Mary Kate Bacalao is the Director of Public Funding at Larkin Street Youth Services, the largest provider of housing and services for homeless youth in San Francisco and co-chair of San Francisco's Homeless Emergency Service Providers Association (HESPA), a coalition of 30 nonprofits providing essential services for people experiencing homelessness.
Nonprofits serving the most vulnerable New Yorkers are waiting. The city owes them hundreds of millions of dollars in cost reimbursements, and they’re racking up tens of millions in interest and fees to compensate.
In January, 275 nonprofit representatives sounded the alarm in a letter to the mayor’s office estimating that almost 20 percent of their agencies are technically insolvent, owing in no small part to chronically late payments on city-funded social services contracts. The city charter mandates that the comptroller “register,” i.e. sign off, on a contract, confirming that the city has funds to follow it through. According to data from the city comptroller, in fiscal year 2017 the city registered more than 90 percent of its social services contracts after the contract start date, with an average registration date of 210 days after the start date.
New York City agencies usually begin the services per the date on the contract, trusting that it will be registered. Once registered, a contract’s scheduled payments can be made but many require the nonprofit to submit a monthly reimbursement form detailing expenses. Each of these must be approved and can incur delays.
New York City nonprofits aren’t the only ones struggling. Hilda Polanco, founder and CEO of the nonprofit consultancy, Fiscal Management Associates, has seen gaps of six months or more from the time nonprofits begin delivering services to the time they finally collect the cash that public agencies committed to pay, particularly in Chicago, where social services providers weathered several months of state funding delays. In San Francisco, the Homeless Emergency Service Providers Association (HESPA)—a coalition of 30 nonprofits operating on the front lines of the homelessness crisis—sees the same six-month gaps in city-funded contracts, which force their agencies to carry hundreds of thousands or more in month-to-month service costs.
As co-chair of HESPA and a senior manager of Larkin Street Youth Services, I have seen and dealt with these problems firsthand. Like many other cities, San Francisco doesn’t have the depth and quality of data that the New York City comptroller's office provides, to help quantify the effect on local nonprofits. This visibility into a city's contracting system presents a critical opportunity to amplify the discourse on an issue that poses serious risks not only for nonprofits, but also for the vulnerable communities they serve.
These gaps compromise the financial health of individual nonprofits on a scale that weakens the entire social safety net, including the homeless response system. Nonprofits need a steady flow of cash to provide a steady flow of services to cities’ most vulnerable residents, particularly homeless residents. When public agencies take months to process payments, nonprofits must divert their resources from the strategic priorities of ending homelessness to the tactical priorities of managing cash. They must furlough staff or delay hiring for critically needed services; they must spend within their means, even if that means providing fewer shelter beds so that more people sleep in the streets.
Cities must confront this as a crisis—one that compounds the humanitarian crises, like homelessness, that they contract with nonprofits to solve.
Research from Oliver Wyman and SeaChange Capital Partners shows that nationally nearly one in eight social services nonprofits is technically insolvent, “limping along from payroll to payroll.” For shelter and housing providers, who generally have high fixed costs, the number jumps to one in three. The reason? Financial stressors imposed by government contracts that not only underpay nonprofits, but underpay them late, with additional compliance and overhead costs red-taped on top.
Conceptually, there are two problems in play. The first goes to the amount of money the city is contracted to pay the nonprofit; the second and much more insidious problem is cash flow—the timing of the money out the doors of public agencies and into nonprofit accounts. Even if government contracts paid a sustainable amount—and they don’t—a nonprofit with enough contract revenue for the year will have no cash in hand to pay the bills if payment is slow.
Nonprofits from New York to San Francisco are delivering unpaid services for up to six months or more while they wait for finalized contracts. And that’s only the first step to getting paid. The second step—invoicing for payment—can take an additional 30 to 45 days, depending on the grace period each government agency gives itself for paying nonprofit invoices.
New York City’s homeless services nonprofits may have it the worst. The Department of Homeless Services registered all of its contracts late, most about a year and a half after when services started. To put that in perspective, a nonprofit with a two-year contract may do 75 percent of the work before it sees a dollar in reimbursement. That’s a long time to wait, especially for nonprofits paying not just their own office rents, but also the rents keeping thousands of formerly homeless people in housing.
In New York City, SeaChange calculates a cash flow burden of $675 million for the 1,025 nonprofits with City contracts for social services. This breaks down to $662 million in “negative” cash flow (i.e., nonprofits delivering services faster than they’re being reimbursed) and an additional $13 million in financing costs, like interest and fees. While the negative cash flow is not an “absolute loss”—it will be reimbursed eventually—the interest and fees are a non-refundable cost of doing business with the city. And these unnecessary fees end up being diverted to banks and lending institutions rather than providing for the people who need basic necessities like shelter. When money can’t get out the door fast enough to provide shelter and housing, homeless people often can’t get inside.
Emergency housing subsidies are a perfect example: a nonprofit may have a contract that pays for 50 people to sleep inside (at motels, single room occupancy (SRO) hotels, etc.), but if the contract doesn’t pay for several months, then the nonprofit must buy shelter with whatever cash it has on hand. In practice, this could mean that only 10 people get shelter while the other 40 sleep outside—despite the fact that there’s a city contract paying for all 50 people to be inside.
Of course, buildings owned or leased by nonprofits will provide the same number of beds regardless of whether the nonprofit gets paid on time. But in high-rent jurisdictions that rely on rental subsidies to shelter homeless people, cash flow is the lifeblood of the system. Landlords on the open market won’t wait for the rent.
When seemingly routine administrative delays result in more people being homeless on any given night, cities should treat it like a crisis. But officials may be reluctant: Cities already struggling with a homelessness crisis can hardly afford a secondary bureaucratic crisis of the city’s own making.
In New York City, the solutions are flowing about as slowly as the cash. The de Blasio administration launched a Nonprofit Resiliency Committee when cash-flow problems surfaced in 2016, but officials recently told the City Council that improvements to the contracting system won’t come online until 2020.
SeaChange recommends several fixes, from creating a $150 million fund to finance the smaller contracts (they’re 75 percent of all contracts), to collecting fees from late-paying public agencies and using those to capitalize the fund. Above all, SeaChange notes that nonprofit boards must be “laser-focused on liquidity,” which may mean rejecting “on-mission” contracts with “potentially fatal timing delays.”
Cities should also be laser-focused on liquidity. While solutions could surely include financing mechanisms and other creative workarounds, they should primarily target the system itself—simplifying policies and procedures, eliminating unnecessary layers of administration, and reducing grace periods for paying invoices—rather than enable an unacceptable status quo that deprives nonprofits of operating cash and makes homeless people wait for the services they need today.
Housing is the answer to homelessness; it's just not the only answer. Housing only works when money can get out the door fast enough to sustain it. City contracting systems should be helping people off the streets—not inadvertently keeping them there.