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Late Government Funds Claims Another Victim
Late Government Funds Claim Another Victim

Late or non-payments on state contracts with nonprofits claimed another casualty when the officials of Sheltering Arms in New York City announced the 200-year-old charity would close.

CEO Elizabeth McCarthy told Gothamist, shuttering the youth and family programs was caused by a double financial whammy of funding cuts and delayed government contract payments. McCarthy and other Sheltering Arms officials did not return requests for comment from The NonProfit Times.

“Many of Sheltering Arms’ challenges reflect systemic problems — what we see as consistent disrespect for the nonprofit sector, in that New York City really depends on nonprofits to provide crucial services all over the city, in every neighborhood, for all New Yorkers,” Nonprofit New York’s Vice President of Policy Chai Jindasurat-Yasui told The NonProfit Times. “We know that nonprofits tend to do that better than government. That’s one of the reasons why [governments contract with nonprofits]. The other reason is, a long time ago, people decided it would save the government money.

“Nonprofits have been operating on very thin margins for a long time,” Jindasurat-Yasui continued. “When fiscal shocks come in or an economic downturn comes, it’s a really dangerous position for nonprofits to be in.”

This is especially true when funders expect nonprofits to not have any reserves, and to not put any money toward their operating expenses while keeping employee wages low. “So organizations sometimes can’t make payroll or can’t make their cash flow obligations, even though they’ve already done work on behalf of the government,” Jindasurat-Yasui said.

The most recent available financial statement from Sheltering Arms is the organization’s annual report for the period ending June 30, 2020, which was published on its website in June 2022 (https://bit.ly/3kv4Oka

The most recent federal Form 990 on GuideStar is for the year ending June 30, 2019. The annual report shows dwindling government support coupled with increasing expenses. Sheltering Arms reported just more than $66.5 million in government grants, contracts and support for the year ending June 30, 2018. Two years later, by the year ending June 30, 2020, that figure had dropped to $55.2 million. And the report was not clear on whether that was money actually received, or contracted money promised, regardless of whether or not it had been delivered.

During the same period, Sheltering Arms’ program expenses rose from $81.3 million to $87.2 million, and its total expenses — which include the program expenses — jumped from $88.9 million to $99.1 million.

Sheltering Arms is not alone in facing disruption from delayed government contract payments. 

According to the New York Council of Nonprofits State of the Sector 2023 report, two-thirds of its members receive funding from New York State. Of those, 62% have experienced delays in payment that range from one month to more than one year, and 25% had to use a line of credit because of a delay in receiving state funding.

Sheltering Arms’ circumstances are not unique. Earlier in February, The New York Times reported GEMS (Girls Educational & Mentoring Services), a New York City nonprofit established in 1998 which supports girls and young women who have been commercially sexually exploited in making positive change, is facing similar circumstances. (https://nyti.ms/3IUiLR9). 

According to published reports, the New York City Council has been consistently late in delivering contracted funds. Two years ago, GEMS had a contractual payment of $850,000 delayed before receipt, and an additional $938,000 promised around June 30, 2022 had not arrived as of mid-February 2023.

As a result, GEMS is behind payments to one of the landlords from whom the organization rents safe spaces for young women. According to published reports, Founder and CEO Rachel Lloyd has maxed out a credit card, taken a loan from an employee and missed a mortgage payment as a result of the delayed funds. 

That said, having to budget around delayed government contract payments while continuing to meet program expenses, payroll, rent and other operating expenses clearly presents difficulties. For the fiscal year ending June 30, 2020, GEMS reported just more than $1.5 million in government grant revenue as part of its total revenue of just over $3.4 million on its Form 990. During the year the organization had a total of just more than $3.2 million in total expenses. The organization had positive net assets of more than $1.7 million – but within its assets calculation was nearly $2.1 million in pledges and grants receivable.

Another report, the Human Service Council’s 2021 publication Essential or Expendable? How Human Services Supported Communities Through COVID-19 and Recommendations to Support an Equitable Recovery, painted an even worse picture for New York nonprofits. (https://bit.ly/3md1TwY) According to information in that report, 70% of nonprofits reported delayed payments from New York City and 60% said payments from New York state had been delayed, and nearly 46% of nonprofits had taken out loans or drawn on lines of credit because of the delayed funds. “The average annual cost of interest for those loans is reported as $223,000,” according to the report authors.

New York City spreads its pain around fairly evenly, according to the report: among nonprofits with annual operating budgets under $25 million, contract payments amounting to 12% of their annual operating budget had been delayed, compared to 14% of annual operating budgets for nonprofits with operating budgets between $25 million and $100 million and 12% of operating budgets in excess of $100 million.

