News and analysis
December 05, 2013

Nonprofit Government Contractors Still Face Late Payments, Says New Study

Illinois and eight other states have assembled working groups to try to improve their contracting systems.

Charities that receive government contracts and grants continue to cope with problems related to late payments and inadequate compensation for the services they provide, according to a study released today by the Urban Institute.

Those problems, coupled with federal spending cuts and the lingering impacts of the recession, are forcing many nonprofits to make tough decisions even as the economy gradually strengthens. More than 40 percent of the organizations in the study tapped their reserves during 2012 to make ends meet, and 26 percent reduced the number of their employees.

The study, which is one of the first to closely examine the financial arrangements between governments and a broad swath of nonprofits, estimates that $137-million in government grants and contracts went to 56,000 nonprofits in 2012. (Hospitals and colleges, which receive significant government aid, were excluded from the study.)

As part of the study, the Urban Institute, a Washington think tank, also updated its earlier look at government contracts with human-service organizations, which was conducted in 2009, near the peak of the financial crisis.

Concerns about the government-contracting process drew considerable national attention late in 2008, when charities in some states, including California and Illinois, feared they would run out of money as state governments fell behind on payments at the same time that private support was shrinking.

The National Council of Nonprofits, which collaborated on the study with the Urban Institute, has issued several reports highlighting problems in the government-contracting process. The council says nine states—Connecticut, Hawaii, Illinois, Maine, Maryland, New Jersey, New York, North Carolina, and Texas—have assembled working groups to try to improve their systems.

“The contracting process has been below the radar screen in our sector,” says Elizabeth Boris, director of the Urban Institute’s Center on Nonprofits and Philanthropy.

The new report shows that some progress has been made. Fewer human-service organizations reported receiving late payments in 2012 than in 2009. However, some of that improvement is probably the result of the stronger economy in 2012.

Persistent Problems

A state-by-state look at the data, which the Urban Institute expects to release in January, will identify continuing problems in some states, such as Illinois, that have become known for their contracting woes. More than half of the Illinois nonprofits in the current study said they received late payments.

In the overall study, 73 percent of charities said their experience with government contracts and grants last year was about the same as in 2011, while 21 percent said the situation was worse. Just 6 percent said that the process had improved.

“You don’t turn around a battleship in a few days or even a few years,” Ms. Boris says. “It takes time to improve system and processes.”

Despite the improving economy, many nonprofits continue to struggle, the study found. Fifty-two percent of human-service organizations froze or reduced salaries in 2012, up slightly from 50 percent in 2009.

Nearly half of all groups reported a decrease in support from the federal government in 2012, compared with 2011. As a result, many groups say they now depend more on state governments, but that is problematic as well because states are the most likely to fall behind on payments to charities

State governments owed nonprofits with contracts an average of more than $200,000, according to the study, compared with an average of $109,000 owed by federal agencies and $85,000 owed by local governments.

Late payments have the biggest impact on human-service and health organizations, which receive the lion’s share of all government spending on nonprofits. The study estimates that human-service groups received 59 percent of all dollars spent by governments, and health groups received 27 percent. Education groups were a distant third, receiving about 4 percent of the spending.

Large organizations—those with annual revenue of $1-million or more—were more likely than smaller organizations to report cuts in government funding from all sources, at the local, state, and federal levels. Larger organizations were also more likely to receive grants that required a match or contracts that required cost-sharing. And about 60 percent of large nonprofits, but only 37 percent of small ones, had government contracts and grants that limited reimbursement for administrative expenses.

Some Progress

Although it may not yet be showing up in the data, states are making progress in identifying strategies to improve the contracting process, experts say. One of the most promising developments is the use of a document vault, in which nonprofits upload financial and other information to a central state repository.

The Urban Institute study found that the typical nonprofit has more than six government grants or contracts. In some states, charities that get aid from more than one state agency are often subject to multiple audits and information requests. The document-vault concept is intended to avoid such duplication, thus helping states and charities save money.

David Thompson, vice president of public policy at the National Council of Nonprofits, says his group is studying the idea.

“The concept has caught fire,” Mr. Thompson says. “But getting government officials to not junk it up and go overboard is always a problem. Getting nonprofits to buy into the idea is also an issue.”

New York State allows charities to become “prequalified” to compete for state contracts by uploading to a vault federal tax returns and other information, including details about governance and conflict-of-interest policies. About 2,000 organizations—more than half of the roughly 3,500 New York charities that receive state government contracts or grants—are already prequalified, says Fran Barrett, the interagency coordinator for not-for-profit services under Gov. Andrew Cuomo.

The state is creating a new portal where prequalified charities will be allowed to apply for grants and contracts that are posted by state agencies. The new system will also track the contracts through the process. “We’ll all be able to see where the contract is if it gets stuck,” Ms. Barrett says. “You’ll be able to track your contract like you track your package from Amazon.”

Lingering Issues

Officials at the National Council of Nonprofits are also pushing for states to regularly post the average length of their delays in paying contracts.

“Everyone says nonprofits need to be accountable,” says Tim Delaney, the association’s president. “Well, why not government?”

In some states, continuing fiscal woes overshadow years of work to improve the contracting process. For the past 18 months, Illinois has agreed to make expedited payments to charities with serious financial problems. The state also has a document vault, which saved 1,400 nonprofit organizations a total of $40,000 in paper, printing, and administrative costs over three months.

But the state’s unfunded pension liabilities—now more than $100-billion—consume a big share of the budget, leaving little cash to pay charities for services the state has hired them to provide. Illinois legislators this week approved an overhaul of the pension system, a move that nonprofit advocates have long sought, but the effort will take 30 years so the state’s budget is expected to remain tight.

“Nonprofits and government are trying to work together to find some solutions to the unpaid-payments issue,” says Delia Coleman, director of public policy at the Donors Forum, a state association of grant makers and charities. “But a large part of that issue is—to put it very bluntly—the availability of cash.”