Abilities United, a 65-year-old Palo Alto nonprofit serving people with disabilities, will merge with a larger Redwood City-based organization as soon as this June, the nonprofit announced this week.
The merger would allow Abilities United and the larger, nearly 100-year-old Gatepath to reduce their administrative and payroll costs, cover two counties and position the organization to become a top-tier nonprofit capable of attracting additional grants and funding, leaders from both organizations said.
The new organization would not cut services, both agencies confirmed. They share a mission of providing services to children and adults with disabilities, including early intervention and training, inclusive education, physical and occupational therapy and community integration through jobs and housing, the officials said.
Gatepath has 11 program sites spanning from Daly City to Sunnyvale and Abilities United has two locations in Palo Alto. The Abilities United locations at 3864 Middlefield Road and 525 E. Charleston Road, including its preschool, would remain and services would be expanded, Gatepath CEO Bryan Neider, who will head the merged organization, said during a phone interview on Friday.
Gatepath has two preschools in Mountain View and Burlingame, and with Abilities United's existing Milestones Preschool, Neider anticipates serving more children. San Mateo and Santa Clara counties have a shortage of 18,000 preschool spots. With its inclusive preschools serving children with and without disabilities, the larger program would provide a service to the entire community, he said.
Neider also anticipates expanding physical and occupational therapy services at the Palo Alto campus, an advantage for parents who don't have to transport their children to another location after school, he said.
Clients between 12 and 22 years old are currently underserved but combined, the smaller programs each agency runs would be larger, allowing staff to write innovative grants, he said.
Both organizations could also gain financial benefits of joining forces. Abilities United, which had a total revenue of $5.3 million for the fiscal year ending in June 2018, included a $222,057 deficit, according to its Internal Revenue Service Form 990 filing. In the same fiscal year, Gatepath had total revenue of $15.6 million and a $566,789 deficit.
But contributions to Abilities United dropped from $2.4 million during the fiscal year ending in June 2017 to $1.6 million for the fiscal year through June 2018. Gatepath, however, received nearly identical donations of $2.85 million during the same consecutive fiscal years.
Although Gatepath showed a revenue loss, its ability to continue to attract contributions could be a key factor to weathering current and future funding storms. Nonprofit organizations, which traditionally run lean operations, are now feeling the effects of the Tax Cuts and Jobs Act of 2017 (TCJA), which has changed the rules on taking contribution tax write-offs.
"The TCJA is really devastating for nonprofits. It removes the incentive for givers' motivation by providing a tax opportunity to give. A very large number of people have now chosen not to itemize their tax returns and are not giving. It's been a very confusing year. People are not motivated because they can't write off Abilities United anymore," board of directors President Jenn Wagstaff-Hinton said by phone on Friday.
Abilities United has seen its revenue yo-yo over several years, as is the case with many nonprofits, Wagstaff-Hinton said. The previous fiscal year the organization had a total revenue of $6.4 million and a $842,201 surplus, for example.
But other environmental factors are also playing havoc with nonprofit organizations. The price of living in the Bay Area is a major factor in cutting into revenue margins. Smaller organizations have a harder time finding employees and doling out wage increases. In the fiscal year ending in June 2018, Abilities United shelled out $4.5 million in salaries or roughly 85 percent of its revenue. Gatepath paid $12 million or 76 percent, according to the IRS filings. Both organizations said that combining their administrative and payroll functions could free up money for programs and to pay higher wages that would attract and retain employees.
"We pay minimum wage. People can work at Starbucks and make more money than at Abilities United," Wagstaff-Hinton said.
Reports by the Stanford Graduate School of Business' Alumni Consulting Team for Nonprofits and the Taproot Foundation, which looked at strategic options for nonprofit foundations, including mergers, spurred Abilities to make the final decision, she said.
One month after the disappointing IRS filing, at the August 2018 board meeting, Wagstaff-Hinton proposed merging with another organization with the same mission. After a search, the board whittled the list down to two organizations. By December, Gatepath and Abilities United signed a letter of intent and in January, both boards decided they would be a good fit, she said.
"We could have survived, but we want to survive. The needs are growing and the funding is shrinking," she said.
"The cost of doing business in California has increased during the last decade while the funding for California’s disabilities system has been reduced by more than $1.1 billion," representatives from both organizations said in a press release.
"The resulting economic pressures have created a system-wide crisis seriously impacting some of California's most vulnerable residents. Like other Bay Area nonprofits, Gatepath and Abilities United are addressing the harsh reality of these financial pressures, ensuring continuity and quality of the services they provide."
Neider said under preliminary calculations only about six positions might be cut. Abilities United is working to find other positions outside of administration for employees who face layoffs. Although the full merger won't take place until the end of the current fiscal year ending June 30, the agencies expect to begin the transition in April, he said.
Leaders of both organizations said they are excited by the changes.
"I've always admired what they do and we have similar programs. We collaborate on a lot of areas," Neider said. Having a 300-person organization would make their mission more powerful and help attract funding, he said.
"We can put more resources into direct-care programs rather than into overhead," he said.