The Precarious Billion Dollar Sector: Nonprofit Human Services in the Pittsburgh Metropolitan Area By Carol J. De Vita and Eric C. Twombly Center on Nonprofits and Philanthropy The Urban Institute September 2003 Report Prepared for The Forbes Funds The authors wish to thank Jennifer Auer for her research assistance and statistical support. Thanks also to John Pierce, Allegheny County Department of Human Services, and Ron Gdovic, 3RC, for their insights into the nonprofit human service sector in the Pittsburgh metropolitan area. The views expressed here are those of the authors and do not necessarily reflect those of the Urban Institute, its board, or its sponsors. The Urban Institute 2100 M Street, NW, Washington, D.C. 20037 Center on Nonprofits and Philanthropy • The Urban Institute iiThe Precarious Billion Dollar Sector: Nonprofit Human Services in the Pittsburgh Metropolitan Area Executive Summary by Carol J. De Vita and Eric C. Twombly Center on Nonprofits and Philanthropy The Urban Institute The thousands of nonprofit organizations in the Pittsburgh metropolitan area are a vital part of the region. They touch nearly everyone’s life, providing essential services to local residents and fostering civic participation and social cohesion. Yet nonprofits today are facing serious challenges—an economic downturn, declines in philanthropic giving, state budget shortfalls, realignment of government priorities, and homeland security issues. In this climate of uncertainty, many people are turning to nonprofit organizations to address community needs and public policy issues. Some nonprofits are also wrestling with an increased demand for their services while their own financial resources are strained and uncertain. With more being asked of nonprofits, it is essential to understand the capacity, management, and performance of the sector. This report examines the financial structure and fiscal health of nonprofit human service organizations in the Pittsburgh metro area so that local leaders can better plan and invest in their communities. Using data from the Form 990 that nonprofits file with the Internal Revenue Service, it examines six questions: 1. How many human service organizations operate in the Pittsburgh metro area? 2. How concentrated or diversified are their sources of revenue? 3. How much do human service organizations spend on management and administrative expenses as a percentage of their total budgets? 4. What is their average operating margin—that is, do revenues exceed expenditures? 5. What percentage of human service groups end the year with positive net income? 6. What are the average end-of-year net assets—do assets exceed liabilities? Findings • Compared with other nearby metro areas, the size of the nonprofit sector in the Pittsburgh region is fairly typical. There are nearly 2,700 nonprofit organizations in the Pittsburgh metro area or about 11.1 organizations for every 10,000 residents. With revenues of $12.9 billion in 2000, the Pittsburgh nonprofit sector is roughly on a par with the nonprofit sectors in Cleveland and Baltimore—metro areas of similar population size. • Looking only at human services, Pittsburgh area nonprofits rank last in terms of per capita spending for residents in poverty. The 547 nonprofits that provide human services in the Pittsburgh metro area spent roughly $3,700 in 2000 for each resident in poverty. Compared with six other metro areas (Baltimore, Buffalo, Cleveland, Detroit, Indianapolis, and Philadelphia), the Pittsburgh nonprofit sector spent the least per capita on residents in poverty. It also had fewer human service providers per capita than most other metro areas in the study. This finding suggests Center on Nonprofits and Philanthropy • The Urban Institute iiithat when Pittsburgh area residents need assistance, they have fewer options than residents in other cities, and less money is spent on their needs. • The nonprofit human service sector in the Pittsburgh area is relatively small, despite revenues and expenses of nearly $1 billion each in 2000. Human services account for about 20 percent of all nonprofit organizations in the region, but these groups have roughly 8 percent of the region’s revenues and expenses and 6 percent of its assets. The average operating budget for human service groups is about $1.7 million, although the “typical” (or median) budget is much smaller—about $463,000. Although several of the largest human service providers are located in the city of Pittsburgh, there are no significant differences in revenues, expenses, or assets between groups in the city and those in the surrounding suburbs or counties. • Client fees are the single most important source of revenue for nonprofit human service providers in the Pittsburgh area. Government funding is second. Client fees accounted for 40 percent of revenue and government funds for 28 percent. Together, these sources of income rep