Nationally, two out of every five nonprofits (41%) report that governments paid them late at least once in 2009.[i] The dollar amounts are significant: on average the federal government owed $97,635 on each contract, state governments owed $117,679, and local governments owed $38,937.[ii]
Failure by governments to pay their bills when they are due amounts to an unreasonable taking – essentially forcing nonprofits to involuntarily bankroll the government services they provide. This practice increases the cost of providing services, shortchanges the people who are most in need, and forces nonprofits to borrow or raise funds to fulfill the governments’ legal obligations. Some states owe individual nonprofits hundreds of thousands of dollars for contracted services already provided, and reports indicate that nonprofits are being forced to wait increasingly longer – sometimes a year or more – to receive payments from governments for services the nonprofits already have provided.
By withholding payments to nonprofits, governments effectively use that money as free financing. This practice unfairly takes money from nonprofits, which are essentially strong-armed into providing interest-free loans to governments. To add an ironic twist, nonprofits that do not receive payments on time from government often have to secure “bridge loans” to fill the void until governments pay what they owe. But nonprofits fortunate enough to find a bank willing to loan them money for this purpose then get stuck with paying the interest because governments will not reimburse those costs – costs incurred because governments failed to honor their written contracts. This has the effect of diverting more money from actual delivery of services to those in need.
What Governments Paying Late Looks Like
Government officials, the media, and now the Urban Institute Study all chronicle the major problems that human service nonprofits are experiencing as a result of governments failing to pay on their contractual obligations. The scale of late payments is frightening when one considers the extent to which our nation’s human service delivery system depends on reliable and consistent access to needed services.
- In Illinois, the Comptroller issued a response to a Freedom of Information Act request listing the 2,000-plus nonprofits that the state owed more than half a billion dollars for the first six months of this year alone.[iii] The Comptroller, Daniel W. Hines, took the unusual step of posting on his website an open letter to nonprofit human service providers acknowledging the severity of the problems caused by the state’s delinquent payments:
I remain impressed as always by the important work you do to ensure that our most vulnerable citizens are cared for and protected. Moreover, your ongoing commitment to continue working in good faith as business partners with the State of Illinois is truly commendable given the fact that the State has been anything but a good business partner in return. … [I]t is time for our [State’s] leaders to recognize that the public service community and its hundreds of thousands of employees is not just an essential purveyor of critically needed services to our most at risk population but is a significant element of our state’s economy.[iv]
- Recently, California, Pennsylvania, and New York were unable to pass their budgets by the start of their fiscal year.[v] For each state, this was a continuation of the economic and political impasse that has created significant challenges for nonprofits in the past.
- Pennsylvania’s historic budget crisis of 2009 caused untold disruptions in services. In Allegheny County, for instance, the Department of Human Services notified its service providers that the office was unable to make payments for advances, pre-payments or services rendered for the 2009-10 service and vendor contracts until the passage of the budget, which faced a $3.25 billion shortfall.[vii]
- A recent survey conducted by the New York Council of Nonprofits found that 66 percent of nonprofits said they had been forced to take out a line of credit due to late payments from government agencies.[viii]
- The budget impasse in California in 2009 led to the state paying some of its bills with I.O.Us. Nonprofit with contracts with the state struggled to maintain operations, but suffered additionally under a unique quirk in California law, which states, “No nonprofit public benefit corporation shall be eligible for a late payment penalty if a state agency fails to make timely payment because no Budget Act has been enacted.” [vi]
- In Tennessee, a nonprofit responding to a recent survey by the Alliance for Nonprofit Excellence in Memphis described waiting “eight to nine months on the county… At one time we were owed $500,000.” Another survey participant, in describing how a contract that was supposed to begin in July took until October to get signed, observed: “we’re financing the government.”[ix]
Last year, New York’s Comptroller investigated state agencies to see how promptly they were approving contracts. His report found that state agencies in New York were processing contracts late about 92.5% of the time, which then delays payments to nonprofits.[x] In the interim, nonprofits are put in the precarious position of having been awarded a contract and instructed to begin performing, yet technically they do not have a signed contract in hand. Moreover, without a signed contract, they cannot get paid. So when the state sits on the contracting paperwork, it means the nonprofit is expending its own resources hoping that the state will act in good faith and pay it.
