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Municipal Bankruptcies Are Changing Social Services

By Mark Hrywna and Patrick Sullivan - August 30, 2013

The City of Detroit filed the largest municipal bankruptcy in U.S. history this past summer but the Motor City is certainly not the first to file for bankruptcy. Almost two years after filing for Chapter 9 bankruptcy protection, Jefferson, County, Ala., is still crawling its way out of bankruptcy and charities in that region were tightening belts well before the 2011 filing.

Charity leaders seemed resigned to the fact that Detroit would end up in bankruptcy, with some even seeing it as inevitable. For others, the filing doesn’t really change anything at nonprofits for the time being.

“It’s not like a switch has been flipped and things are automatically different, because [nonprofits have] been struggling to meet increased needs for several years,” said Tim Delaney, president and CEO of the National Council of Nonprofits in Washington, D.C.

Detroit nonprofits have had eight years of pretty deep depression and financial challenges and are starting to come out of it, according to Mariam Noland, president of the Community Foundation of Southeastern Michigan in Detroit, Mich. “If you look at the nonprofits in Detroit and the state, they’ve had to deal with the challenges of lack of revenues for a long time,” she said.

Social service nonprofits have been struggling with increased demand for services since the economy turned south. “When the economic situation in a community gets worse, there’s greater pressure on our capacity and greater demand for our services,” said Amanda “Amy” Good, CEO of Alternatives for Girls. She believes that with the city filing for Chapter 9, it can move forward. “Creativity comes out of crisis,” she said. “As an organization, we’re looking for opportunities to do some social enterprise, educate our participants in money-making skills and teach them some entrepreneur skills. There’s lots of opportunity for creativity.”

Kathy Moran of Focus: HOPE, a human services nonprofit, said the bankruptcy demonstrates the necessity of the nonprofit sector. “We exist to help fill the gap between what government can provide and what the community needs,” said Moran, communications manager for the Detroit-based charity. “While the bankruptcy filing highlights the problems here in the local economy, it also challenges us to work even harder to meet the needs of local residents,” she said.

Donna Murray-Brown, president and CEO of the Michigan Nonprofit Association, views the bankruptcy as an opportunity for not just nonprofits but residents to really create “the next Detroit.” Although Murray-Brown acknowledged the demand for services probably would continue to rise, she’s optimistic. “Nobody wanted to be here, it’s a scary thing to be in a city that just filed for bankruptcy, but it’s also an opportunity,” she said. “This is a time not to acquiesce but to be proactive and figure out the best role for nonprofits,” she said.

Faced with nearly $20 billion in liabilities, much of it in pensions and related healthcare costs for city retirees, Kevyn Orr, emergency manager for Detroit, presented a restructuring plan to creditors in June before formally filing Chapter 9 bankruptcy on July 18. In a video on his website, Gov. Rick Snyder said filing for bankruptcy provides the city with “a fresh start” and “realistic promises” for creditors — of which there are estimated to be more than 100,000. The largest creditors are related to the city’s pensions for public workers and bond holders.

The courts cannot force the city to stop certain programs or sell off certain assets but only to rule on an actual plan that’s been put forward, according to Brad Reynolds of LJPR, LLC, a Troy, Mich.-based wealth management firm. Services, he said, are status quo until they figure out the Chapter 9 filing. The plan presented by Orr was a starting point, said Reynolds, offering just 20 cents on the dollar and it didn’t appear like they negotiated that much. “The court’s goal is to make sure the proposal is the fairest possible for creditors that they can get,” he said.

A number of issues arise for Delaney, the foremost of which is what will happen to nonprofits that have contracts with the city. “They become another creditor and it’s one more piece of the puzzle that goes before the bankruptcy judge. The fact is, Detroit has some 700,000 residents with ongoing needs that need to be met. You can’t deliver all the needs to that many people on just hope and well wishes. It takes resources,” he said.

Patrick Heron, president of Catholic Social Services (CSS) of Wayne County, said he has seen “significant” delays on reimbursement for services for which CSS has contracted with the city. “We get two (state) grants (that pass through Detroit), around $200,000 annually,” he said. “We’re waiting to get payments. The city hasn’t had enough money and the city owes us some money,” he said.

