Pay For Success, Social Impact Bonds
Principles on New Funding Mechanisms Announced
The National Council of Nonprofits today is publishing “Principles for Consideration of New Funding Mechanisms,” designed for use by nonprofits, governments, foundations, and for-profit entities when considering launching pay-for-success initiatives, social impact bonds, or other new funding mechanisms. The new arrangements typically involve private investment to fund experimental social interventions. Governments promise they will pay back the investors with interest or profit if the intervention proves successful in improving outcomes and saving money that the governments would otherwise be expected to spend.
As interest in pay-for-success initiatives and social impact bond programs has spread in recent years at the local, state, and federal levels, these experiments have had mixed results. Research shows that the new funding mechanisms are neither the cure-all remedy for every social problem or public funding short-fall as promoted by some nor the guaranteed disaster in every circumstance warned against by others. Rather, they are nuanced tools that can be appropriate in certain situations.
The Principles from the National Council of Nonprofits can help parties contemplating alternative funding arrangements set expectations and avoid unintended consequences as they seek to address community problems. “Based on the results of several experiments in recent years, the Principles can aid in decisions about how to structure future partnerships – or to determine whether these funding mechanisms may not be right for a particular project or community,” said Lisa Maruyama, President and CEO of the Hawai`i Alliance of Nonprofit Organizations and Chair of the National Council of Nonprofits’ Public Policy Committee in releasing the Principles.
- EEOC Seeking Employment Data: A proposed rule from the Equal Employment Opportunity Commission would require employers with 100 or more employees to submit information about workers’ wages and hours worked, broken down by sex, ethnicity and race, and job category. A company showing wide pay discrepancies could face investigations and lawsuits from the Commission, CQ Roll Call reports. The draft regulation also proposes that employers with 50 to 99 employees would submit only the demographic and job category information. The rule received more than 900 comments from business
groups, unions, women’s groups, and individuals during a public comment period this spring. Bills in Congress (S 2693, HR 5393) would block the rule from going into effect, should the EEOC publish a final rule later this year.
- Federal Transparency Improvements: With little fanfare, Congress and the President agreed on FOIA Improvement Act of 2016, a law to modernize the 50-year-old Freedom of Information Act that is often used by nonprofits, journalists, and others to ensure that the federal government is open for the American people. The new law sets a presumption in favor of openness, denies agencies an exemption for “intra-or inter-agency communications” in most circumstances, requires federal agencies to share their disclosable records in electronic format, and creates an appeal and
mediation process to provide relief when requests for information are denied. See K & L Gates issue brief for more information.
- Updates to Accounting Standards: On August 18, the Financial Accounting Standards Board (FASB) released a long-awaited update to its accounting standards for nonprofits. Focused on providing more clarity and transparency, the update includes changes to the presentation of cash flow information, restricted net assets, and more. The changes are effective for fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, 2018. Nonprofits should work with their bookkeeping and/or accounting functions to prepare their financial systems
for these changes. Accounting Today has additional insights on what the changes will mean for nonprofits. See also a brief analysis by Tate & Tryon.
S&P Predicts States That Will Suffer the Most in Next Moderate Recession
In the event of an economic downturn, the states most likely to suffer significant stress are Connecticut, Illinois, New Jersey, and Pennsylvania. This news from a new Standard and Poor’s analysis is not a surprise to charitable nonprofits in those states that have had to deal with cuts to programs, late or no payments for services performed on behalf of governments, and the offloading of programs and services from governments onto nonprofits. The report found that a majority of the 10 states with the most tax-supported debt outstanding have a limited ability to handle the effects of an economic
downturn, judging by stress tests S&P conducted on their 2016-2017 budgets. Analyzing the data, Governing determines that Florida, New York, and Washington state were the best-positioned for an economic downturn. States in the middle include California, Massachusetts, and Wisconsin.
Massachusetts Governor Protects Nonprofits from New Taxes, Assessments
Massachusetts nonprofits and foundations overcame two challenges to property tax exemption in an economic development bill. The Legislature considered but rejected a provision that would have required tax-exempt entities purchasing property currently on the tax rolls to pay property taxes over the course of four years. A separate provision of the “Job Creation and Workforce Development” bill would have created a mechanism to levy assessments on all manner of tax-exempt
entities. Specifically, Section 36 of the bill would have given taxing powers to private property owners operating as new “community benefits districts,” with the approval of the local government. Governor Baker signed the legislation, but used his state constitutional power to veto Section 36, forcing the Legislature either to override his veto or allow the law to go into effect without the power to levy discriminatory assessments. The Providers' Council and 13 other nonprofits had
sent a letter strongly urging Governor Baker to veto the section.