How Governments Paying Late Hurts
Nationwide, nonprofits experiencing late payments from governments were 17% more likely to have to freeze or reduce their employees’ salaries than nonprofits without this problem.
- In Tennessee, as in many places, the impact of the payment problems is so great that nonprofits have to make painful decisions to stay afloat. A homeless prevention program in Tennessee recently reported “a fairly large number” of local residents had been evicted from emergency housing due to delays processing federal grants.[xi]
- A Louisiana human services nonprofit official stated the problem succinctly: “It is critical that federal, state and local government agencies make payments in a timely matter. Delays in payments cause programs to suffer and severely hamper the efficacy of the funding in the first place. Everyone (funder, agency, and client) loses when payments are delayed.”[xii]
- In New York, the Comptroller issued a report indicating these resulting burdens on nonprofits:
- Missed payroll
- Employees laid off
- Reduction/elimination of service
- Taking out loans[xiii]
Where Governments Paying Late Is Happening
Nonprofits in Illinois reported this occurring the most, with more than eight out of 10 (83%) nonprofits there reporting that receiving late payments was a problem. About seven out of ten nonprofits in Maine, Connecticut, the District of Columbia, and Pennsylvania also identified late payments from governments as a problem.
Who Is Making Late Payments
The reports on late payments relate to all governmental entities in a state – local, state, and federal –and not just state governments. Nonprofits in half the states report that the federal government pays its contracts late – and the federal government pays 60 days or later in 19 states. (Of course, if individuals are late paying their taxes to the government, the government imposes a penalty – yet there is no equivalent penalty in many places when governments fail to pay their nonprofit partners on time.)
Even worse, at least 30 state governments paid their nonprofit partners more than 30 days late, including 17 states that paid 90 days or later. Local governments in 18 states paid late, including 90 days or later in 10 states. Deeper review of the data reveals curious patterns. For instance, nonprofits in eight states (Alabama, California, Georgia, Illinois, Maryland, Michigan, New York, Rhode Island) reported late payments of 60 days or more from all three levels of government.
[iii] Illinois Council of Human Service website: Tax Exempt Orgs Awaiting Payment as of July 12 10.pdf
[iv] Open Letter to Service Providers, Illinois Comptroller Daniel W. Hynes (emphasis added) http://www.ioc.state.il.us/news/isp.cfm.
[v] “Late State Budgets,” National Conference of State Legislatures, August 27, 2010, http://www.ncsl.org/default.aspx?tabid=17823.
[vii] Pa. budget crisis leaves state-dependent agencies cash-strapped - Pittsburgh Business Times (July 31, 2009).
[viii] Comptroller Questions, Nonprofits Respond, New York Council of Nonprofits, (January 19, 2010) http://www.nycon.org/news/newsDetails.asp?newsid=266.
[ix] “Downstream and In Demand: Another Look at Mid-South Nonprofits and the Economic Crisis,” (Alliance for Nonprofit Excellence, August 30, 2010), http://www.npexcellence.org/Downstream2010.pdf.
[x] Prompt Contracting Annual Report Calendar Year 2008, State of New York, Office of the State Comptroller (May 29, 2009) http://www.osc.state.ny.us/reports/fiscal/contract_annualreport.pdf.
[xi] Late federal funding to homeless program results in evictions, Johnson City Press (February 4, 2010) http://www.johnsoncitypress.com/News/article.php?ID=73720.
[xii] Louisiana Nonprofit Sector Fiscal Health Survey, Louisiana Association of Nonprofit Organizations, June 2010, page 19 ; see also this observation from another survey respondent: “Expecting nonprofits to carry state expenses while waiting for contract approval is not realistic ‐‐ cash flow is an incredible problem.”
[xiii] “New York State’s Not-for-Profit Sector,” Office of the State Comptroller, 2010, http://www.osc.state.ny.us/reports/economic/nfp2010.pdf.