“I’m really concerned about agencies closing right now,” says Carmen Schulze, executive director of Missouri Coalition of Children’s Agencies (MCCA), Jefferson City, Mo., an Alliance state association member. “The gap between what the government pays and the actual cost of service is increasing, and almost every avenue to fill the gap is closing down.”
In a recent survey of the MCCA membership, which includes several Alliance members, Schulze found that almost 100 percent rely heavily on government funding. A few are reimbursed 100 percent for some programs, but others receive as little as 40 or 50 cents on the dollar.
“Can you imagine the state awarding a contract to build a bridge and telling the winning bidder, ‘You’ll have to come up with half the costs yourself?’ Yet that’s just what they do in awarding human service contracts,” Schulze says.
Even in the best economic times, government funders typically expect nonprofit organizations to cover the program administrative costs, at a minimum. Over the past few decades, reimbursement rates as compared to actual costs of providing services have steadily eroded.
Now, amidst a significant economic downturn, states increasingly are shifting their budgetary problems onto the nonprofit organizations that serve the country’s most vulnerable populations. The social safety net is being strained to the breaking point.
“When the government initially began partnering with private nonprofit organizations to deliver human services, we didn’t anticipate that providers would later have to subsidize these services to the extent that their sustainability was jeopardized,” says Elizabeth Carey, senior vice president and COO of the Alliance. “Nonprofit organizations no longer can shoulder this burden. They no longer can provide ‘business as usual.’”
Widening Gap is Untenable
Alliance member Christian Home Association–Children’s Square USA, Council Bluffs, Iowa, relies on government funding for about 86 percent of its $8.8 million budget. The organization is reimbursed an average of 80 cents on the dollar.
Earlier this year, the state approved a rate increase for providers of psychiatric residential treatment for children, a Medicaid funded service. This increase brings reimbursement more in line with costs. However, because of an across-the-board budget reduction that came down in early October, the rate is b
eing scaled back by 5 percent. Still, the net result will involve an increase over current levels.
“Our decisions about government contracts are based on mission and whether we can subsidize the program to the level of need,” says Carol Wood, president and CEO of Christian Home Association–Children’s Square USA. “The reality is this: we know that our sustainability requires us to develop alternative funding streams as well as supplement resources.”
Another member, Lutheran Child & Family Service of Michigan (LCFS), Bay City, Mich., has experienced steady growth in government funding over a number of years. More than 90 percent of its $21 million budget is derived from government funding, with reimbursement at about 92 percent of costs.
As a result of expanded contracts and a merger, LCFS grew 25 percent in 2008. The organization had planned for about 5 percent growth annually. Then the recession hit.
Because of Michigan’s economic struggles, which yielded reduced revenue for the state, the agency lost government funding for some family preservation programs. It also voluntarily relinquished a contract in one of its residential care programs because of decreased occupancy and slowing referrals. Meanwhile, ever-greater delays in reimbursement mean LCFS sometimes has two or even three payrolls due before it is reimbursed for services already provided.
"We’ve been operating with deficits and our net assets are going down,” says Robert Miles, president and CEO of LCFS. “The government, as a result of decreasing revenue, is changing its buying patterns, especially when it comes to residential placements. Our pension plan is underfunded as a result of market losses, and our small endowment fund also shrunk. Total gift dollars from individual donors has decreased about 20 percent. Foundations are telling us they’re not taking on new projects. The result is that we’ve had to secure some short-term loans and remortgage some property. Even with these adjustments, our financial institution lowered our line of credit from $1.5 million to $1 million.”
Giving USA 2009, an annual report on American philanthropy, found that contributions to charitable causes declined 2 percent in 2008, the first decrease since 1987. In the human services sector, giving dropped 15.9 percent.
“Revenue is lagging, but the need for services is increasing. The tough thing is to decide what we need to stop doing, as well as identify wha
t we need to start doing or start doing differently,” Miles says. “I don’t think we can simply cut our way out of these deficits if we’re going to be a viable organization going forward.”
Heather Feltman, president and CEO of Alliance member Lutheran Social Services of New England (LSS), Wellesly, Mass., agrees. “We have to make sure we maintain certain staffing levels and provide high quality service. If the government makes more cuts, they’re really buying more risk. We don’t want to be part of that.”
Cash Flow Crisis
Even in the most efficient system, Medicaid and Medicare payments to service providers take about 45 days. With payroll due every 15 or 30 days, some organizations must tap their operating reserves or lines of credit to manage cash flow.
By the spring of 2009, this standard practice had given way to crisis. An April 2009 survey by the joint public policy office of the Alliance and United Neighborhood Centers of America (UNCA) revealed that, since the recession, members were experiencing dramatically increased payment delays. Most were the result of states struggling to pass budgets with unprecedented revenue shortfalls.
The public policy office report found that nonprofit organizations’ already thin operating margins were being pushed to the breaking point by funding cutbacks, increased operating costs, and payment delays. Meanwhile, their ability to tap short-term alternative funding declined markedly. In a tight credit market, many financial institutions consider nonprofit organizations to be poor risks.
