to 55,000 disadvantaged people annually in South Australia alone, and pressure at the coalface is starting to mount,” says Linn. “Like most NFPs, we have a moral obligation to care for people in a desperate situation. We can’t just turn them away.”

NFP boards have learned to be lean, agile and resourceful, and have frequently turned to volunteers to fill gaps in funding. But there is a limit to how much volunteers can do.“We have some 1,600 staff and over 600 volunteers, which is a massive volunteer workforce to manage,” Linn continues. “Australians are generally very good at stepping forward when there’s a need. The cynical view might be that the governments are relying on volunteerism to pick up the slack of the reduced funding.”

Fat-free arts

In 2012, Queensland’s government slashed funding to local arts organisations on the grounds that they don’t provide essential services. Tamara Winikoff OAM, executive director of the National Association for the Visual Arts (NAVA) and convenor of ArtsPeak, dismisses that claim.“Cuts to arts funding have a ripple effect on Australia’s capacity for innovation and creativity,” she says. “Artists are key contributors to productivity, social cohesion and the economy.”

Most of the federal funding for the arts is subject to an efficiency dividend, an annual reduction which encourages administrators to look for cost savings and efficiencies. “The need to find savings has driven a lot of internal restructuring,” says John Irving FAICD, chairman of the State Theatre Company of South Australia.“But sooner or later, there will be no more fat to trim and inevitably this will impact on the arts themselves.”

Irving estimates that his company has the same amount to spend on productions today as it did 10 years ago. “Arts companies are very good at doing things on the smell of an oily rag,” he says.

“Many people work in the sector because they love it, and they put in a huge amount of unpaid time. But, however creative your approach, it gets harder and harder to maintain quality. And, if quality falls off, audiences can fall off too.”

Overseas aid slashed

Over the past two years, overseas aid has suffered more cuts to funding than any other sector. In 2014, a total of $11.3 billion was slashed from the budget for the coming four years.

“Previous governments, both Coalition and Labor, had committed to lifting overseas aid to 0.5 per cent of the gross national income (GNI),” says Bronwyn Morris FAICD, a director of CARE Australia and several other NFP and for-profit organisations. “This would have brought us more in line with countries like the UK, Germany, Denmark and Luxembourg, which have allocated 0.7 per cent or more. Instead, we’ll lag even further behind.”

According to Marc Purcell, executive director of the Australian Council for International Development, the latest cuts will take us to just 0.21 per cent of GNI, the lowest level since records began in 1960. And, despite having one of the highest incomes per capita in the world, Australia is likely to fall to 20th position on the chart compiled by the OECD of the 28 member nations that give aid.

“Eighteen of our 20 closest neighbours are developing countries and, at CARE Australia, we strongly believe that Australia’s growth and prosperity is tied to theirs,” says Morris. “Continually slashing aid reflects poorly on Australia and could have a negative economic impact by isolating us from like-minded nations.”

Rising to the challenge

“NFPs used to rely on lump sums from government to cover recurring expenses such as salaries,” says Freeman. “Today, I’d expect boards to be looking at ways of making costs variable, such as using contractors rather than having permanent staff.”

Alternative sources of income, such as corporate sponsorship and personal philanthropy, are simultaneously more central and more difficult to secure. “The corporate environment is extremely competitive and, as the economy tightens, companies are less likely to enter into new arrangements,” says Irving. “Existing relationships are also under greater pressure.”

Boards will undoubtedly look more closely at deductible gift recipient status and other ways of incentivising private donors.  “We’re also hearing from larger organisations wanting advice on diversification into income-producing activities,” says Sloper. “There’s a lot of anxiety about the effect that being forced into them might have on their charity status.”

Linn considers consolidation inevitable. “I expect to see larger organisations with stronger governance taking advantage of efficiencies of scale,” he says.

Boards will also need to consider collaborative tenders and grant applications. “If your NFP can’t provide a holistic solution, governments will expect you to source an appropriate partner rather than leave it to them to join the dots,” says Sloper.

A challenging job

NFP boards have the same obligations and challenges as corporate boards, but with added complications. “The uncertainty around donations and other funding makes cash management a real art form,” says Freeman. “Directors may not be able to draw on the same range of skills they would expect to find on a corporate board. And they could also be managing people with a lot of good will but limited experience.”
NFP boards are often more disorganised because directors are reluctant to allocate money to administration. As a result, they can take up a disproportionate amount of time. “We’re very fortunate that many of the country’s most able directors are prepared to donate their services,” says Turnour. “However, smaller charities can find it hard to attract directors of the calibre they need.”

Budget cutbacks

• Community legal centres: $19.6 million cut over four years.
• Local government: $925 million cut over four years.
• Indigenous programs: Over $500 million will be cut from indigenous programs by replacing more than 150 programs, grants and activities with the new indigenous advancement strategy.
• Landcare: A new national landcare program has an allocation of $1 billion – a cut of almost $500 million.
• Arts: The nation’s peak arts organisation, the Australia Council, has had its funding cut by $7 million a year over four years.
• Research: Cooperative research centres will have their funding cut by $80 million over the next four years and the Australian Research Council will have its funding cut by $75 million over the same period. The CSIRO expects to lose more than 500 jobs.
Source: Funding Centre