Financial Stress a Constant for Social-Service Groups, Says New Report

Many social-service nonprofits face significant financial stress and may not be able to survive even short-term disruptions in funding or unexpected expenses, according to a new report that paints a grim picture of the financial health of human-service charities.

The most eye-popping statistic: Nearly one in eight organizations have total liabilities that exceed their total assets, which means the groups are technically insolvent.

“Many community-based organizations are perpetually skating on thin ice,” says Dylan Roberts, a partner at Oliver Wyman, the management consulting company that wrote the report. “Any unexpected financial event — their roof starts to leak and needs to be repaired, they have a contract they’re competing for and it falls through — any kind of surprise event like that immediately places those community-service organizations in financial crisis.”

Growing inequality, the aging of the population, and the opioid crisis are driving up the need for services, so shoring up social-service charities’ financial health is critical, the report argues. But, it says, doing so will require significant changes by nonprofits, government agencies, and donors.

Shaky Finances

The report is based on analysis of 200,000 Form 990 tax filings by roughly 40,000 social-service nonprofits as well as an online survey that drew responses from 177 charities and 40 government agencies and 40 in-depth follow-up interviews. It was commissioned by the Alliance for Strong Families and Communities and the American Public Human Services Association, with financial support from the Kresge Foundation, the Ballmer Group, and several other grant makers.

Other findings include:

• More than 40 percent of social-service nonprofits don’t have enough cash on hand to meet their immediate obligations.
• Nearly half of all social-service groups reported a negative operating margin over three years.
• Almost one-third of human-service charities have cash reserves that cover less than one month of expenses.

There were differences among charities of different sizes and organizations that focus on various issues. For example, nearly one in three housing and shelter-related groups has liabilities that are greater than its assets, compared with one in eight for all social-service groups.

The report makes both a moral and economic case for strengthening social services. Receiving high-quality services at difficult times helps people become healthier and more productive, which in turn lowers the amount of money society pays for big-ticket items like health care and corrections.

Making an economic case will likely be important as nonprofits face the prospect of government budget cuts and changes in the tax code related to charitable giving.

“The sector really has a number of converging forces hitting it at one time,” says Susan Dreyfus, chief executive of the Alliance for Strong Families and Communities.

Covering Costs

One of the biggest financial challenges that social-service organizations face is government contracts that don’t cover the full cost of providing services. Both human-service charities and government agencies that responded to the survey estimated that government funding covers roughly 70 percent of direct program costs.

For the social-service ecosystem to get stronger, government contracting practices have to change, says Ms. Dreyfus.

“I’ve never once seen a government contract for an information-technology project not cover the full cost,” she says. “It’s imperative that all of us see and understand the importance of the community-based organizations, not just in the delivery of these critical services but in the building of strong and healthy communities.”

Other obstacles cited by the report include restrictions on funding by both government and philanthropy, overlapping and conflicting regulations, lack of financial risk-management expertise, and outdated technology.

5 Recommendations

To strengthen the financial health of social-service organizations, the report suggests that:

• Nonprofits, government agencies, and philanthropy must commit to assess outcomes, standardize measures, and direct funding to programs that demonstrate the greatest impact.
• Human-service groups have to develop their capacity for innovation and experimentation, and government and foundations need to realize that some of the new ideas will fail.
• Social-service charities need to develop deeper partnerships and networks with one another and explore mergers and affiliations. Government and philanthropy should provide financing to make that possible.
• Social-service charities must develop more sophisticated finance and financial-risk capabilities, including scenario planning and program-continuity planning.
• Regulators at all levels of government should work with social-service groups to review and reform regulations.