Government: Contracts and Grants

National Council Special Report: State Budgets Threaten Nonprofits

As state governments across the country grapple with severe budget deficits, many are placing extraordinary burdens on nonprofits. On March 16, the National Council of Nonprofits released a special report, State Budget Crises: Ripping the Safety Net Held by Nonprofits, documenting how states are delaying contract payments to their nonprofit partners, slashing funds for essential programs, and imposing new fees and taxes on 501(c)(3) organizations. The report encourages leaders of governments, foundations, and nonprofits to work together to address challenges posed by state budget crises.

The Congressional Research Service (CRS) recently found that “in addition to funding cuts, states apparently have been delaying payments for services they have contracted with nonprofits to provide.” CRS cited a national survey documenting that 35% of responding nonprofits reported declines in overall government support and more than a third reported delayed payments from the government. The CRS warned that “it appears that governments, particularly state governments, may be contributing to the financial difficulties of nonprofit organizations, even to the point of not paying for contracted services.”

When governments withhold payments to nonprofits, it hits especially hard because contrary to common lore, the nonprofit sector does not get most of its income from donations. In fact, that same CRS report showed that the nonprofit sector gets only 12% of its operating revenue from private donations. The sector earns 49% of its revenue through fees for services (such as tuition, theater ticket sales, or paying fees to the nonprofit hospital) and earns another 29% of its revenue from government payments for contracts (sometimes called grants). (Every nonprofit has a unique funding stream, so these sector-wide percentages do not apply to every individual nonprofit.)

Withheld payments – even if delayed for just a short time – cause all sorts of harm. A recent survey of nonprofits in New York found that 66% of nonprofits had been forced to take out a line of credit due to late payments from government agencies, thus not only diverting valuable staff time, but also adding direct financial burdens on nonprofits. Other nonprofits, from an affordable housing provider in Louisiana to a homeless shelter in Northern California, have been forced to trim their workforce or withhold payments to auditors and other staff to cope with the budgetary impact of late government payments.

But delayed payments are not the only government contracting problems plaguing nonprofits. Consider these additional strains being encountered more frequently:

• Late contracts. Last year, New York State Comptroller Thomas DiNapoli investigated state agencies to see how promptly they were approving contracts. His report found that agencies in New York are late processing contracts around 87% of the time.
  • (UPDATE) Comptroller Thomas DiNapoli recently recommended several key changes to state contracting practices. Among other recommendations, Mr. DiNapoli called for expedited contract payments, faster reviews of requests for proposals (RFPs) and efforts to spur greater private lending to nonprofits.

• Less than full reimbursement. Nonprofit homeless-shelter providers in New Jersey, where the Governor recently declared a fiscal state of emergency, are discovering that state and local agencies are only reimbursing them for a portion of their agreed-upon contracts.

• Withholding of funds. In North Carolina, a recent legislative report recommended withholding 2% of every grant to nonprofits to pay for state oversight. Curiously, while the report notes that nonprofits receive only 4% of all grants issued in North Carolina (with local governments receiving 88% and the University of North Carolina system taking 7%), the report offers no rationale why it wants to take away 2% from every nonprofit in the name of oversight, but not withhold a penny from the $15.3 billion in grants the state gives to governmental entities.

What Nonprofits Can Do

Individual for-profit businesses do not challenge harmful government policies and practices; instead they gather together in Chambers of Commerce to raise their voice. Similarly, nonprofits can amplify their voices by working together through their state nonprofit associations. Find your state association