FAE Speaker: NYC Human Service Nonprofits on the Brink, Payroll to Payroll

Chris Gaetano
Published Date:
Dec 2, 2016

Many nonprofit organizations are aimed to help people down on their luck, but some nonprofits themselves, particularly those that focus on human services, are just as vulnerable, according to Allison Sesso, executive director of the Human Service Council of New York (HSC) and a speaker at the FAE's Exempt Organizations Conference on Dec. 1. 

"They are living, I say, much like their clients—their clients live paycheck to paycheck, and they live payroll to payroll, and that is not an environment where you can operate well," she said.

Of the approximately 20,000 nonprofits based in New York City, about 10 percent are insolvent, said Sesso. For those nonprofits with a human services mission, of which there are 1,500, the insolvency rate is higher, at 18 percent. 

“The reason humans services are so much higher is we take government work, and the bulk of our budget is from government sources, so government is clearly a driver of this underlying fragility throughout the sector,” she said.

She said that the sudden collapse last year of the Federation Employment and Guidance Services (FEGS)—a $250 million nonprofit organization that provided mental health, disability, housing and homecare employment services—after 80 years in operation was a big wake-up call for the sector. Previously, she said, the conventional wisdom was that such sudden breakdowns were something that could only happen to smaller organizations, not multi-million dollar ones nearly a century old. If FEGS could fall, everyone is vulnerable, she argued.

The event prompted her organization to launch the Commission to Examine Nonprofit Human Services Organizations Closures, which convened experts from all areas in the nonprofit field to determine what challenges nonprofit human service organizations face today, and what can be done to ensure a sustainable sector. What they found were organizations that, because they were operating in constant survival mode, couldn't plan strategically, couldn't innovate and it was their clients who suffered. 

The commission recently released its final report, "New York Nonprofits in the Aftermath of FEGS: A Call to Action," which identifies three major problems with New York's human services deliver system and makes a series of recommendations designed to work together to strengthen it.

"This doesn't bode well for our ability to think of ways we can serve our clients and reflect on the work we do in our communities, and that really undermines our service," Sesso said. "This is happening all over the city." 

A major issue, she said, is that the amount of money the government provides these organizations is not nearly enough to do the tasks that it asks of them. She criticized the government's current approach of coming up what she said were very prescriptive approaches that would then be put out to nonprofits in the form of a Request for Proposals. Rarely, she said, does the government actually consult with experts on the ground on what their opinions are on program design. 

Instead, "they identify a problem then go behind closed doors to come up with a solution and put it out there, and often times within that formula, the dollars they come up with don't match what they're suggesting you guys do," Sesso said.

What's more, she added, even these inadequate dollars don't always arrive on time or in the amounts that were promised, stretching nonprofit organizations even further. 

Sesso said her organization recommended that the government take a different approach to projects. There needs, she said, to be more feedback with the organizations who actually do the work and are more familiar with their own needs. The process should be reformed so it's less the government looking for an organization to fulfill a specific program it came up with, and more the government identifying a problem, saying that they can devote this much money to it, and ask nonprofits what they can do for that amount. 

"So there wouldn't be this thing where the RFP comes out, nonprofits look at that, and then say 'look at that, we need double the money to actually do that' and scrambling to explain that," she said. 

Sesso's organization also made a recommendation that governments pay up front and on a more timely, perhaps on a quarterly basis—a suggestion that she said should not really be that complicated an ask. 

Despite all this, she made it clear that the blame cannot, and does not, rest entirely with the government. She pointed, too, to the nonprofit organizations themselves. 

"It's true that government contracts and policy drives a lot of this, but I want to be extra clear, that is not an excuse for failure or poor management. It doesn't say it's okay. This is the operating environment and if you want to work in it, you need to own it," Sesso said. 

She said that if a nonprofit organization is not doing its job, it needs to close down and let another, more competent one take over and do the work. 

"I'm O.K. with that because, at the end of the day, it's about being able to serve communities," Sesso said. 

For example, she was exasperated at what she felt was an unreasonable fear of overhead, saying that nonprofits are their own worst enemy in this respect. They like to say that they have very low overhead rates, but Sesso warned this was not necessarily a good thing. While this attitude represents a reasonable impulse—she said she certainly didn't want to see a 70 percent overhead rate—some organizations take it too far. 

"If you truly only have five percent, you're not doing something, and you don't have the accountability systems in place to make sure no one is stealing, that you're doing a good job in the community, et cetera. So we need to really rethink this overhead conversation," she said. 

Infrastructure, she said, is something that a nonprofit brings to the table, and needs to be seen as valuable. Because right now, nonprofits will get a government contract that come with an assumption that they have this infrastructure, and it simply isn't there. 

She also said that nonprofits need to engage in more systemic risk assessment: They need to have systems in place to assess what their risks actually are when they take on government business, and how to maneuver through them. She said that her organization has found that a lot of nonprofits simply don't do a lot of good risk management, and while she conceded that such analysis can be costly, she said it doesn't necessarily have to be. She explained that this is something that needs to involve both nonprofit management and their boards, perhaps to the point of having a specific board-level risk assessment committee. 

Sesso said that to help organizations handle risk, her group is in the middle of creating a database that weighs the risks associated with government proposals to better inform nonprofits of which jobs might deserve a little more scrutiny. This will be paired by a survey her organization plans to send to its member nonprofits of their experiences with various government agencies, something she compared to a customer satisfaction survey. 

While things may seem grim for the human services nonprofit sector in the city, there is some hope: Sesso said that shortly after her organization released its report last March, the city government convened its own commission to look into the problems it raised. She was pleased to find that many of its own recommendations matched the ones made by her organization. It's a start, but she said that "until we see changes we're not going to be satisfied."  

Without this change, consequences could be dire for not just the nonprofits that go under, but also the ones that survive that will need to pick up their slack. 

"If the 18 percent of nonprofits who are insolvent, if they go down, the ability to absorb for the ones left to do the programs these agencies do, it's not feasible. If we change nothing and keep going down this path, what is our collective ability to provide these services? Will government do it themselves? I don't think they can do that, I think it will be extremely expensive for them ... How do we get people to understand this sector is truly on the brink and how do we get policy changes enacted to be on a path to future sustainability?" she said. 

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