Some organizations have used the maximum amount available on their lines of credit. Many have had their lines of credit reduced and interest rates increased. Operating reserves, if they exist, were quickly depleted; and the more the reserve is drawn down, the less interest it earns and the narrower the cushion the agency has to manage cash flow.
During the spring, the Alliance and UNCA joined Independent Sector in asking the U.S. Congress to allow the federal government to make payments for social services directly to nonprofits, rather than through states. The petition also sought a $15 billion bridge loan program for nonprofits that can no longer tap banks for short-term loans. Despite numerous conversations and lobby visits with legislators, neither houses of Congress passed the measures.
“The public policy office is doing critical work in bringing these issues to the forefront and maintaining relationships with key decision makers in the federal government,” Schulze, of MCCA, says.
Stimulus Dollars Create Opportunities
In the weeks leading up to the passing of the American Recovery and Reinvestment Act, the public policy office also lent its expertise to the debate about the stimulus package. Public policy office staff advocated for provisions that would benefit members and, once the law passed, the office worked with a consultant to identify what opportunities existed for members.
It's clear that the precarious privatization contracting model upon which most human service organizations rely is no longer financially tenable, says Peter Goldberg, Alliance president and CEO.A follow-up to this article will provide an in-depth look at the future of human services financing. |
Months after the law’s passage, federal stimulus dollars, tax credits, and other new funding sources are presenting new opportunities for some organizations.
Family Service Agency of San Mateo County received stimulus money to provide additional internships for older workers.
LCFS is ready to begin construction on an affordable housing project in Detroit, but it is waiting for the tax credit the state approved to be sold. The project would reap LCFS about $500,000 in a one-time developer’s fee.
Yet, these revenue sources only serve as a bandage. Many organization leaders say they’re concerned that harder times might be ahead as stimulus dollars run out, state budgets grow increasingly tight, and more families experience life in poverty. Still, some see a positive amidst the recession: the crisis has thrown funding disparities into stark relief.
“There is no better time to educate our county, state, and federal partners about the critical gap between funding and actual costs,” Schulze says. “Donor support should enable us to build capacity and move forward to a new level of practice. Instead, because of the ever-increasing funding gap, nonprofit agencies are focused on day-to-day survival.”
Strengthening Development
Alliance members are also developing new ways of doing business so they can sustain services in this challenging economic environment. They are diversifying referral sources and funding streams. They are exploring partnerships, back-office collaborations, and even mergers.
Many are restructuring operations and administration. Open positions are left unfilled, salaries frozen or reduced, and employees asked to pay a greater share of their benefits. Most agencies have delayed or even eliminated plans for program or facility expansion.
Almost universally, organizations say that donor development is a key strategy in these challenging times. Some Alliance members even report that they are adding staff in development and marketing. They are also expanding efforts to build relationships, educate donors about the exceptional need, and more closely engage community residents in the agency’s mission.
LCFS in Bay City, Mich., shifted the focus of its fund development efforts so that it now seeks smaller gifts from a greater mass of donors. Although overall giving from individual donors is down about 20 percent, the number of total gifts has greatly increased.
Christian Home Association–Children’s Square USA is strengthening its planned giving program and looking to its foundation to help meet its current and future needs. “Rather than cutting programs, we’re focusing on how we can grow our way out of this dilemma,” Wood says.
The organization also is focusing on its critical relationships with the state department of human services and other key decision makers. “The work of the Alliance in civic engagement has strengthened our advocacy efforts,” Wood says. “The knowledge and relationships I’ve gained help ensure that we’re not chasing dollars, but accessing those dollars to support where we want and need to go.”
Brutal Resource-Allocation Decisions
Across the nonprofit sector, human service providers are scrutinizing existing programs, cutting costs, and achieving efficiencies wherever possible. Still, many organizations have had to cut programs and lay off staff. In making these difficult decisions about how to allocate ever-scarcer resources, agency mission and the impact on society’s most vulnerable are paramount.
LSS of Wellesly, Mass., which operates in six states and has a $72 million budget, was well into a major restructuring when the recession hit. The restructuring has enabled LSS to take advantage of its size by leveraging fixed expenses, better managing receivables and payables, and achieving other operational efficiencies without taking on any increased risk or liability.
LSS also instituted a monthly business review process for all lines of service. “The margin is so thin; we have to manage very closely,” Feltman explains. “The business review ensures we don’t have any surprises and that we can take quick action if needed.”
On the opposite coast, Family Service Agency of San Mateo County decided to pursu
e only government contracts that pay both the full program and administrative costs. “We no longer have the luxury of taking on anything that doesn’t help our bottom line,” Wishard says.
The agency is focusing on sustainability. Based on its areas of unique expertise and its financial vulnerabilities, the agency made hard decisions about what programs it could and couldn’t afford to keep. It closed a program it had operated for more than 30 years and laid off staff. At the same time, Family Service is tapping into new funding sources, and the agency is expanding and enhancing other programs and services.
Wishard says the decision-making process was brutal, but she sees a silver lining. “Because of the tight economy, this was a tremendous opportunity to find greater efficiencies and develop new systems that, in the long run, will be helpful for our organization,” she says.
When the economy improves, Wishard is confident the agency will be well-positioned for growth.
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