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.