In contrast, larger nonprofits were less likely to have experienced delays in receiving contracted New York state funds. Nonprofits with annual operating budgets less than $25 million indicated that funds equivalent to 7% of their annual operating budgets had been delayed, compared to 3% among nonprofits with annual budgets between $25 million and $100 million and 1% of nonprofits with budgets exceeding $100 million.

Part of the difference in payment, especially of state funds, may be that both federal money and state money are available, but accessing it – even after it has been contracted – can be difficult. Not every nonprofit has the resources to devote to following up on contracted payments. 

“The city and state both have bureaucracies where it can be hard to find the information they need about where the contracts are, in order to be able to put pressure to move them along,” Jindasurat-Yasui said. “An organization has to dedicate a ton of resources and energy to find out what’s going on with their contract with the city, depending on the city agency, depending on the contract, depending on the funding stream. And they have to do the same thing with the state.”

While the damage to specific nonprofits may have been exacerbated by the increased client demands and requests for services by government agencies due to the coronavirus pandemic, the issue itself is not new. A 2014 report from the National Council of Nonprofits, Toward Common Sense Contracting: What Taxpayers Deserve, (https://bit.ly/3IuvzgG) outlines a number of problems that arise when governments contract with nonprofits. Issues discussed nearly a decade ago include underpaying for services, arbitrary caps on indirect costs, changing agreement terms mid-stream and late payments, among others.

Not only is the situation not new, its not unique to New York City or New York state. According to the Toward Common Sense Contracting report, 45% of nonprofit leaders in a nationwide survey by the Urban Institute said they had experienced problems as a result of being paid late. At the time, 81% of nonprofits from Rhode Island reported significant problems, as did 75% of those in Illinois and 67% in Hawaii. New York and Pennsylvania were still fairly high on the list, with 62% of nonprofits in each state indicating problems.

Even in the states where governments performed best in their payment practices, around one-quarter to one-fifth of nonprofits reported significant problems. Fewer nonprofits in Minnesota reported late payment issues than anywhere else, but even so 22% reported such issues, as did 23% of Alaskan nonprofits, 26% of nonprofits in Arkansas, and 27% of nonprofits in New Mexico.

A decade later, the problem has not been mitigated. “Issues of government grant and contracting reform are very hot, very active in legislatures across the country,” National Council of Nonprofits Vice President of Public Policy David L. Thompson said. “They’re taking action now because of the very serious nonprofit workforce shortage. Nonprofits can’t raise salaries [because of language in government contracts]. If their government contracts are at a fixed rate, they can’t do more services if the government is not paying more for the services that are needed. New York has the strongest contracting law [regarding payments and other conditions] on the books, and it is constantly ignored. There’s no mechanism to force the state agencies to do their job on time, or to pay their bills on time.”

That may be changing on a national scale. The California legislature is considering S.557, which would assign penalties to state agencies or the Controller to pay penalties if timely payments are not made. According to Thompson, bills similar in spirit are pending in Kentucky, Maryland, Michigan, North Carolina and Vermont. Maryland had already taken steps to alleviate the financial strains of nonprofits waiting for government funding. In 2017, the state launched the Nonprofit, Interest-Free Micro Bridge Loan program, through which the Maryland Department of Commerce provides short-term financing to qualifying nonprofits that have received written confirmation of funding from government grants or contracts. 

But the strains the coronavirus pandemic put on nonprofits may have caused these chronic concerns to come to a head. “New York City was the first to connect the dots of the American Rescue Plan Act money available for the pandemic to fix government grants and contracts problems,” Thompson said.

One of the actions New York City officials took to ameliorate the grant and contract problems nonprofits face was to convene a task force in late 2021. In February 2022, the task force issued A Better Contract for New York: A Joint Task Force to Get Nonprofits Paid On Time, an action memo that offered a five goals, along with a handful of short-, medium-, and long-term recommendations for achieving each goal. The five goals include:

* Creating new processes and routines for holding City stakeholders accountable for timely procurement and making information about the process transparent to nonprofit providers and the public.

* Establishing new processes to streamline and modernize the procurement and contracting process to reduce inefficiencies and delays.

* Reducing the costs incurred by nonprofit organizations when contracting with the City and promote equity and access in the contracting process.

* Establishing leadership and management practices at the highest levels of City government and demonstrating a renewed commitment to timely nonprofit contracting and registration.

* Strengthening the capacity of nonprofit organization’s administrative and contracting capabilities and expand the skills of the City’s contracting workforce.

Each of the five goals was supported by a series of short-, medium- and long-term recommendations. Full text of the report, including the goals and recommendations, is available here: (https://on.nyc.gov/3m0Z8ie).