More Taxes, Fees, PILOTs
- PILOTs: The Washington Post is urging nonprofit universities in D.C. to make voluntary contributions to the local government while acknowledging their tremendous contributions to the community. An August 20 editorial expresses respect for the “long-standing policy” rationale that tax exemption is tied to the missions of nonprofit universities to “seek to serve broad public needs, not provide a return on shareholder investment.” Unlike Boston, where the city and the Boston Globe are demanding that higher education, hospitals, museums, and other nonprofits make “voluntary” payments in lieu of taxes (PILOTs), the Post is suggesting that two universities make a “meaningful contribution” to help “improve overall fiscal equity in the city.”
- PILOTs: The circumstances surrounding an agreement by a nonprofit independent-living facility in West Deer, Pennsylvania provide context to concerns nonprofits generally have when governments seek to take money from tax-exempt entities. A division of Concordia Lutheran Ministries is expanding operations onto land that would undoubtedly be treated as exempt under Pennsylvania law. The nonprofit, however, has agreed to make payments in perpetuity to three taxing jurisdictions (city, school district, county) and the governments will forgo “a potentially long and protracted legal
battle” despite the “strong argument” the city lawyer acknowledges in support of the tax-exempt status of the property.
Government-Nonprofit Contracting Update
Thinking About Administrative (and Indirect) Costs Differently
Pie charts are out when depicting nonprofit costs, if a recent blog posting from the Nonprofits Assistance Fund has any say about it. The standard depiction of three pieces of the pie — administration, fundraising, and programs – gives the misleading impression that administration and fundraising expenses are taking away from the core mission of providing programs. In fact, non-program costs are essential to meeting an organization’s mission, a truth that the federal government now recognizes. See the OMB Uniform Guidance provision mandating reimbursement of indirect costs. The Nonprofits Assistance Fund blog offers an alternative for visualizing costs. “Rather than thinking of our investment in key infrastructure as diminishing our programs, it should be seen as valuable Core Mission Support.” As nonprofits know all too well, failing to include these critical costs as part of the true costs of providing a service results in underfunding and ongoing financial challenges. Ultimately, not treating administrative and indirect costs as equally essential to program
expenses does in fact detract from fulfilling our missions.
Kentucky Nonprofits Express Concern about a Volunteerism Mandate
Nonprofits in Kentucky are expressing concerns over a proposal by the Governor to require individuals to volunteer before they can receive public benefits. Governor Bevin is proposing to change the Kentucky Medicaid program to require able-bodied adults to volunteer in their communities as a condition of continuing to receive benefits. The Kentucky Nonprofit Network (KNN), the state association of nonprofits in the Commonwealth, submitted a letter to the Governor’s office sharing concerns from many nonprofits about the costs and burdens of a mandated volunteerism program for more than 215,000 people,
such as the costs of background tests and training and supervision of people. According to the letter, one nonprofit commented, “We are one of the few nonprofits in our rural, poor community and I can just imagine the amount of calls we will get from folks seeking volunteer hours.” Another shared, we “do not typically take people who are ‘required’ to volunteer, because they don't make good volunteers. Also, 20 hours is A LOT OF TIME. We don't allow people to volunteer that many hours because at that point they could be considered a part time employee, and you have potential legal issues to consider.” “It seems a good idea in theory and I do foresee some positives,"
another nonprofit commented, "but unfortunately it sounds like it may put a bigger strain than it’s worth on nonprofits, particularly smaller nonprofits and/or those that require special skills.” In an interview with the Lexington Herald Leader, Danielle Clore, executive director of KNN, stated, “I think the notion of forced volunteerism is an oxymoron.” Clore added, “Either you want to be there to help or you don’t. And it’s a little insulting, not to mention inaccurate, to say that anyone can do volunteer work.”
Nonprofits Seek Clarity Under Alabama Ethics Law
The Alabama Association of Nonprofits is seeking clarification on how the Alabama ethics law affects fundraising by organizations whose board members include public officials and their family members, the Alabama Media Group (AL.com) reports. Association president and CEO Shannon Ammons alerted the nonprofit state association's members to concerns arising in part from an opinion the Ethics Commission issued last year about a State Representative, who was then director of
the Human Rights Campaign of Alabama. The Commission opinion gives the impression that no public official or public employee may raise funds on behalf of a nonprofit organization. It also appears to hold that "principals" (an ambiguous term about which clarification is being sought) may not make donations to nonprofits following a request from a public official or public employee. The Ethics Commission may take up the request for clarification at its next meeting scheduled for September 1.
