Community-based organizations (CBOs) all over the country are critical partners with government and philanthropic institutions in the provision of housing, mental health care, job training, family support, child care, and other services and assistance for Americans young and old. CBO staff work tirelessly every single day, and in some cases 24 hours a day, to make sure the needs of community members are met.
The Alliance for Strong Families and Communities and the American Public Human Services Association just published a groundbreaking report focusing on the economic and social impact of CBOs in our country today. Their findings are alarming given the important role CBOs play in our city, region, and nation. Here are the report’s highlights:
- On average, government contracts currently cover only about 70% of CBO/nonprofits’ direct program expenses and less than half of all indirect expenses;
- Nearly one in eight human service CBOs are technically insolvent, meaning their liabilities exceed their assets;
- Three in 10 nonprofits have cash reserves that cover less than one month of expenses; and
- Nearly half of nonprofits have a negative operating margin over a three-year period.
In addition to government not paying its fair share of indirect costs, the report also notes that governments are often late with payments by months and, in some cases, years. Excessive government reporting requirements tie up nonprofit workers whose time would be better spent engaging their clients. Government and charitable foundation restrictions on funds also add burdens to the CBO sector. This is all happening at a time when charitable giving may go down due to the new tax laws.
Latin American Youth Center (LAYC), in the District of Columbia and Maryland, is a good example of these CBO challenges. For 50 years LAYC has been transforming the lives of low-income young people and their families. LAYC has risen to national prominence as an award-winning network of community- and school-based sites, and staff have guided thousands of low-income youth to better opportunity while creating pioneering program models and public charter schools. LAYC maintains a commitment to outcomes, is innovative, and strives for meaningful partnerships. Despite all of LAYC’s programmatic successes, the financial issues noted above hinder its work.
As a multiservice organization, LAYC manages over 40 federal, county, and state contracts annually. Few pay LAYC’s federally recognized indirect rate, which, at 17% of direct costs, is still nine percent below the actual overhead costs of the organization. Some contracts pay zero percent indirect, while others pay only a bit more. In FY18 alone, LAYC has lost over $600,000 in indirect cost payments so far. These expenses represent the true cost of providing human services and are costs that we must make up through private fundraising from individuals, corporations, and foundations. From the minute LAYC accepts a new contract, if our full indirect cost rate is not paid, we are losing money. We must use coveted general support dollars to cover the gaps that government is not paying. It is important to note that while a CBO is a nonprofit, it still must cover its costs and act as a for-profit business in this sense. Businesses that are working with local governments simply include their indirect expenses with their overall costs. Rules and regulations do not allow CBOs to do the same.
LAYC is a valued and trusted partner with local government, philanthropies, educational institutions, other CBOs, and the private sector. Yet we are part of the 33% of US nonprofits that do not have cash reserves. Any reserve we fundraise is almost immediately used to cover late payments from government and/or our indirect costs deficit. For years we have navigated the complex, and often confusing, contracting processes with local government. The cost in staff time is almost incalculable. One small step in addressing these challenges would be getting our fair share of indirect costs for the important and valuable work we are doing.
There is some good news. Recently, Maryland State Senator Cheryl C. Kagan introduced Senate Bill No.1045 requiring the state to pay a CBO’s federal indirect rate, if there is one, or no less than 10% of direct costs if there is no negotiated rate. As LAYC’s president & CEO, I am working with the DC Office of the City Administrator to address this issue and with Ward 1 City Council Member Brianne K. Nadeau to submit similar legislation in the District of Columbia. Now we need to roll up our sleeves and get this legislation passed. Fair compensation of indirect costs will relieve undue financial stress and better enable CBOs to serve the families who need us.