Steve Mumford, University of New Orleans
The COVID-19 pandemic was devastating to nonprofits. One in eight nonprofit jobs were lost in the pandemic’s initial months. At the same time, many nonprofits were needed to play an essential role supporting community resilience, which demanded more staff and resources.
Governments worldwide stepped in to help. In the United States, the federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March 2020, providing $2.2 trillion of disaster relief, the largest relief package in history at the time. It created the Paycheck Protection Program (PPP), guaranteeing forgivable stopgap loans to sustain small businesses and nonprofits. Organizations that employed between one and 500 paid staff members could borrow funds for wages and have them forgiven if they maintained employees and pay rates. PPP had two primary goals: stabilize revenues and maintain employee hours.
Although the program was designed with businesses in mind, many nonprofits seized the opportunity to obtain PPP loans. What ultimately came of these emergency relief funds, and to what extent did they support the sector’s short-term financial sustainability as intended? Using survey data collected from nonprofits in New Orleans, Louisiana, at the start of the pandemic and one year later, matched to public PPP data, my colleagues Nicole Hutton, Stephanie Riegel, and I attempted to find out in our new NVSQ article.
Matching Nonprofits by Resilience Capacity
As we explored answers to these questions, we ran smack into the problem of selection bias. That is, nonprofits that pursued and obtained PPP loans could be systematically different from those that didn’t, biasing the estimated impact of the loans. To get around this problem, we used a technique called Propensity Score Matching (PSM), allowing us to match similar nonprofits that did and did not obtain a PPP loan based on their pre-pandemic characteristics.
To select which characteristics to match on, we drew from our nonprofit compound hazard resilience model emphasizing eight critical factors thought to influence nonprofits’ PPP loan pursuit and receipt, as well as their short-term financial sustainability outcomes. We then operationalized each factor in our dataset within the context of pandemic response. These factors were: adaptive capacity; strategic planning; external communication; financial management; board leadership; operational capacity; mission orientation, and; staff management.
Our matching process was successful, because the “propensity” (or probability) that nonprofits would obtain a loan, based on the combination of these pre-pandemic factors, was made equal across the nonprofits that did and did not ultimately obtain one. In other words, we controlled for these baseline characteristics. However, we also had to remove a big portion of our survey sample, leaving us with 94 nonprofits remaining in our dataset (or 47 that received a PPP loan, and 47 that didn’t). We could then compare outcomes across these nonprofits one year into the pandemic.
What did we find?
With our remaining matched sample, we were able to make preliminary conclusions about the impact of PPP loans on nonprofits. These findings fall into three outcome categories: staff retention, service maintenance, and financial health.
- Staff retention: We did not find significant differences in staffing changes from just before the pandemic to one year later based on whether the nonprofit obtained a PPP loan. On average, both groups of nonprofits lost some employees.
- Service maintenance: There were signs that loan recipients were more likely to adapt services during the pandemic, perhaps allowing them to maintain earned revenue streams. But for the most part, we did not find evidence that PPP loans helped nonprofits sustain or expand vital community services, even though groups in our matched sample were equally likely to provide “essential services” at the start of the pandemic.
- Financial health: Our strongest finding of all was that PPP loan recipients were able to increase the coverage of their cash and reserve funds by more than six months on average during the first year of the pandemic, with most of the increase going towards reserves. Non-recipients, on the other hand, increased coverage by just over two months, mostly going towards cash on hand. The two groups were the same on this metric at baseline. It does not appear that loan recipients leveraged budget cuts to invest more in reserves, as they were more likely to maintain and even increase their total budget than non-recipients.
In sum, our results suggest that PPP loans helped nonprofits bolster their reserves (i.e., short-term savings). This is a positive development, because reserves provide financial slack crucial for weathering future disasters. Investing slack resources into reserves may have been a smart strategic decision for nonprofits facing uncertainty one year into an ongoing pandemic. At that point, loan recipients had a year’s worth of expenses covered through cash on hand and reserves on average, which seems prudent. And this use of the PPP funds did not appear to jeopardize loan forgiveness, as the vast majority of loans in our sample were ultimately forgiven.
On the other hand, PPP loans did not appear to measurably promote staff retention or service maintenance. Of course, it’s also possible that more nonprofits – and especially loan recipients – hired staff after our follow-up survey took place in early 2021, especially as PPP loans were forgiven, second loan draws became available, and the pandemic wound down as a result of widespread vaccination. More long-term study is needed in this area.
Where do we go from here?
So, how can future disaster relief programs be more helpful for nonprofits? Our results suggest some guidance for policymakers.
- Better target funds based on organizational size and need. Like with small businesses, PPP loans tracked in our dataset were more likely to reach larger, more professionalized, and more financially diversified nonprofits, instead of those with the least resources and therefore the most in need. Subsequent rounds of PPP did a better job targeting the hardest hit organizations, and these changes should be built into future interventions from the start to enhance the impact of relief funds.
- Provide technical assistance to help smaller organizations – especially nonprofits – access emergency loans through private banks. PPP was designed for businesses, not nonprofits, and delivered through private banks. Therefore, tailored technical assistance was even more necessary for the program to reach less formalized nonprofits. Public funds could support nonprofit intermediaries that provide this type of assistance, like at least one community foundation did in New Orleans.
- Consider other policy tools beyond forgivable private loans. Options like lockdown insurance, revenue replacement programs, wage replacement delivered directly to employees, and expanded government grants and contracts could substitute for or complement loan programs. However, governments must balance this improved targeting with the potential for time lags, exclusive restrictions, and bureaucratic “red tape.”
While the effectiveness of PPP should be debated for years to come, we hope that our study will enhance future investigations. Ultimately, we as nonprofit researchers, leaders, and other stakeholders (and indeed as a society) need to decide if supplementing the reserves of a subset of nonprofits is a worthy return on investment for emergency pandemic relief. Let’s go into the next crisis wiser than the last.
Click here to read the full open access paper: Mumford, S.W., Hutton, N.S., and Riegel, S.M. (2023). Contributions of the Paycheck Protection Program to Nonprofit Short-Term Sustainability. Nonprofit & Voluntary Sector Quarterly. https://doi.org/10.1177/08997640231164538
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