Let’s Start a Loan Fund to Keep Social-Services Groups in Business

For decades the YMCA has been running effective child-care programs in low-income neighborhoods in Los Angeles. The Latchkey Program provides kids with tutors, mentors, and a safe place free from gang crossfire on the streets.

About a month ago, California was threatening to cut the money it provides to the Y for that program — about $3.6 million for 16 child-care sites. That decision would have forced poor families to find another way to keep their sons and daughters — a total of 774 children — safe after school. Today the federal poverty line for a family of four is $22,050. Imagine feeding, clothing, and housing your family on that budget, then trying to eke out a few extra hundred dollars every month for day care.

Then there is Lutheran Social Services of Illinois. Two home-care assistants from this organization routinely visit Fred Wing, an 85-year-old struggling to make ends meet while dealing with serious health issues. They are from “Intouch Home Care,” a program that helps older people stay at home rather than be placed in nursing facilities. So vital are Fred’s assistants that he calls them “Angel One” and “Angel Two.”

Such programs can continue to provide unquestionable benefits — if state and local governments around the country stop being delinquent in paying for them and stop pulling money for those efforts altogether.

What happened to Latchkey in Los Angeles? Notices had already been sent to families stating some day-care programs were closing when, late on August 31, California rerouted federal stimulus dollars at the last minute. The Y was just hours away from closing all 16 sites. Fortunately, 744 kids got a happy reprieve, but only until next July, when the government money is scheduled to run out. Similarly, unless the Illinois state government pays Lutheran Social Services promptly, people will be turned away from programs designed to prevent child abuse, counsel foster kids, and help mentally ill people.

In many states, governments have given nonprofit groups, already lean from the recession, contracts to care for our most vulnerable citizens and then have refused to pay them for their services for 18 months or more. Several states have dropped programs and contracts, hoping nonprofit organizations will find some way to continue services anyway. Let’s face it, if you tried to run a business this way — or even your family budget — you would go bankrupt.

Ultimately, who will suffer? Angel One, Angel Two, and millions like them who risk joining the ranks of the unemployed. But, to an even greater extent, the kids in Los Angeles, vulnerable people like Fred, and 7.8 million others who are in dire need of such services.

This comes at a time when homeless shelters are filled to capacity and food lines stretch out the door. Nonprofit groups are struggling to solve the immense needs of communities around the country. When you add governments defaulting on service contracts or deciding to stop supporting certain programs altogether — as in the case of California and many other states — the impact is staggering because government money amounts to about 66 percent of the budgets for the nation’s health and social-service charities. That adds up to $85.3-billion annually.

New York dropped support for programs that help people get over substance abuse and homelessness, as well as those that care for the elderly. California issued IOU’s to welfare recipients and people with disabilities and older state residents — IOU’s that some banks won’t even accept.

While the American Recovery and Reinvestment Act has helped stave off a worse disaster, state ledgers will probably continue to bleed from the recession.

States’ inability to get money to charities in a timely way is a big problem — about $15-billion is provided late, or nearly one in every five dollars that social-service groups use to finance their services to the nation’s vulnerable. In fact, one survey found that 19 states have delayed payments for grants or contracts to nonprofit organizations.

In the past, nonprofit groups coped with temporary financial gaps created by delayed state payments by falling back on lines of credit and private donations. Those options are not viable today. Many organizations cannot obtain new or expanded lines of credit because of frozen credit markets. Seeking private donations is equally challenging because of the recession: Americans simply have less to give. Corporate donations, which track market conditions, have been declining steadily for many years as a percentage of total philanthropy in the United States. Foundations are stuck in the same quagmire with endowments down by as much as 35 or 40 percent. As a result, foundation giving has shrunk considerably. Even in good times, the combined donations of individuals, businesses, and foundations could never make up what government fails to provide.

Fortunately, for those nonprofit groups affected by the confounding problem of late payments, there is a potential solution — a nonprofit bridge-loan program — that would cost the government very little, carry minimal risk, and help continue services for the coming months. This program could be administered in a number of ways. The federal government could enlist community banks and other financial institutions to offer noor low-interest loans to nonprofit groups. Another option is modeled after the Auto Supplier Support Program that was created under the Troubled Asset Relief Program to help car-part suppliers stay afloat when the auto industry collapsed. Under this approach, nonprofit groups would be able to use accounts receivable, or money the government owes them, as collateral for temporary, short-term loans.

Both options are, in fact, a safe bet. Over the past 40 years, 96 percent of loans made to nonprofit organizations have been fully repaid with interest, according to a recent study by FSG Social Impact Advisors

Unfortunately, there is no such remedy for nonprofit groups in states that have simply decided to eliminate spending on important social programs. In those cases, it’s not financing options that are needed but a re-examination of the roles — and duties — of government to support its fragile and most vulnerable citizens.

In the end, we need to remember the young and old — the kids in L.A., the older people in Illinois — and many more nonprofit clients. Although the government created this problem by failing to honor its contracts, it can be part of the solution by creating a bridge-loan program now. Doing so would safeguard millions of people at risk who depend on such services for their very survival.

However, where the government has made the choice to respond to its financial challenges by turning away from those least able to fend for themselves, we need to press for a serious discussion of the responsibilities of government, not only to allow its citizens to survive but also to embrace the opportunity to thrive. Failing to do this will bring us a bill due-and-payable in a few years that promises to be many times greater than the money we imagine we are saving today.

Diana Aviv is chief executive of Independent Sector, a coalition of charities, foundations, and corporate-giving programs. Neil Nicoll is the chief executive of YMCA of the USA.