Board Advocacy on the OMB Uniform Guidance:
Taking on Governments to Promote Nonprofits and Communities
What’s a community to do when state and local officials fail to follow federal law? In this case, we are talking about governments spending federal funds but not following federal rules expressly designed to protect and promote the ability of charitable nonprofits to serve their communities. An answer is for boards of directors to raise the profile of the problem by calling for state and local governments to honor and obey federal law. In this article we highlight the statesmanship of the boards of a state association of nonprofits in North Carolina and a regional association of grantmakers in New York, but first some background.
The federal law is clear: nonprofits must be paid their indirect costs when performing services on behalf of governments when federal funding is in the payment mix. Specifically, the Uniform Guidance of the federal Office of Management and Budget (OMB) expressly requires pass-through entities using any federal funds (typically states and local governments, as well as some larger nonprofits) and all federal departments/agencies to reimburse a nonprofit for the reasonable indirect costs it incurs in performing services under written agreements with governments. As for how much can be paid for indirect
costs, nonprofits that already have negotiated a federal indirect cost rate must be paid that amount. Nonprofits that have never had a federally approved indirect cost rate can elect to be paid either a de minimis rate of 10 percent of their modified total direct costs (MTDC) or negotiate a higher rate in accordance with federal cost principles.
The challenge for nonprofits is that pass-through entities are not following the indirect costs mandate in federal law, which went into effect in December 2014. As a result, nonprofits and their private funders continue to subsidize governments that aren’t paying their fair share of the actual costs of the services they hire nonprofits to perform.
Which leads to the story of board intervention.
Last fall, the board of directors of the North Carolina Center for Nonprofits went “all in” on promoting full implementation of the OMB Uniform Guidance. By way of a board resolution, the leaders of the North Carolina Center stressed that full implementation of the Uniform Guidance is important to the whole community because it
will “promote consistency, efficiency, cost savings, and community impact.” The resolution commits the organization to “[c]ollaborating with government officials and employees at all levels in North Carolina” to, among other things, “promote full implementation and avoid conflicts, disruptions, and unnecessary added costs and burdens.” The nonprofit state association board members also called on foundation leaders and program officers to weigh in on the debate by leveraging the “unique position of foundations as community leaders to convene and support parties interested in collaboratively addressing the challenges and opportunities of the OMB Uniform Guidance.”
Philanthropy has indeed weighed in. In early August, the board of directors of Philanthropy New York, the association of grantmakers in and around New York City, issued two powerful resolutions in support of full implementation of the Uniform Guidance. The first official statement expresses disapproval over the fact that state and city
government “have not implemented contracting procedures that are consistent with the new rules and continue to develop [requests for proposals] and contracts with overhead rates that are significantly less than those to which nonprofits are entitled by the federal rules.” The statement concludes: “Philanthropy New York urges New York State and New York City to immediately act in compliance with the OMB Guidance on Indirect Costs.”
But the philanthropy leaders didn’t stop with saying “follow the law” as written; they also called for other common sense efficiencies. The OMB Uniform Guidance does not apply to grants and contracts that are funded solely with non-federal dollars. Philanthropy New York’s second official statement encourages the governments to go farther and “integrate contracting procedures that will consistently reimburse nonprofits for their full federally-approved indirect cost rate or, for nonprofits that don’t have one, a negotiated rate in accordance with federal cost principles or
a minimum rate of 10 percent of total [modified] direct costs.” “Allowing nonprofits to submit budgets that include appropriate indirect costs on all contracts would not only advance the spirit and intent of OMB Guidance on Indirect Costs,” the statement explains, “it would also increase predictability in government contracting, and would have the long-term effect of increasing the fiscal stability for the nonprofit sector – an important goal for both the philanthropic and government sectors.”
None of this is to suggest that all governments are failing to follow the binding federal law. Instead of ignoring or resisting federal law, Illinois embraced it by enacting a statute aligning state grants and cost allocation rules with the Uniform Guidance. Recent actions to implement the new state law, including creating a process for streamlining negotiations of indirect cost rates, was discussed by the Indirect Cost Rates panel (Panel 5) of the recent the OMB video presentation “Uniform Guidance: Promising Practices in Implementation.” Last year, the Los Angeles County Board of Supervisors
modeled the way for other local jurisdictions to begin implementing new federal rules by approving a motion instructing the county executive and others to work with local nonprofits and foundations to develop recommendations on how the county will implement the Uniform Guidance.
The board of directors of the associations in New York and North Carolina have added their weight to the demand that the law of the land be followed by their states and localities. These leaders are to be commended. And emulated in boardrooms across America.