America Needs a New Way to Finance Social Services

Our country’s human-services financing system, rooted in the 1960s, needs to be modernized. Programs and services to help the nation’s most vulnerable people have changed substantially over the years, as have the ways in which they are financed. Most significant has been the shift from grants to federal cost-reimbursement contracts and the increasing use of of Medicaid to support human services. Those financing approaches have strained nonprofit organizations to the breaking point.

Each year, more than $1-trillion in federal, state, and philanthropic spending goes to nonprofit organizations, including many that focus on helping the neediest people in society. Grant makers and governments are increasingly concerned about accountability, social-service organizations face challenges reaching sustainability, and our most vulnerable populations often struggle to find the services that meet their needs.

The current economic crisis has reaffirmed the fragility of the nation’s human-services system. As more and more families face hardship, government and nonprofit organizations are stretched to a breaking point as they try to meet demands for aid. Ironically, many human-service providers find themselves in the same situations as their clients: reduced cash flow, decreased credit availability, and few tools at their disposal to create stable, long-term financial well-being.

Our conventional 20th-century approach to financing human services has strained organizations that provide social services. A burdensome patchwork of government aid results in a tangle of regulations and constrains true integration of services to those most in need. Nonprofit organizations are challenged in creating capital, maintaining strong balance sheets, and preparing for the future. Innovation in social-service delivery — so passionately promoted by the Obama administration — will not happen fully if nonprofit groups are required to create and dismantle programs based on the availability of government money and the uncertainties of government financing cycles rather than need, effectiveness, and results.

It doesn’t have to be this way. It will take time, effort, and thought, and it will take determination, big-picture thinking, razor-sharp analysis, and consensus building between Democrats and Republicans, liberals and conservatives, Congress and the administration, federal officials and their state counterparts, but we are sure that significant changes in financing human-service delivery are possible and that such changes will reinvigorate organizations that care for society’s neediest members.

What makes us so confident this can be achieved? In May 2009, our organizations gathered leading business executives, researchers, and experienced social-service leaders who reflected, in microcosm, the breadth of interests and perspectives that would have to come together to design and promote change. Given the diversity of participants, the amount of consensus achieved was, at the very least, a hopeful harbinger.

We and the other participants agreed on three priorities: to encourage innovations in providing social services, to integrate services for efficiencies that help both nonprofit groups and clients, and to better capitalize social-services groups. We then identified specific approaches and benefits that can be obtained in relatively short periods of time. We call these ideas to the attention of Congress and the Obama administration.

Spurring innovation. Social-service providers are generally nonprofit organizations that often don’t know exactly how much their services cost. They frequently take whatever money governments are willing to offer even if their contracts do not cover expenses, supplement cost overruns by raising money or cutting back in other areas, and end up with little or no resources to finance the growth of their organizations and foster innovation.

To begin to solve those problems, participants urged government to overhaul its purchasing system, adding pay-for-performance provisions; supporting new business functions in human-services organizations, including more support for sophisticated consortiums to handle back-office functions like finance and personnel; and developing an enhanced capacity for capital investments.

Integrating services. Participants expressed concern about the extraordinary number of discrete government programs that comprehensive human-service delivery systems must tap into to effectively serve their clients. The vast array of separate financing sources often results in excessive administrative burdens on human-service providers. To tap into each source of support, nonprofit groups must follow different reporting standards and rules that focus on different results — some at odds with one another. This fragmentation of financial sources virtually ensures the lack of a common electronic platform that allows providers to track client results or exchange client information in a way that promotes more efficient and effective delivery of services.

To resolve those concerns, participants urged the development of a national human-services strategy built on the premise of serving the whole individual or family and thereby putting the financial system backing those programs into a more consumer-centric model that would promote effectiveness. In addition, they sought new investments in human-services technology predicated on the same idea behind the effort to make medical records easily available electronically; financial incentives to encourage providers of different services to operate in the same location so clients don’t have to travel far; shared administrative processes and common standards for providing services and measuring results. Participants also suggested that open contracting — the central tenet of which is to involve human-service providers in the planning of government-financed service programs — could also help bring transparency to human-services delivery, as well as better coordination in planning social-service efforts.

Long-term financing. Participants explored ways to create increased capital flow for nonprofit human-services groups so they could find money to make much-needed long-term investments that would ensure the sustainability of their organizations. Participants urged exploration of finance innovations needed to support groups that have long depended too heavily on traditional government grants and contracts. While pursuing mechanisms where nonprofit groups could collaborate with for-profit organizations to develop lending programs for people in need, participants simultaneously highlighted the challenges of introducing more market forces into the nonprofit world. Participants didn’t want to suggest that nonprofit organizations should necessarily work more like corporations, but rather that they should stay focused on how they could better use capital-market ideas to further their important missions.

Participants called for variations and expansion of small-loan programs that are now common in the developing world; a national human-services bank that could make loans to organizations for capital projects, finance new programs and business lines, and provide venture capital to stimulate innovation; creation of financing organizations that might better connect investors with good social investments in services to those in need; and investigation of policies that, perhaps modeled along the lines of the federal low-income-housing tax credits, could stimulate growth in financing for human-services groups.

It seems more and more clear to us that the traditional late-20th-century way of financing human-service delivery on the “dollar in, dollar out” basis of government grants and contracts is running headlong into the brick wall of its limitations. There simply isn’t going to be enough money to maintain the status quo. We have to get smarter about how we spend increasingly precious resources and we have to test new, more modern ways to finance the system.

Fundamentally we are either going to lead change or lag behind it, but, one way or another, change is coming. If we are going to lead change and create new, 21st-century financing models for human-service delivery, there is no better time to start than now.

Robert N. Campbell III is vice chairman and U.S. state sector leader at Deloitte LLP, Peter Goldberg is president and CEO of the Alliance for Children and Families, and Dennis Richardson is president and CEO of the Hillside Family of Agencies. A report detailing the ideas devised at the May 2009 meeting is available on Deloitte’s Web site.