Report Highlights Consequences of Underfunding Nonprofits

The bankruptcy of FEGS, a large and previously well-regarded nonprofit social service agency in New York City, underscores the importance of providing full cost funding to nonprofit organizations administering government grants and contracts. In a new report, “New York Nonprofits in the Aftermath of FEGS: A Call to Action,” the Commission to Examine Nonprofit Human Services Organizations Closures shares lessons-learned and guidelines for helping nonprofits set a course for sustainability. While focused on a New York City story, the report is much more broadly applicable across the sector.”


Some of the major findings from the report include:

Human services nonprofits have a higher rate of insolvency than other types of nonprofits. Organizations with budgets from $10 million to $49 million are more likely to be in financial distress than those with budgets of less than $1 million, and a significant portion—60 percent—are financially distressed, having no more than three months of cash reserves.

Underfunded government payment rates are the primary driver of financial distress. Government contracts dominate provider budgets but pay only about 80 cents or less of each dollar of true program delivery costs, leaving budget holes that private funders cannot, or should not, fill. 

Underfunding leads to salaries so low that many nonprofit employees depend on safety net programs, such as food stamps and Medicaid. It also results in inadequate investment to keep facilities safe and in good repair. 

Chronic delays in contract payments force providers to undertake costly borrowing to make payroll and rents, often accruing interest not covered by government contracts.

Multiple and redundant audits, along with unfunded mandates and other oversight mechanisms, add up to staggering administrative costs. The transition to Medicaid Managed Care poses considerable risk for human services providers and there is no assurance that any of the substantial State investment to prepare for this new system will flow to human services

Too many government regulations are redundant and unnecessary. The multiplicity of procedures that accompany government contracts detracts from the focus on mission. 

the philanthropic community is a crucial partner in the capacity building efforts of nonprofit human services providers and should better facilitate investment in these functions. 

Download the full report here.

The Executive Summary can be found here.

Also a recent Wall Street Journal article that emphasizes the failure of government contracts to cover full costs.