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Asking More Commentary: Perspectives from Mendoza College of Business

Commentary Post - Thomas Harvey

Death by a Thousand Cuts

September 16, 2010

Years of chronic underfunding and exploitation have taken a serious toll on nonprofit human service providers that contract with government agencies. This column, originally published in Nonprofit Director, Issue 3, 2010, explains how the human service sector got to this point and, more importantly, three tactics that may help providers and their boards of directors reverse the trend.

This is the second in a two-part series about how deeply problematic government funding practices are crippling many nonprofit organizations. The first column cautioned against pursuing government funding over maintaining an unwavering commitment to mission. It was published in Issue 2, 2010, and is available at nd.alliance1.org.

The nonprofit human service funding model as it relates to government contracting is most certainly broken. Yet, it seems many organizations do not understand how they are agents in their own exploitation.

Why do we call it exploitation? We do so because funders are pulling on the heartstrings of helping organizations and their boards by “guilt-tripping” them into working for below market reimbursement— something that rarely happens in contracts with for-profit businesses.
Unlike for-profit companies that provide products, services, and other tangible outputs, the human service sector provides help for people in need. The prevailing assumption among some in the nonprofit sector is that stepping aside from helping because of inadequate financial support causes more harm than good and is a betrayal of mission.

Funders recognize this, and they assume that organizations will not refuse to provide services such as foster care, family support, or residential treatment despite low contractual rates. Therefore, as governments face growing financial pressure, they continue to pass their financial problems on to human service organizations.

In other words, government agencies exploit these nonprofit agencies’ goodwill in two general forms: by failing to fund the true costs of programs and failing to provide support for administrative infrastructure. They further this exploitation by making delayed payments, which is increasingly common.

Providers end up with shortfalls. They raid their endowments and other unrestricted income sources while draining resources from other programs. At worst, agencies even cut staff salaries.

The entire process leaves providers feeling that there is nothing they can do to correct the situation. They buy into the idea that they are victims of forces beyond their control and, in effect, commit to a self-fulfilling prophecy.

However, a growing number of providers are resisting this pervasive problem. Advocacy and public policy efforts—many of which are headed by state associations—have been successful in improving some of the issues associated with this problem. The tactics described below—contract rejection, litigation, and restructuring—provide additional avenues for reversing the trend.

Tactic 1: Contract Rejection

The most obvious solution involves rejecting any program that is underfunded. A dramatic example of this took place last year when Catholic Charities of the Archdiocese of Chicago refused to participate in a contract to provide foster care services to nearly 1,000 children.
The agency’s analysis showed that the state was passing on the risks of child welfare without funding any of the considerable costs of risk management.

As expected, public opinion mounted to try to intimidate Catholic Charities to stay in the flawed system. What was surprising, however, was that even some of the other service providers rallied to criticize Catholic Charities. Instead of using the opportunity to band together to challenge the unfair funding system, the agencies turned against each other.

This example demonstrates the backlash that can result from the contract rejection approach, particularly in terms of public opinion. However, where there is widespread agreement that the status quo is unacceptable, or especially where there are state association-led efforts, it can be effective.

Tactic 2: Legal Appeals

There are strong indicators that legal challenges may be another strategy for human service providers. Providers in California, Indiana and Missouri have sued their state over the issue of underfunding for human services. Although lawsuits can be costly and time- consuming, they have yielded favorable results in all three of these states.

Details about each case are available in a March 29, 2010 report from the Alliance for Children and Families public policy office, which is available at alliance1.org.

Tactic 3: Social Entrepreneurship  

A third approach to solving the problem of underfunding focuses on moving to a social entrepreneurship model of service delivery. A nationally recognized example of this approach can be found in Alliance member Family Service Association of Western Riverside County, Moreno Valley, Calif.

Between the mid-1980s and mid-1990s, the organization’s yearly budget grew from less than $500,000 to more than $5 million. Unfortunately, this growth was mostly through government funding, which involved the problems previously described, including underfunded services and delayed payments.

Equally troubling for the board of directors was the disharmony they noted between the state’s approach to services and the organization’s own philosophy. The state directed its funds at fixing people and their problems, while the organization sought to prevent those problems in the first place.

Rather than closing or dropping all programs, the board and President and CEO Dominick Betro aggressively redesigned the structure and vision of the agency to be more mission-driven by becoming more entrepreneurial. For example, the organization has invested in its infrastructure. It owns a building that offers double the amount of space the organization actually needs to operate. The extra space is rented to other nonprofits at a favorable market rate.

Family Service Association also provides day care services to its staff, as well as the staff of the colleague organizations that rent office space. This arrangement underwrites much of the agency’s building costs.

With the addition of the day care facility, Family Service Association’s food purchasing needs changed. It was no longer cost-efficient to purchase catered food. Instead, the organization established a cooking school to train unemployed community members, equipping them with new skills for future employment.

The program produces enough food for the day care and also caters to other nonprofits in the area. The catering service has become a source of hundreds of thousands of discretionary dollars that can be allocated to other services within the organization.

Additional examples of Family Services Association’s entrepreneurial approach are described at nd.alliance1.org.

Role of Trustees

These examples—contract rejection, litigation and restructuring—demonstrate that it is incorrect to believe nothing can be done about government underfunding of important and needed social services.

There are reasonable responses, and trustees should promote innovative options because doing so goes to the heart of their primary role: to serve and strengthen the organization’s mission.

Another reason nonprofit human service agencies must take a firmer stand to secure the financial resources they need to provide quality services is reflected in the wisdom of the famous Jewish Rabbi, Hillel, when he asked, “If I am not for myself, who will be for me? If not now, when?”

For information and resources about social entrepreneurship, contact the Alliance Severson Center at severson@alliance1.org or 414-359-1040, ext. 3615.

Thomas J. Harvey, MSW, is director of the Master of Nonprofit Administration Program at the University of Notre Dame’s Mendoza College of Business. John Tropman, Ph.D., is professor and associate dean for faculty affairs at the University of Michigan School of Social Work. He’s also an adjunct professor at the university’s Ross School of Buisness. Harvey and Tropman are co-authors of “Nonprofit Governance,” a book published in 2009 that offers modern information and practical guidelines for directors and executives of nonprofit organizations of all sizes.