The Equity Factor

Helping New York Nonprofits in a Time of Crisis

New York City (Photo by Oscar Perry Abello)

It has been nearly a year since Federation Employment and Guidance Services (FEGS) filed for bankruptcy, leaving 120,000 New York households without essential services, 1,900 employees without jobs, and unpaid creditors holding more than $47 million in debt.

The $250 million behemoth nonprofit human services provider had been in operation for 80 years, and the city and state agencies that contracted with FEGS were blindsided by its dire financial situation. They were forced to find replacement providers to administer about 350 programs such as vital job placement services.

FEGS, like human services providers throughout New York, was funded primarily through public contracts with government agencies. And they are just one of many nonprofit shutdowns in recent years. The trend is continuing with the announcement just last month of the closure of Steinway Child and Family Services, a 40-year-old organization based in Queens. These closures provided a clear signal that systemic issues threaten the survival of the sector as a whole.

Over the past four decades, government has increasingly transferred most legally mandated support functions to the more efficient and nimble nonprofit sector at a fraction of what it would cost government to administer directly. These nonprofits provide essential services that support the well-being of an estimated 2.5 million New Yorkers. By maximizing their clients’ potential, they help to ensure that New York maintains its global competitiveness.

The organizations deliver services that improve the physical, emotional and economic health and well-being of individuals, and help communities fight prejudice and violence, recover from disasters, and create pathways to opportunity. The collective services provided by human services nonprofits make the difference between success and failure for countless individuals and families, and the combined value of government human services contracts in New York is estimated at more than $5.8 billion for the current fiscal year. It is a significant but often overlooked sector.

But this support system is facing a crisis. FEGS’ bankruptcy took place against the backdrop of chronic funding issues in which payment rates and contract expectations are routinely misaligned and government payment delays of six months or more are routine. Too many nonprofit entities don’t have the systems in place to appropriately assess risks, undermining their ability to evaluate government proposals. In an effort to address this impending crisis, we created a commission to review the recent nonprofit closures. They conducted a rigorous assessment of the state of the nonprofit human services sector and recommended measures for bringing this vital sector back from the brink.

The commission’s findings are captured in the report, “New York Nonprofits in the Aftermath of FEGS: A Call to Action,” and include the following recommendations:

  • The public sector, private funders and human services providers need to work together to develop effective human services programs. Additionally, compliance procedures should be examined to ensure they are supporting meaningful government oversight approaches that ensure providers are financially and programmatically responsible.
  • The sector suffers from chronic underfunding and cash flow problems because government contracts and philanthropic grants rarely cover operating costs and payment is often late and unpredictable. Government and philanthropy should fund core functions and indirect costs, and contracts must accommodate cost increases or allow their surrender if they become unsustainable due to unforeseen circumstances, such as costly new unfunded mandates.
  • Service providers need to invest in technology that will help them better perform risk assessment and management oversight. The commission also suggested the sector develop a universal rating system of agencies — so they can pinpoint risks associated with government proposals.

While the sector was able to come together to absorb the programs that would have shuttered when FEGS closed its doors, there are a finite number of organizations and resources to absorb additional closures, and more organizations will go out of business if we do not change course. Action must be taken to fix this broken system, not because individual nonprofits themselves should survive, but because the programs they deliver are a critical component to the overall success of New York, and are a key component to preserving New York’s role as a global center of commerce and innovation. Every business knows that the health and well-being of its workforce is critical to productivity. Human services offer supports that maximize human potential and are worth preserving.

The Equity Factor is made possible with the support of the Surdna Foundation.

Allison Sesso is executive director of the Human Services Council of New York (HSC), an association of nonprofit human service organizations across New York.

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