Prices are up. So is the need for services. How nonprofits are coping.

With inflation at a 40-year high and no quick end in sight, companies in the United States are adjusting to a new normal. Many are passing along higher prices to customers, rethinking products and services, and negotiating with suppliers, while upping their salaries in a tight labor market.

For nonprofits that face the same inflationary pressures, that adjustment is much harder. Unlike for-profit businesses, they can’t simply raise prices or switch out unprofitable product lines. And labor shortages are increasingly forcing them to compete with private employers to hire and retain staff.

“McDonald’s can charge an extra nickel for their fries,” says Isaac Seliger, a Phoenix-based consultant who assists nonprofits with grant applications. For his clients, “the revenues don’t go up. But the costs go up.”

Tax-exempt nonprofits provide a myriad of services, from early education to home health care, and contribute a significant share of economic output. The pandemic drove up demand for their services, even before prices began to spiral upward, squeezing budgets in ways that many nonprofit executives say are making it hard to keep pace with rising costs, particularly for social services tied to fixed state and federal reimbursement rates.

Across the country, some nonprofits are scaling back or opting not to expand in-demand services because of staffing shortages and other cost pressures, which could further exacerbate the yawning socioeconomic divides that the pandemic exposed.

For Habitat for Humanity International, which builds affordable housing around the world, the biggest inflationary pressure in the U.S. is on land prices, says chief executive Jonathan Reckford. Land is by far the largest single cost for homebuilders.

Lumber and other materials are also in short supply, though a recent U.S. decision to roll back tariffs on Canadian softwood imports could help, he notes. Then there are shortages of skilled labor, from plumbers to electricians to drywall and roof installers. “All of the key inputs are going in the wrong direction for us,” he says.  

The net result of all these higher costs is that Habitat is building fewer new American homes at a time of acute housing insecurity, to the frustration of Mr. Reckford, who has led the Atlanta-based nonprofit since 2005. 

Habitat’s home completions in the U.S. have fallen by 15% since 2019. In the year to June 30, 2021, the organization built 3,276 new homes, down from 3,841 in the same period in 2018-19.

“In historically affordable markets like Atlanta or Nashville or Dallas or Charlotte, where we could build lots and lots of houses relatively affordably, we have seen extraordinary inflation in pricing in those markets. And that obviously pushes more and more families’ housing needs out of reach,” he says.

Given higher land prices, Habitat has pivoted to upgrades on existing properties for low- and moderate-income residents. “We’re seeing growth in repairs and renovations, where we’re making housing safer or more sustainable for families,” says Mr. Reckford.

Still, there’s no solution to affordability without expanding the stock of available homes to meet demand. “Housing is a big driver of why inflation is going so hard right now. If we could increase the supply of housing, that would actually moderate inflation,” he says. Instead, the U.S. housing market has been ignited by rock-bottom mortgages and federal stimulus checks. 

Inflationary pressures beyond housing

COVID-19 relief dollars have filled gaps in state budgets that nonprofits rely on to pay for social services, such as behavioral health counseling and after-school programs. But nonprofit executives know that the federal spigot won’t stay open forever. And they also face the challenge of how to budget for periods of high inflation and labor shortages. 

Mr. Seliger recalls the challenge of running a nonprofit in California in the late 1970s when grant proposals had to scale up budgets annually in anticipation of higher costs. Without this adjustment, multiyear grants lose their buying power, making it impossible to deliver services.

“They have no way of increasing their revenues as costs rise. They’re tied to fixed grants or service fees,” he says. 

In some cases, state governments close the gap: Massachusetts recently raised its reimbursement rate for food, says Valerie Frias, chief executive of Ethos, a nonprofit that provides at-home meals and care to thousands of older adults and residents with disabilities in Boston.

That helps Ethos cover higher prices from its suppliers. Meat prices are up. Fresh produce costs more. “These are staples in the meals that we do,” she says, noting that meals must be both nutritious and culturally appropriate for a diverse community.

Faced with higher costs, member-based nonprofits like Audubon societies and the National Rifle Association have the option of raising dues. Some nonprofits have endowments they can tap in emergencies, though most don’t have this flexibility.

Courtesy of Cradles to Crayons

Cradles to Crayons volunteers and staff pack school supply kits at The Giving Factory in Boston in preparation for the first day of school. When schools closed in 2020, demand spiked for diapers and school supplies, says Lynn Margherio, who runs the nonprofit.

When schools closed in 2020, demand spiked for diapers and school supplies, says Lynn Margherio, who runs Cradles to Crayons, a nonprofit that provides essential items for low-income children in Boston, Chicago, and Philadelphia. That led to a scramble to deliver more than 1 million packages to families, a huge increase from previous years. The Boston-based organization relies on individual and corporate donors. “Our community of supporters really stepped up when we needed them,” she says via email.

Inflation adds another wrinkle: Clothes and shoes now cost more. The average family already spends $740 a year on clothing per child, and inflation adds another $45, which is “more than the average cost of a winter coat or boots,” says Ms. Margherio.

That winter coat is even more essential this year, since schools in cities like Boston are keeping windows open to prevent viral spread, says Ms. Margherio, who founded Cradles to Crayons in 2002.

Staffing: An uneven playing field

Perhaps the biggest challenge for nonprofits, small and large, is staffing. Many can’t compete on wages with private employers, particularly for lower-paid positions. Amazon warehouse jobs now start at $18 an hour. Costco offers $17 an hour to new recruits.

Another factor is the expansion of remote work, says Ms. Frias, who is trying to hire more case workers and meal supervisors. Some nonprofit staffers with young kids prefer to work from home, both as a way to keep down childcare expenses and to take a break from the frontline stress of social services. 

She can understand why. “This is a community that’s been devastated by the pandemic. To be [working] in that community, day in day out, takes a toll,” she says.

Gary Linnen runs the Washington, D.C.-based nonprofit Peer Forward, which trains low-income teenagers to help their peers prepare for college. After two years of pandemic disruption and school closures, which led to a sharp drop in college applications from disadvantaged communities, he’s now trying to budget for the next few years and bracing for cutbacks.

Peer Forward contracts with high schools and colleges to provide services, but much of its funding is philanthropic. Rising costs mean that it can’t serve everyone, says Mr. Linnen, who became chief executive in May 2020. “The challenge is that individuals that get affected are in the smaller communities who need it the most.” 

Tight budgets make it harder to compete with other employers: Peer Forward recently posted two full-time jobs, and got two applications. “Normally I’d get 30 or 40 applicants for these jobs,” he says.

Mr. Linnen also needs to retain his current workforce of 20, who all work remotely. He paid everyone a $1,200 Christmas bonus and tries to keep tabs on how staff are feeling. The bonuses are appreciated, he says, but they only take you so far in a competitive job market. “We have young staff, and they have counterparts who are making more money,” he says. 

For some nonprofit staff, the mission is more important than the salary, says Mr. Seliger. But 9 times out of 10, “it’s a job. They will leave and go work for Costco” for higher pay, he says.

Habitat, which describes itself as a Christian housing ministry, may be unusual in that regard. “The majority of our folks could make more if they work somewhere else,” says Mr. Reckford. For some lower-paid workers, though, it’s getting harder to choose mission over money.

“The larger the gap, the more pressure that creates,” he says, “because we have people who want to be with Habitat for the mission. But their costs are going up.”