Nevertheless, the prevailing mood among some Detroit social service nonprofits is optimism. The city has been struggling for a long time, they argue, and the bankruptcy declaration is an opportunity to move forward. “I think this is long overdue,” Heron, a longtime Motor City resident.

Jefferson County, Ala., is still working to get out of bankruptcy almost two years after filing Chapter 9. Local nonprofits have faced the pressure of declining funding well before that. The budget for the Jefferson County Library Cooperative was about $1 million last year, which might not seem that much less than the $1.3-million spending plan in 2009-2010. But the revenue pie paints a very different picture. Funding from Jefferson County made up about 38 percent of the budget in 2009-2010 but today it provides zero, said Patricia Ryan, executive director of the cooperative.

Jefferson County slashed funding in half two years in a row, before eliminating funding altogether in 2012 – the first time in the 33 years of the co-op that the county did not provide funding. In another first, the cooperative began actively fundraising in 2010 in addition to turning to budget and service cuts, staff reductions and asking for donations when patrons renew their library cards. A direct mail campaign is done twice a year.

“There were a lot of behind-the-scenes things we provided to members (member libraries) we’ve cut,” said Ryan. Also eliminated were two positions, 14 part-time positions and freezing two others. The cooperative has six full-time staff remaining.

The cooperative isn’t a library itself but an administrative umbrella organization for a group of 22 libraries within Jefferson County, providing services to branches such as Internet access, databases and staff training. Ryan said the organization is able to provide economies of scale that would be more expensive for library branches on their own.

“We’ve always been behind the scenes, now we have to step out in the limelight and help [patrons] understand we’re the backbone that brings it all together,” said Ryan, comparing the co-op to a hub and library branches as the spokes in a wheel.

Fundraising has climbed steadily, from $15,000 in the first year to $30,000 in 2011, but hardly makes up the lost county funding. So far this year, the organization has raised $50,000. While it’s grown steadily, fundraising has been hit-or-miss at times. Requesting a $5 donation from its 370,000 members when they renew their card annually had hoped to raise $100,000 but has fallen woefully short. More successful efforts include Alabama Giving Day in 2012, which helped the library to raise $116,000 last year.

A variety of fees and fines have been increased in recent years, including membership fees that put more of a strain on city funding and charging out-of-county residents to join.

Each municipal library is funded locally by their cities and pays fees to the county cooperative. The co-op typically raised membership fees some 5 percent annually, but in recent years raised them 7 percent. The continued use of emergency reserve funds forced a more drastic 25-percent hike in membership fees for the next fiscal year.

Treatment Alternatives for Safer Communities (TASC) lost $2.5 million in county funding when Jefferson County went into bankruptcy. TASC cut about 28 staff and the services it provided were not picked up by another organization.

“When the county began to cut back, there were a bunch of other nonprofits that got cut before we did. We were the last man standing along with the library system,” said Foster Cook, director of TASC and associate professor in University of Alabama-Birmingham’s Department of Psychiatry. Bankruptcy was just one part of the problem. Just as Jefferson County was filing for bankruptcy, it lost revenue from an occupational tax that the legislature didn’t renew, he said.

TASC provides court-related services in criminal justice, such as pre-trial services of mental health court and drug court, according to Cook. The organization had been serving about 3,300 felony offenders before losing the county funding, including some 100 serious mentally ill offenders.

“For things we couldn’t do — because we don’t run a residential program — we’d subcontract that service out,” Cook said. That contract funding for “downstream” nonprofits was incremental to their own budgets, mainly for residential housing and such. Once that funding dried up, Cook said they closed beds but none went out of business.

Cook said they’ve been successful in contracting for services with the state Department of Corrections and at securing federal grants to recoup about half of the lost funding. TASC is back up to about 80 staff and a budget of almost $5 million. “The sad part about it is, we’re doing the same services but now for different offenders in different points in the system,” he said, working more with state prison offenders. “The previous things we were doing are still not being done,” Cook said. “I think it’s the new normal.”

Offenders with mental health issues are now in jail far longer than the average 44 days before TASC was able to get them help. “We were moving those cases pretty well for those who qualified. Now, those people are sitting in jail,” Cook said.  NPT

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