Nonprofit and government leaders grapple with post-FEGS realities

One year after the shocking failure of FEGS, at a time when the human services sector is facing increasing uncertainty, leaders from nonprofits and government convened in lower Manhattan on Wednesday to assess the systemic threats to New York’s nonprofit providers.

At an event hosted by the Association for a Better New York, the Human Services Council, a membership organization that represents many of the most prominent social services nonprofits, unveiled a new report that used the closure of FEGS as a springboard to investigate pervasive issues degrading the operating capacity of nonprofits, potentially imperiling programs that thousands of New Yorkers utilize.

“I’m not going to sugarcoat it. The human services, as we know them today in the current environment, is not a sustainable approach, is not a sustainable system,” said HSC Executive Director Allison Sesso. “I think that before (FEGS) there was this assumption that it was only small organizations and that this couldn’t happen on a large scale, and the sheer volume of the transfers that had to happen at FEGS really woke us up to the capacity limits of the sector. The ability of the sector to absorb this is limited.”

Indeed, the report’s findings are grim. According to HSC’s surveys, 18 percent of human services agencies are operating at insolvency rates; 60 percent are financially distressed with no cash reserves. And 90 percent of funding for human services nonprofits comes from government sources, but government contracts regularly pay 80 cents on the dollar of actual program costs.

“It doesn’t take a mathematician to figure out that that’s not a good way to go forward,” Sesso remarked.

Sesso highlighted overhead costs as problematic for the sector, and tied lack of overhead funding to inadequate risk management and underinvestment in oversight systems. “These are not considered program costs, things like HR departments, technology systems that let you run outcome measurements, actual staff members who are dedicated to oversight roles,” Sesso said.

Sesso also cited the human service sector’s low paid work force, and its rapid turnover, as habitually problematic given the needs of clients. “It’s particularly worrisome because we’re dealing with clients that are faced with trauma,” Sesso said. “That’s what we’re trying to have them overcome, and then their case worker disappears.”

She also presented several solutions outlined in the report: further leveraging the expertise of nonprofit providers earlier in the procurement process; adequately capitalizing the sector as the state shifts to Medicaid managed care; and reducing layers of regulations that, while laudable, are poorly designed and cost nonprofits and government too much money to carry out.  

Sesso also announced that HSC would be unveiling an “RFP Risk Assessment” rating system so that nonprofits can better weigh the risk of taking on programs, as well as an annual rating of government agencies that nonprofit organizations contract with.

In a panel that followed Sesso’s remarks, city Human Resources Administration Commissioner Steven Banks echoed Sesso’s call to increase collaboration with nonprofit providers at the onset of program planning.

“As a commissioner, I wanted, for example, when repurposing our employment programs, to have consultations with communities,” Banks said. “We consulted with clients, we consulted with staff, we consulted with advocacy groups, but the procurement rules raised certain issues around consulting with potential vendors. These rules are really important – they have to do with ensuring that there is equal opportunity, ensuring that there’s not an inside track to get contracts, and also, frankly, they came against a background of corruption.

Despite their laudable intentions, Banks said, these rules prevent the type of collaboration that is essential to craft programs that are responsive to community needs that nonprofits observe on the ground.

“As it was, when we issued our concept paper on the employment programs, I really appreciated that Councilmember (Stephen) Levin gave us the opportunity in a public hearing to talk about some of the issues that were at work,” Banks said, pointing out a unique workaround. “And frankly, the responses to the concept paper were terrifically instructive, which is why we’re about to issue the RFP now after taking time to incorporate the comments.”

Christine Quinn, president and CEO of Win, a prominent homeless services provider, said that a large part of nonprofits’ current struggles is that government simply is not fully funding services that it is mandated to ensure.

“We have in New York … a requirement that every person be housed,” Quinn said. “That is not negotiable. You could go about meeting that requirement in a number of ways. The city of New York could provide all of those services. Not a way to go. We all know it. Better to have providers do it. But that means we are taking on a mandated-by-the-courts role of government of New York. The government at all of its levels needs to recognize the profound responsibility they have handed over.”

Quinn highlighted Win’s Scatter Site Housing Program as just one example of the sorts of losing propositions that nonprofits take on.

“If you look at a lot of the Scatter Site Housing Programs, they get x amount of rent in our HUD contract. There is nowhere in the city of New York where you are going to find an apartment for that rent. So what do we do at Win? Look homeless people in the face and say, ‘You’re not getting an apartment?’ You take on apartments that cost more than you have money for and you hope that you’ll make up the difference by going to companies and foundations asking for money. But none of those groups want to fund what they see as mandated by the courts and others as the core requirement of government. But honestly, if we at Win lived within the budget of the government, we would fail our clients.”

David Rivel, CEO of The Jewish Board, which largely absorbed FEGS’ programs in the wake of its collapse, said that the habitual gap between government funding and program costs forces all nonprofits, even those that are relatively well-endowed, to pass up essential investments.

“Even at the level that we’re doing it at The Jewish Board, there are lots of things that we’d like to do that we can’t do,” Rivel said “There are investments in business intelligence systems, there are data and outcomes work, there are innovative pilot projects that we’d like to do that we can’t do because when we go to a foundation or a corporation or an individual, the first ask has to be: Can you please fill the gap left by government funding?”

However, Banks cautioned against overemphasizing the funding gap and urged nonprofits to take a hard look at their own portfolios.

“The point about managing risk is in part how we contract and we fund, but also how each organization evaluates its contracts,” Banks said. “When I got involved with the FEGS situation, it read a lot like the situation that I inherited at the Legal Aid Society. And there were a lot of flags within the organization that one could see, and I saw this because I had been through it running a nonprofit. I think that’s an important thing that goes along with this. Not every contract is a contract that every organization can perform on even when we address some of the issues that we’ve been talking about.”

But Quinn insisted that much of the responsibility rests with government agencies, especially the many overseers of homeless shelters that do not currently coordinate inspections – a timely critique given the highly publicized feud between Banks’ HRA and the state Office of Temporary and Disability Assistance.

“There’s been much press and debate about the quality of homeless shelters, and that’s a good thing, because we want them to be the best they can be,” Quinn said. “But our shelters in New York City are inspected by seven or eight city agencies and at least one state agency. Every time one of those inspectors comes, no other work gets done, as you can imagine. And every inspector interprets the regulations differently, so you end up confused. Now, I’m in no way saying reduce the standards, but you coordinate inspections. You’re going to save nonprofits like Win money, because we’re not going to be chasing around every inspector, and you’re going to open up resources through that kind of efficiency in government.”