by Joseph Coletti
Senior Fellow, Fiscal Studies, John Locke Foundation
Government has crippled community-based human services providers. A devastating new report by a coalition of community human services providers and government health and human services agencies details the ways government funding, regulations, service demands, and slow payments get in the way of providing help to one another through formal organizations.
As much as 75 percent of the $200 billion in annual revenue for nearly 218,000 human services community-based organizations (CBOs), or what we normally think of as the nonprofit sector, comes from government. Payments to health and human services providers account for 86 percent of government payments to nonprofits. Their reliance on government funding forces these organizations to deal with redundant audits, conflicting mandates, and increased litigation risk.
Researchers examined 200,000 publicly available tax filings from 40,000 human services CBOs for A National Imperative: Joining Forces to Strengthen Human Services in America. They found that half of them have been losing money on operations for three years, 30 percent do not have enough cash in reserve to cover less than a month of expenses, and 12 percent are “technically insolvent, with liabilities exceeding assets.”
Executives said cutbacks in federal or state and local funding were the biggest concern. But the funding they get is fraught with challenges. CBOs have government contracts that cover between 30 and 44 percent of indirect expenses, leaving the CBOs to generate the rest of the money on their own. But social workers spend up to 75 percent of their time filling out paperwork, which leaves less time to provide services or raise money. The CEO of one organization interviewed for the project said his organization had been waiting six years for a $500,000 payment from the government. This is not an isolated incident. Illinois alone owes $11 billion in overdue bills to nonprofits and other vendors.
In addition to the financial risk, CBOs face litigation risks. Governments have sovereign immunity, but even those that receive 100 percent of their funding from government do not. As a result, their liability insurance rates continue to climb. Local governments may impose caps on the use of funds that make it difficult to meet federal service-level obligations. Like any other business, these providers also deal with excessive regulation. A human services CEO quoted in the report said, “The desire to just do something trumps any sort of logic…No one takes a step back to figure out whether more regulations will actually make a difference, other than making it harder and more costly for us to serve our customers.”
The local focus of community-based organizations further hamstrings their ability to get out from under their financial risk. Of 218,000 organizations, 56 percent of them have less than $250,000 in annual revenue. Just 10,000 of them (4.5 percent) earn more than $10 million in a year, accounting for 60 percent of total revenue for the sector. While 14,000 profit-seeking companies merge each year, only about 50 CBOs do.
But all is not lost. The report was commissioned by the Alliance for Strong Families and Communities, an association of nonprofit human services providers, and the American Public Health Services Association, an association of state and local government agencies. With sponsors like these, one would expect additional funding to be a top recommendation. Instead, they focus on making more productive use of the funding already available.
Beyond the standard call for a commitment to long-term outcomes, innovation, and partnership, governments and nonprofits regularly pledge to do better in each of these areas. Reports like this are less likely to call for better financial management practices and policies or less burdensome government regulations.
Among the concerns, nonprofits too often take a loss on contracts because they pursue revenue with little appreciation of the actual cost of providing services. Governments acknowledge that they try not to pay the full cost of services even as they spell out specifics of implementation for providers with little flexibility.
Maybe the most striking recommendation is one for “elimination/restructuring of regulations that create compliance burdens in excess of their value, to reduce expense levels for human services CBOs.”
Privately-managed local human services providers can avoid some of the regulatory burdens by seeking more private financial support. More diverse investors can fund more innovative approaches to social challenges. Governments and nonprofits have diagnosed some of the problems and solutions in this latest report. A true partnership will require more independence for nonprofit providers.