Our Social Service Nonprofits Living on the Edge

David R. Jones, The Urban Agenda

New York City’s nonprofits are in danger.  Ten percent are insolvent, including 18 percent of nonprofits in the health and human services sector, which has the highest insolvency rate. 

Of major concern are the small “safety net” nonprofits that provide health and human services. Low-income neighborhoods rely on these organizations to provide everything from adult education programs to assistance applying for benefits. Yet nearly one in four of these small nonprofits have gone insolvent between 2009 and 2013.

The result is a dearth of crucial aid in the city’s black and Latino communities, neighborhoods with overwhelming numbers of low-income families.

These findings were some of the conclusions of a new report on the state of nonprofits in New York City.  The report, “Risk Management for Nonprofits,” was published by two Marsh and McLennan Companies, Oliver Wyman and SeaChange Capital Partners.  It can be accessed at http://seachangecap.org/wp-content/uploads/2016/03/SeaChange-Oliver-Wyman-Risk-Report.pdf.

Some of these nonprofits cannot even meet their payrolls.  Many are operating with cash and reserves of less than two months.  This is the situation for half of the agencies in the health and human services sector.  Also, nonprofits face increasing risks, including rising interest rates and real estate costs. 

Importance of Nonprofits

Nonprofits have become an important part of everyday life for many Americans.  Over the years, many nonprofits have taken over the tasks that governments once did.  One of these is providing many types of aid for low-income and poor individuals and families.  While some of these organizations have succeeded, many have struggled financially, and some – even large ones like FEGS, the Federation Employment and Guidance Service – have gone bankrupt.

When these nonprofits go out of business, people are hurt.  Recently, a New York City nonprofit, Steinway Child and Family Services, based in Queens, went bankrupt, some $10 million in debt.  The bankruptcy will affect some of the most vulnerable members of our society.  This agency provided services to children with severe mental health problems.  Many of the 3,500 children who relied on Steinway are in foster care.

For many community-based safety net agencies, the matter of survival comes down to dollars.  Many of these organizations depend on a combination of government support, aid from philanthropies, and individual donations to keep going.

But government support usually covers only basic services, not infrastructure or technology.  And this type of aid does not take into account cost-of-living expenses.  Philanthropic aid and donations help, but much of these charitable donations go to institutions and organizations that do not deal with poverty.

  Problems of Support

One problem is the creeping changes in the tax codes of what constitutes charities.  The original idea for tax deductions for charities was to aid people living in poverty.  Today, a taxpayer can deduct as much for his or her $1,000 donation to Harvard University – with its $36 billion endowment – as they can to the local social welfare agency or soup kitchen, fighting to stay afloat as it aids desperate families.

The report found that “the median nonprofit in the health and human services sector receives only nine percent of its revenue from philanthropy,” as opposed to the overall average of 32.1 percent of revenue from philanthropy for all nonprofits in the city. 

People with money to spend donate to charities.  And, not surprisingly, they tend to donate to the institutions that they enjoy or experience.  Much of their donations go to their colleges, or local museums or performing arts companies.  These are fine institutions, contributing to the quality of life, but donations to them are of no help to people who really need help.

Social service nonprofits deal with difficult, intractable, and often unpopular problems.  These organizations tend to rely on government funding to survive.  The report found that nearly 80 percent of the largest human services agencies receive at least 90 percent of their funding from governments.

Although they have little choice, relying on government funding can be a tenuous means of keeping nonprofits solvent.  Because the decisions involving their funding can be controversial, they are sometimes at the mercy of changing political priorities.  And they rarely have strong lobbying activities.

Those entrusted with managing the organizational risk of nonprofits must be vigilant in determining reserves on hand, payroll expenses, benchmarking, and future plans.  While it is important for these organizations to have excellent oversight, as the report stated, changes in government funding policies are also necessary.  We should consider offering increased tax deductibility for contributions to front-line social service providers.  And more adequate funding to safeguard against them going out of business.

These social services organizations are vital to the health of many black and Latino neighborhoods, where low-income New Yorkers rely on them for their basic health needs.  “Risk Management for Nonprofits” should be a wakeup call to public officials who decide on policies that affect the lives of those they represent in Congress and the State Legislature.       

Issues Covered

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