HSCN Newsletter:
Subscribe to our quarterly newsletter and stay on top of the latest news in Human Services.
More information...
 
Enter Email Address:
HSPulse
Do you see the need for Human Service workers increasing or decreasing?
Increasing
Decreasing
Not sure
Like us on Facebook

Home > Research Articles > Donating Wasn't As Easy As M1-2-3

The NonProfit Times

Saturday, August 17, 2002

Soaring money supply soothed economic wounds for some fundraisers

Like virtually every corporation in the nation, nonprofits generally suffered catastrophic blows to their financial revenues after September 11. Following an unprecedented grounding of the airlines and a subsequent biological attack on the postal system, the ability to raise funds and communicate with constituents was seriously impaired.

Amid the logistical logjam, a grieving nation struggled to regain its composure and confidence, making requests for cash even more awkward for non-9/11-related causes.

Yet, most nonprofits withstood the shock, and some even experienced surprising recoveries in a stumbling economy. "Overall, we're doing a little bit better than last year, which I think is remarkable given the economic uncertainty and world uncertainty," said Bruce Joyner, director of direct marketing for the Cystic Fibrosis Foundation in Bethesda, Md. "The good news for us is that the downs are not too far down and the highs are up just enough so that they are almost offsetting each other. If it continues to do this all year, we will have a decent year."

While leaders of nonprofits continue to navigate uncharted waters, they are riding a rising tide of money supply after the Federal Reserve flooded the market with cash and credit last year. Under the broadest measure of money, the Fed added almost $1 trillion to the economy, a 13 percent increase that ranks as the largest since 1972.

That measure, known to the Federal Reserve as M3, includes jumbo certificates of deposit, dollars held in European accounts and time deposits more than $100,000, along with all other forms of cash, checking and savings deposits.

A more liquid measure and the most commonly used is M2, which includes cash, checking, savings deposits and money market accounts. Last year, M2 grew at a 10.25 percent rate. That translated to a record decline in "M2 velocity" -- the ratio of economic growth to M2 supply. In other words, throwing gasoline on a dying campfire only produced more smoke.

For fundraisers, the most immediate measure of potential success could be the most liquid supply of money, known as M1, which grew 8.3 percent during 2001, its fastest rate since 1993. M1 includes only checking accounts, travelers checks and currency.

Dramatic increase notwithstanding, M1 took a major hit after September 11, falling by $39.1 billion or 3.3 percent by the end of October. Checking deposits alone fell 10.3 percent to $327.8 billion, and a month later dropped another 0.5 percent before easing back up 1.3 percent in December.

Clearly, that impact was felt in the nonprofit sector. In the month after the terrorist attacks, 44 percent of nonprofit fundraisers saw a decrease in donations, with more than 20 percent reporting a drop of 20 percent or more, according to a survey by the Association of Fundraising Professionals (AFP).

By the end of the year, however, 72 percent of nonprofits reported meeting or exceeding their goals, as 28 percent fell short.

While those numbers sound reassuring, some executives are finding trends hard to trust after one of the most erratic years in memory. "It's been so radical since September 11, it's hard to find a trend that lasts more than 30 days," Joyner said.

Joyner is not alone in his appraisal. Like the for-profit businesses, nonprofits remain wary as they operate in the shadow of a continuing terrorist threat and a fog of uncertainty about the economy.

With all the unknowns of last year, the Federal Reserve sought to steady the nation's economy through its control of the money supply. Compared to the fever charts of Wall Street, the line for the money supply undulates like a gentle wave with only occasional whitecaps.

To lift all boats in a recession, the Fed typically makes money more available by lowering interest rates so that more businesses can afford to borrow. That, in turn, allows businesses to expand, which, in theory, accelerates recovery.

To increase the money supply, the Federal Reserve operates through commercial banks, whose officers decide which companies and consumers deserve loans and at what rates of interest. The money that is loaned to the commercial bank from the Federal Reserve is re-lent to the business customer at a higher interest rate.

Of the money loaned to the banks by the Fed, only 10 percent typically must be retained in reserves. The remaining 90 percent is expected to be loaned or invested. Those transactions produce profits for the commercial banks. Each time the money is re-lent, the money supply grows.

Despite the Federal Reserve's largesse, the nation's banks appeared reluctant to play along during the events of the third and fourth quarters.

