Nonprofit Sector

Bridging the Gap: Why New Jersey Nonprofits Must Look Beyond Trenton to Cover Full Costs

September 24, 2018

Governments often share responsibility for providing critical human services, relying on nonprofits as on-the-ground partners for the provision of food, shelter, healthcare, education, and more. These longstanding partnerships, whereby governments contract services to nonprofits to address social issues that are beyond the direct scope of the government, are well-intentioned, but often fall short of providing the level of assistance necessary for nonprofits to function healthily. Too often, contracts do not cover the full costs of a project or payment comes too late, burdening – and sometimes breaking – organizations dedicated to the public good.

Here’s an example. Let’s say a state seeks to provide job readiness training for those who are out of work. Instead of running the program on its own, the government will typically contract this service to local nonprofit organizations that specialize in workforce development. In theory, this could be a healthy, symbiotic relationship. In practice, governments often don’t pay what it actually costs to create the desired outcomes, and years of increased demand and insufficient late payments push many nonprofits to the breaking point.

In our workforce development example, the nonprofit is paid only for the costs allowed under its contract with the state – the “direct” costs. This may include funding for a life-skills coach, job-placement counselor, and materials directly related to the program. It will likely not include the “indirect” costs, or overhead, that keep the nonprofit running, such as the executive director’s salary, the computers and printers that keep the project running, and even rent and heating costs for the building where the program is housed.

In turn, the workforce development organization develops a scarcity mentality. Their programs continue to go underfunded as they are told to be as efficient as possible with limited resources. Under this model, consideration for the full cost of what it really takes to run effective, high-quality programs is a nonstarter.

When NFF began work with a cohort of Newark-based nonprofits as part of the Newark Resilience Initiative, we saw these widespread dynamics at play. According to the National Study of Nonprofit Government Contracting conducted by the Urban Institute, New Jersey ranks first in the country for “payments [that] do not cover the full cost of contracted services.”

In addition to not covering the full cost, reimbursements from government contracts are often delayed. Nonprofit Finance Fund’s 2018 State of the Nonprofit Sector Survey found that of the 21 respondents from New Jersey that receive state government funding, 52% reported their reimbursements were received more than 31 days late.

Delayed government reimbursements, coupled with the failure of contracts to cover the full cost of service delivery, have forced New Jersey nonprofits to tap into their operating reserves, take on debt in the form of a line of credit, and delay payments to vendors and creditors, among other financial management decisions. This ultimately deprives organizations of funds to pursue new opportunities and shield themselves against risk during times of uncertainty.

Beyond the direct financial consequences, there are very real operating implications for nonprofits experiencing delayed payments or contracts that do not cover the full cost. Interruptions in services to the community, turning away clients in need, forced delays in payroll, and not raising salaries to adjust for the growing cost of living are all effects of this issue.

I spoke with the executive director of a human services organization based in New Jersey to gain a deeper understanding of the underfunding dynamic. She lamented the cap on “indirect” costs allowed under one of the organization’s many federal and local government contracts. “Fifteen percent shaved off a $1 million contract is not enough to cover the whole project,” she said. As a result, the organization sees a shortfall in revenue and “runs a deficit.”

In response to delayed payments on government contracts, the organization uses a line of credit to prevent the worst-case scenario of missing payroll. “We’ve been on the brink [of missing payroll]. During the summer, payroll was drawn on the line of credit twice. If the check did not come ‘in the nick of time’ we would have missed payroll.”

When asked about potential solutions, the executive director offered a range of possibilities. As a start, government funders could offer “adjustable contracts that are reflective of the full costs to deliver services” and general operating support for line items such as interest expenses that result from drawing on a line of credit. “If they know this is how nonprofits have to manage, [funders should] allow some cushion” in their grantmaking.

As the state government coffers continue to dwindle while community needs persist, nonprofits are left to do more with less. This begs the question of who will step up when nonprofits in the Garden State wrestle with late payments from the government that do not cover projects full costs?

For nonprofits to succeed in truly promoting the general welfare, more is needed than what the government currently provides. Private donors and the philanthropic community must understand the impact of public funding shortcomings on New Jersey nonprofits and respond with flexible capital and general operating support to level the playing field.

Click here to learn more about the unique story of each participating NRI nonprofit and how they’re serving the Newark community.

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Funder Dialogue: Henry A.J. Ramos, Mauer Kunst Consulting