Opinion: Government contract reform is a must for social sector nonprofits

A lawsuit filed this past November in the state of New York highlights an issue that confronts the nonprofit social sector nationwide – the growing number of state and federal government contracts that fail to pay nonprofits the full cost of providing services.  

Professionals who work in the nonprofit social sector are essential to the health and wellbeing of all Americans. The vital work they do includes providing mental health and in-home services for all in need, running our nation’s homeless and domestic violence shelters, overseeing foster care services and placements for those engaged with the child welfare system, and offering young children better access to early education opportunities that they need to succeed. These are just a fraction of the critical services they offer that focus on addressing the social determinants of health that are essential to building a thriving society. 

Our nation, though, has failed to recognize their impact and adequately fund the services the social sector provides in communities across this country. Social sector nonprofits have operated under mounting financial stresses that have impeded their ability to achieve meaningful outcomes for far too long. In 2018, in partnership with the American Public Human Services Association, we issued a report that found that half of all community-based nonprofits in the social sector reported persistent operating deficits, one in eight were technically insolvent, and one in three had less than one month of operating expenses on hand.  

The report highlighted the fact that, even five years ago, one of the largest obstacles to community-based organizations achieving financial stability was the fact that government contracts were not covering the actual cost of providing services. And that was prior to the COVID-19 pandemic and the resulting recession and rise in inflation, all while the demand in services increased and nonprofit social sector employees stepped up to serve as frontline workers during the pandemic.

Why has the gap between what it costs nonprofits to deliver these services and what government contracts actually pay been an issue for so long? 

Some believe that this funding gap is the result of an explicit policy choice on the part of county, state and federal governments to underpay, reflecting the belief that philanthropic funding can and should close the gap. This is based on the presumption that philanthropic donations represent appropriate “skin in the game” from the communities who benefit from these services. The result of this thinking is nonprofits are forced to use philanthropic donations to cover funding gaps rather than investing in research, technology, reserves, staff, quality improvement, knowledge and organizational strategy.  

Social sector employees don’t have the liberty to strike or refuse to provide services because they realize that if they do, lives are at stake. Forcing social sector nonprofits to cover these gaps comes at the cost of our ability to offer competitive wages. We are seeing staff leave the field to work in higher paying, lower stress jobs at places like Target or McDonald’s as a result. One CEO recently shared with me that in 2021 they lost $1.5M in revenue and had over 60% staff turnover. We have also heard about graduate programs in human services areas like social work not seeing enrollment at the same level as in the past so the pipeline for new workers is becoming increasingly narrow. 

These challenges are illuminated across the sector. The National Council of NonProfits did a study in 2021 that found that nearly half of all nonprofits had vacancy rates of 25% or greater. Eight out of ten attributed that to salary competition.  

In addition to not covering full costs of service delivery, government contracts and grants often specify how human services organizations are allowed to use funds, stipulating in detail the actions they must take in providing services and care. This inflexibility signals a lack of trust between government payers and providers that prevents social sector nonprofits from using funding where it is most needed including covering the indirect but necessary costs associated with delivering services. As a result, nonprofits have limited ability to pursue more effective treatment strategies or meet specific community needs in innovative or creative ways. For example, social sector nonprofits may not be allowed to use funding for housing services to address the actual, root causes of homelessness, such as substance use or mental health disorders. A CEO from Florida explained the tough choice he faced: “You can create programs to meet guidelines and get paid, or you can create programs that you know work better and not get paid. That’s a tough place to be in as a mission-driven organization.”  

We have identified, in partnership with the #Relief4Charities coalition, made up of some of our nation’s largest charitable organizations, key policies that can support the nonprofit social sector at this time. They include: 1) Using federal incentives to increase reimbursement rates in state and local government contracts to cover the full cost of performing services, including competitive wages; 2) Monitoring and promoting local and state contract and procurement reform efforts and advancing similar efforts at the federal level; 3) Expanding and making permanent the universal charitable deduction; 4) Advocating for robust and equitable distribution of federal dollars to the nonprofit sector to compensate for increased demand and decreased resources as the nation recovers from the COVID-19 pandemic; 5) Reinstating and Extending the Employee Retention Tax Credit; and, 6) Enacting annual Cost of Living Adjustments (COLAs) for federal and state contracts to cover rising costs of living and actual costs that nonprofits incur in providing services. 

These policies, along with enhancing the relationship and trust between payers and providers to allow for greater flexibility, would help to minimize the burden that nonprofits face. Paying the true cost of service delivery, coupled with trust-based relationships, will enable nonprofits to more effectively identify and respond to the underlying needs of those they serve with an ultimate result of more self-sufficient, healthy and safe communities. By doing this, social sector nonprofits will be empowered to develop their capacity to innovate, widen their focus beyond service delivery to include improved outcomes and return on investment, enhance their financial stability and enable the sector to offer more efficient, effective and better coordinated care across a community.