"What happened was commercial banks were not making that many loans because the economy was weakening," said Tucker Hart Adams, chief economist for the Rocky Mountain Region at US Bank. "Even though the Federal Reserve was doing what it normally does when the economy slows, putting more money into the system, the multiplier wasn't at work. So, you didn't get as great of an expansion in the money supply."

The Federal Reserve tracks the raw monthly totals, as well as adjusting for standard seasonal trends to depict monthly changes in the supply more accurately.

Good times

Late summer -- traditionally a slower period for fundraising -- proved to be successful for both the Arthritis and the Cystic Fibrosis Foundations. August marked a 45 percent increase in revenue compared to July for the Cystic Fibrosis Foundation. In the same month, revenues jumped 80 percent for the Arthritis Foundation.

Both organizations graciously agreed to be part of this reseach, allowing information to be examined for the past two years.

These figures could reflect the steady growth in M1 for the summer, with increases of 1 percent in June, 1.2 percent in July and 0.5 percent in August.

March, a month during which M1 totals are typically higher, continued to represent an opportunity for raising funds. The Cystic Fibrosis Foundation showed an increase of 30 percent compared to February 2001. The Arthritis Foundation, which showed a 63 percent increase in revenue for March, 2001, concentrates efforts during this time of year. The organization sends renewals for its high-dollar donor club in late January. March shows the impact of the January acquisition campaign, February donor renewal and the high-dollar club renewal.

The year's M1 totals show a dramatic jump in September, which does not follow the normal trend. That growth was due to the logjam in check clearing and other financial transactions brought about by dislocations in the financial world and the shutdown of the airlines that carry most of the mail.

At the same time, "The Feds just poured liquidity into the system after the terrorist attacks," said Adams.

The Cystic Fibrosis Foundation's fall revenues were dramatically impacted by the anthrax threat. The organization saw September income drop 25 percent from August. October marked a further decrease in revenue of 29 percent.

"In the late fall of the year, we saw a trend of mail coming in very slowly," said Joyner. Approximately 90 percent of the organization's mail goes through the Brentwood post office in Maryland, which was closed for a significant period of time because of the anthrax scare. "We had a period of 30-45 (days) when we had no deliveries at all during the last couple weeks of September and most of October. That made it impossible for us to even measure trends," said Joyner.

The organization's mail was being shipped to Ohio to be cleaned. Joyner knows that some donations were never received, but he has no way of knowing how much his organization lost due to mail that never reached the office.

The organization's increase in revenue for November was an astonishing 137 percent. "In November, we had a lot of catch-up mail coming in that had been delayed," Joyner said. "We feel that probably, we missed out on maybe as much as $1 million just in direct mail because of September 11."

The events also impacted the Arthritis Foundation. "After September 11, we saw the tail end of our mailings fall off very quickly," said Angie Moore, group vice president customer relationship marketing. "It would often appear that they would come close to a doubling day, but then they'd never gain that last 50 percent that you would expect."

Performance for the Arthritis Foundation's September mailing showed a decrease of 2.6 percent. The November decrease of 30 percent reflects totals from the organization's October mailing.

Both organizations experienced particular difficulty with acquisition mail throughout the year. The Cystic Fibrosis Foundation experienced a drop in revenue for acquisitions for every month of 2001 when compared to the same month for 2000. The Arthritis Foundation had a similar situation.

As with all organizations, the staffs of these nonprofits had to make decisions about how to respond to the drop in the number of new donors or members. "Organizations began to fine tune their acquisitions somewhat because the response rates were going down," said John Mastrobattista, vice president, marketing for Target Analysis Group, in Cambridge, Mass. "For budgetary reasons, they needed to reduce their investment in new donor acquisitions. To some degree, it's self-fulfilling. The response rates go down so organizations retract a little bit and over all numbers go down."

The Cystic Fibrosis Foundation responded by mailing fewer pieces for acquisition and renting what it knew to be the best lists for its organization. Cutting the quantity of mailings for acquisitions approximately 20 percent at 26 cents apiece saved the organization money.

At the Arthritis Foundation, officials chose to continue their efforts without any significant change. "To pull back on acquisition is far-reaching when you look at the long term because pulling back on acquisition in 2001 was going to hurt us in 2002," Moore said. "So, we pushed forward."

