Although the “Pay-What-It-Takes Philanthropy” article rightly highlights the need for foundations to step up and reimburse a nonprofit’s true indirect costs, foundations aren’t the source of our biggest financial challenge. For Good Shepherd Services, under-resourced government contracts do us far more financial harm.
Good Shepherd Services is a large human services provider in New York City. We operate nearly 90 programs that help more than 30,000 young people and their family members in struggling neighborhoods throughout city. We’ve been fortunate to work with foundations—Edna McConnell Clark and The Clark Foundation, to name two key long-term supporters—that have provided us with the general operating support we need to build our capacity. It’s rare for nonprofits to find a foundation that will provide general operating support and allow it to be used where it is needed most. But it’s even rarer to find a government agency that covers the full cost—both direct and indirect—of the services for which it contracts. We have more than 150 government contracts, and because of that we need to raise 20 percent of our approximately $88 million budget privately, an enormous gap that we struggle to fill each year.
Our new federal indirect cost reimbursement rate is 17.2 percent—the highest among our government contracts. Why? Because we have a very robust program evaluation and training department, and we manage by using data. That is what it takes for an agency committed to utilizing evidence-based and evidence-informed practices to manage more than 150 government contracts. By contrast, the New York State Legislature has imposed an overhead cap of 15 percent on state social services contracts. But our biggest challenge is New York City, where contracts traditionally have never exceeded 10 percent for overhead, and many have paid less.
Fifteen years ago, government contracts received regular adjustments to reflect the increased costs of doing business. At that point, 10 percent was doable. Since then, emphasis has shifted dramatically toward compliance, evidence-based programs, and valuable, but costly, program evaluations. All of that demands sophisticated databases and technology. In addition, providers of evidence-based programs must ensure specific implementation and model-fidelity standards, which requires creating new administrative capacity and on-going training that are enormously costly. Now 10 percent comes nowhere near our true expenses. Low fixed-overhead rates are destabilizing to nonprofits like Good Shepherd Services, and the services we provide, whether they come from government or foundations.
The city government contract climate has become so unfavorable that increasingly we and others pass on contracts that don’t provide sufficient indirect reimbursement for the quality of the work needed to meet our bar. And Good Shepherd Services is not alone! In response to a recent procurement for a youth employment program, agency after agency declined to apply because of insufficient funding for administrative costs.
To make up for the shortfall we experience from government contracts, Good Shepherd Services engages in a number of intensive fundraising activities. We gratefully accept general support funds from our donors. We organize two gala dinners and two golf events each year, and we use our monthly newsletter and web site to appeal for support.
Solving the problem of low, fixed overhead reimbursement rates won’t be easy. It is made more difficult by the lack of a standard definition of overhead or indirect costs. One first step to address this problem is for all stakeholders in the field to agree to a clear and shared definition of indirect costs.
The need to direct private fundraising dollars to cover un-funded costs in government contracts stymies Good Shepherd Services’ ability to continue our long history of innovation. We have had the distinction of creating program models that have been replicated in New York City and across the country. For example, we started the Transfer High School model to re-engage students who have dropped or fallen behind. It became a core model in the Bloomberg Administration’s high-school graduation strategy that led the Bill & Melinda Gates Foundation to fund Good Shepherd Services to codify the model for national replication. We believe that there are many other new models that need to be created to serve our population well, and we are eager to do this! But when we have to use our unrestricted money to fill the gaps left by government contracts, we can’t afford to innovate and create new models to meet today’s needs. That is a real tragedy.
Fortunately, nonprofits in New York City are organizing to amplify their concerns about insufficient government contracts. The Human Services Council of New York, which represents hundreds of New York City nonprofits, is taking the lead to form a committee that will create a rating scale—red, yellow and green—to signal whether city contract procurements meet acceptable standards, including coverage of indirect costs. This will help all nonprofits make better contracting decisions and encourage government to improve. Rating contracts is a whole new frontier for nonprofits. But we hope it’s an important step to breaking the grip of the “starvation cycle” that jeopardizes the work of so many social services agencies.