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Nonprofits Have Major Money Problems

A first-of-its-kind report shows that many of the nonprofits delivering social services are underpaid by governments and fail to manage their budgets wisely.

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State and local governments across the country partner with nonprofits to deliver a bevy of social services -- from health care to housing to early childhood education. But many of those nonprofits are struggling financially.

According to a first-of-its-kind report from the largest national associations representing government agencies and nonprofits in human services, governments underpay nonprofits and burden them with costly or time-consuming regulations. Meanwhile, a large share of nonprofits fail to manage their budgets wisely.

The findings come at a time when a recent tax deal in Congress is expected to reduce charitable giving to nonprofits by as much as $13.1 billion a year and deep cuts to federal welfare programs are favored by the White House.

"This isn't just about solving for the financial health of the sector," says Susan Dreyfus, president and CEO of the Alliance for Strong Families and Communities, a national group representing more than 400 nonprofits across the country. "This is about accelerating the human services ecosystem to achieve better results."

Dreyfus and other nonprofit leaders argue that greater investment in services like housing or education can help governments avoid bigger expenses in health care and criminal justice -- but nonprofits' financial troubles hold back the human services field as a whole from providing those cost-saving services. 

The report includes findings from a survey of executives at 40 government agencies and 177 nonprofits, plus a review of three years of tax filings from more than 40,000 nonprofits. Among the key findings: 

  • On average, government contracts cover only about 70 percent of nonprofits' direct program expenses and less than half of indirect expenses.
  • Nearly one in eight human service nonprofits are technically insolvent, meaning that their liabilities exceed their assets.
  • Three in 10 nonprofits have cash reserves that cover less than one month of expenses.
  • Nearly half have a negative operating margin over a three-year period. 
  • About one-third also have no plans in place to deal with financial challenges. 
Though nonprofits aren't designed to yield excess money, they need a financial cushion for times when money comes in late or below projections, for settlement expenses related to lawsuits, for capital projects that cost more than expected and valuable government contracts that don't get renewed. 

The report also notes that governments are often late with payments by months, if not years. In addition, government reporting requirements tie up nonprofit workers who could be spending that time helping clients instead. And both government and philanthropy place restrictions on funds that make it more difficult for nonprofits to respond to their communities' changing needs. 

One of the report's conclusions is that nonprofits need to be more selective about the contracts they pursue, and more assertive when negotiating the terms of a contract with governments. 

As a general rule, nonprofit executives also need to recruit more people with experience in financial and risk management to their boards of trustees, the report says, and hire a chief financial officer if they don't already have one. 

Public-sector leaders are "very aware of these gaps," says Tracy Wareing Evans, the president and CEO of the American Public Human Services Association. But, she added, it will take time to find solutions that work for both the nonprofit and public sectors. The report is an important first step, and last year, her organization co-hosted a national conference on human services for the first time. 

Despite those gaps, much of the report actually strikes an optimistic tone, highlighting positive case studies and providing recommendations for how nonprofits can work better with their government and philanthropic counterparts.

The Colorado Department of Human Services, for example, is praised for reducing regulations by 20 percent. Dakota County, Minn., appears as a case study of local government reporting on outcomes rather than solely on dollars spent and services delivered. Hawaii is cited as a model for helping children and families access a range of services from multiple nonprofits at the same location.

Those examples illustrate some of the report's other recommendations for the field, such as eliminating overlapping and unnecessary regulations, committing to measuring long-term outcomes, and expanding partnerships across nonprofits and government agencies.

"The idea here is we actually believe so much of this is fixable," says Evans.

"[My] hope is that everybody will see themselves in both the reasons why we have the challenges but also will see themselves in the solution."

J.B. Wogan is a Governing staff writer.
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