Joyner agreed that it is a difficult balance to maintain. "In the long run, you have to keep adding to your file through acquisitions," he said. "Right now with the economy and uncertainty, we're being conservative, but we're not overreacting."

Both organizations saw some good trends in their member and donor numbers. However, neither was enough to make 2001 more successful overall than 2000. The Target Analysis Group has been analyzing the fundraising results of their clients. While the sample of 24 organizations is relatively small, the study may reveal some interesting trends.

Overall, the number of donors in member organizations went down about 10.4 percent and the revenue declined by 4.8 percent. Donor organizations saw a loss of 1 percent of donors and revenue grew by 2.3 percent. The donor group had average gifts of $17.20, with the member group averaging $44.12.

The Arthritis Foundation uses both a member and donor approach to fundraising. An undisclosed strategic change that has since been reversed impacted their numbers for member efforts. But the results from the donor side seem to be in line with the Target Analysis study. Their revenue per contributor increased by 10 percent for donors in 2001. While donors made up 25 percent of their revenue in 2000, they composed 29 percent of the organization's revenue for 2001.

"We saw some good trends. Our gift per contributor pretty much stayed flat. Our average gift rose 8.9 percent. We saw some good trends in our donors," said Moore.

The Cystic Fibrosis Foundation, a member organization, saw an increase in monthly revenue for membership renewals for every month in 2001 as compared with the same month in 2000, except for September and October. Again, the loss in those months may be more representative of problems due to mail rather than renewal responses. They also saw consistent monthly increases compared to 2000 for acknowledgments.

"Our base of people were loyal and continued to give to us," Joyner said. "When we've seen downturns in other years, our house files generally stood by us."

Impact for 2002

With organizations in the middle of the 2002 calendar year, they continue to look for indicators to help guide their efforts. For the first three months of the year, both the Cystic Fibrosis and Arthritis Foundations' revenues paralleled fluctuations in the money supply with decreases in January and February and gains in March. Changes in interest rates can also act as an indicator for fundraisers because they directly impact the amount of money in circulation.

"The Federal Reserve, in the process of cutting interest rates 11 times last year, did put a great deal more base money into the system," said economist Adams. "They had to buy securities to lower the interest rate. They buy securities, it pushes the price of securities up, it pushes the interest rate down."

While one of the schools of economic thought was that what really determined economic activity was changes in M1, economists no longer view it as such a significant indicator.

"The way people handle their money, their use of credit cards, their use of deposits at places other than at commercial banks, money market accounts, none of that is included in M1," said Adams. It is important, however, because it serves as a measure of the level of interest rates and availability of credit in the system.

"The feds took correct action in putting money in the system," Adams said. "They did the same thing in 1998 after the collapse of the financial markets in Asia. They flooded the market with liquidity in an effort to smooth the bump out and it worked pretty successfully."

Lower interest rates have an additional impact on businesses as well as consumers. If a consumer has a loan, interest or credit card rate that fluctuates with short term rates, the payments come down as the short term rates are lowered, freeing up some of the consumer's money for other uses.

Personal income and unemployment numbers also provide some insight for timing fundraising efforts. "For annual fund donors, spending behaviors are very sensitive to their earning situation," said Mastrobattista. "Overall participation from numbers of donors is more sensitive to income issues and unemployment, those sorts of issues."

Like many organizations, the Arthritis Foundation's acquisition program is still showing challenges. "We have a much higher average gift than we expected and a much lower response," said Moore. They are currently conducting an in-depth analysis before considering any major changes in their approach.

"I am not so sure that this is a short-term situation for charities. I don't think anybody knows that at this point. My strategy is that you have to be careful. You can't change too many things. You really have to know what is going to work in the times that we are in right now," said Moore.

With the Gross Domestic Product and retail sales up, signs of an economic turnaround seem to flicker in a world that has somehow grown darker with the collapse of Enron, Andersen, Global Crossing, Pacific Gas and Electric, XO Communications and host of other corporate giants teetering on the brink.

"This country is going to settle down," said Joyner. "There are some good economic indicators and I think that will bode well for the nonprofit world. People will get back to their normal trends. This is the most generous country in the world and it will get back to being that wayn"