The next couple of years will test the resiliency of the nonprofit sector and may require tough decisions from the boards, managers and supporters of its 5,000 organizations in Hawai'i. Many nonprofits across the country are already feeling some of the effects of the turbulent economy, and the entire sector is bracing for a possible recession and the number of challenges that come with it.

The economic woes on the Mainland, coupled with the sudden myriad of job cuts and business closures, have forecasters reassessing their views on our local economy.

A recent report by the University of Hawai'i Economic Research Organization predicts that our economic malaise will continue for several years before we see moderate economic growth. Recalling the challenges that the sector faced during past economic downturns is important to be able to prepare for and withstand the predicted storm.

First, contributions decline in a recession. Indiana University's Center on Philanthropy studied the last five national recessions since 1973 and found that giving dropped an average of 1.3 percent compared to a rise of 4.3 percent during non-recession years. When asked how their organizations will fare in 2008, nonprofit respondents to a survey conducted by the Association of Fundraising Professionals found that only 58 percent of fund raisers said they expected their organizations to raise more money in 2008 than in 2007 — the lowest level of optimism since 2002, when gifts to charities fell when the stock market declined after the dotcom bubble burst and the Sept. 11 attacks.

In a similar vein, the Hawai'i Community Foundation conducted its second household giving study in 2002 to determine the impacts on local giving after the stock market plunge and Sept. 11. Although the study concluded that Hawai'i's people are incredibly generous (nine out of 10 households give), it also showed that affluent household giving declined. In particular, households with older individuals facing reduced retirement savings and apprehension about the future were more inclined to hold off on making significant charitable gifts.

Our other studies have found that contributions account for more than 60 percent of revenue for small and medium nonprofit organizations. With belt tightening going on everywhere, nonprofits that rely heavily on support from individuals, foundations and corporations may need to reassess their current fundraising plans.

Second, the greater challenge facing most organizations will be government cuts to the sector in grant-in-aid as well as reduction in service contracts. Well over half of the total revenue for the nonprofit sector in Hawai'i comes from government sources, and the most significant revenue growth for nonprofits since 2002 came from government program services and contracts.

At a national level, the Center on Budget and Policy Priorities reported that federal grants in fiscal year budget 2008 cut grants to state and local governments by $12.7 billion, or 5.1 percent from fiscal year 2006 to 2008. In addition, discretionary grants to state and local governments would decline by $3.9 billion from 2006 to 2008. The proposed fiscal year budget 2009 cuts are more prominent. Grants would decline by $18.9 billion or 7.4 percent from fiscal year 2008 to 2009—significantly lower as a percent of the economy since at least 2001. In addition, our just-concluded legislative session cut $22.6 million in temporary assistance to needy families spending, and for the first time in 10 years, all grant-in-aid funding was cut from the state's operating budget.

These actions may lead to nonprofits reducing services, closing critical programs for the community, and staff layoffs. Ironically, the demand for services offered by nonprofits often increases in tough economic times, especially for health and human services agencies that are most reliant on government funding.

During unstable times, as well as in everyday life, many of us count on the nonprofit sector to provide child care, food, shelter, education, culture and arts and places of worship. In many cases, they deliver services more efficiently than government and can stretch government funds.

We must remember that the services and benefits these organizations provide are the foundation of what makes our community work.

In the next few columns, we will look at revenue strategies and other ways to weather the storm.

Kelvin Taketa is president and chief executive officer of the Hawai'i Community Foundation. E-mail him at kelvin@hcfhawaii.org.