This new report shows how bad New York City has been at contracts

New York City Hall
New York City Hall
Zach Williams
New York City Hall

This new report shows how bad New York City has been at contracts

But the report also says four ways to make things better.
August 27, 2018

Over the years, SeaChange Capital Partners has been approached by many nonprofits literally pushed to the brink – forced to stiff vendors, furlough staff, max out credit lines – while waiting to get paid by New York City. But the city’s contracting process still has the ability to shock us.

A recent report from the Office of New York City Comptroller Scott Stringer showed how consistently late the city’s contracts actually are. It also raised some additional questions for us about the financial burden this creates for nonprofits. So we asked the Comptroller’s Office for some additional data, which we’ve spent the last few weeks analyzing.

The amount of spending on contracts is a thorny political issue – there is only so much money to go around – but paying on time seems much more straightforward provided the necessary political will. If not now, when?

Our resulting report – New York City Contract Delays: The Facts – may not shock nonprofits familiar with doing business with the city, but it still makes for sobering reading. Here are the main takeaways:

  • Social service contracts registered in 2017 were an average of 210 days late; the odds that a contract was registered on time was 9 percent; within 90 days (33 percent), within six months (50 percent); and within one year (81 percent). A full 19 percent of contracts remained unregistered after a year.
  • Nonprofits faced delays on multiple contracts: 84 percent experienced registration delays on all of their city contracts; 10 percent had some delayed contracts; only 6 percent had no delayed contracts. One nonprofit had 26 delayed contracts!
  • Nonprofits beginning service on the start date would have completed 29 percent of the work under contracts before they were registered. (This was 78 percent for one-year contracts.)
  • 223 contracts imposed individual cash flow burdens over $500,000 because of the delays, 119 imposed burdens over $1 million, 57 over $2.0 million and 17 over $5 million. Eleven organizations faced total burdens of over $10 million because of multiple contract delays. Delays of this magnitude pose an existential threat to even the best run nonprofits.
  • The total burden imposed on all nonprofits due to registration delays in 2017 was $675 million: $662 million in negative cash flow associated with the expenditures from the start day to the registration date and a further $13 million in imputed financing costs, which come directly out of the nonprofit’s precious unrestricted net assets.

Although nonprofits are not legally entitled to payment under a city contract until it has been registered, they have little choice but to begin service from the start date. And the ability of mission-driven nonprofits to demand better treatment by refusing to do business with the city is limited given its status as a near-monopoly “buyer” of many social services. So any improvement in the late-payments crisis is going to have to come from the city itself.

Fortunately, the crisis appears to be getting more attention from the de Blasio administration. The Nonprofit Resiliency Committee has made some important procurement-related policy changes. Steven Banks, commissioner of the Department of Social Services, has publicly acknowledged the problem and taken concrete steps to begin addressing it.

Stringer recently recommended that each agency with an oversight role in procurement be given a specific timeframe within which to complete its task and that a tracking system be created to allow nonprofits to view the status of their contracts. Lastly, a new bill has been introduced in the New York City Council that would require that city agencies disclose to nonprofit contractors the reasons for delays in the payment process.

Despite these positive developments, addressing the root causes of registration and payment delays will take time. In our report we suggest four strategies that the city could pursue to help mitigate the problem: lend nonprofits the money for the large number of itsy-bitsy contracts that every agency registers really late; make it easier for nonprofits to borrow from banks against their larger contracts; establish a procurement SWAT team to handle the largest, latest contracts; and collect late fees from the offending agencies.

The risks associated with late registration and delayed payments are only going to grow. Interest rates are rising and with them the cost of bridging government funding with borrowed money. Many nonprofits – including most of the larger “battleship” organizations that are individually vital for New York City – face increased demands on their resources from the movement toward managed care. In this environment, nonprofits must be laser-focused on liquidity even if this sometimes means rejecting otherwise attractive city contracts with potentially fatal timing delays.

At the same time, New York City needs healthy nonprofit partners more than ever, but these partners cannot be healthy without timely and predictable payments. The amount of spending on contracts is a thorny political issue – there is only so much money to go around – but paying on time seems much more straightforward provided the necessary political will. If not now, when?

John MacIntosh
John MacIntosh
is a partner at SeaChange Capital Partners, which helps nonprofits complete transactions including mergers, acquisitions, joint-ventures, financings, divestments and dissolutions.