The Business of Nonprofits: NYS Aims to Revitalize the Sector

I remember the looks on the faces of my undergrad sociology classmates when they learned I was also majoring in business. A traitor was in the ranks! How could I possibly be one of the good guys while learning about global markets? Conversely, in my business courses I was suspect for having an affinity for the “softer” side of academia—subjects that surely weren’t as important or rigorous as microeconomics.

This stereotyping divided our student body – groups were aware of each other, but rarely interacted and certainly didn’t recognize their commonalities in perspective or purpose. During my professional career I have witnessed similar antics between our sectors – nonprofit, business, and public. Sure, we know the others exist, but we aren’t really playing on the same team.

That is why I found it quite refreshing to read the recently released report to the NYS Attorney General – Revitalizing Nonprofits Renewing New York. The report was the result of an appointed Leadership Committee for Nonprofit Revitalization which consisted of nonprofit leaders from throughout the state who were tasked with developing concrete recommendations of how the state can both help and regulate nonprofits.

A key theme of the report was acknowledging that the sectors are important business partners. According to the report, as of October 2011, the state paid $16.8 billion through 22,000 active contracts with nonprofits to provide services. Nonprofits are significant employers, representing over 18% of the state’s private workforce in 2010 with 1.25 million workers. The services provided by nonprofits and government help improve the quality of life which affects the prospects for economic development in our communities.

Nonprofits are quick to note that New York State has been a lousy business partner.
Imagine investing millions of dollars from your business on a handshake agreement with a real possibility that your largest customer may never pay the bill or may pay you a lower amount than you planned. This is essentially what the state has required of its nonprofit agencies by its significant delays in both signing contracts and processing payments.

The first recommendation of the report is clear: Fix the contracting problem.
The State Comptroller’s review of its nonprofit contracts in 2010 found that the state was late 92% of the time, representing $1.8 billion. For the same year, agencies reported that 71% of contracts were not even approved until after their start dates. Both practices make nonprofits gamble by providing services on the hope that funding will come through the door. Despite the state’s delays, payrolls must be made, supplies ordered, and services provided – sometimes on private loans when cash flow is tight. This places the burden of government service unfairly on the backs of nonprofits.

Late and uncertain payments to the state’s nonprofit partners threaten their viability.
The recession had a triple hit on nonprofits through increased demand for services, reductions in public dollars, and declines in private contributions. Outdated reporting requirements, poor use of technology, and a laundry-list approval process all contribute to the delays, and are reasonable places to look for improvement.

Nonprofits and their boards also have room to improve.
Last year a New York Times article exposed two nonprofit executives in NYC with salaries over $1 million each while overseeing homes for the developmentally disabled – which were largely supported by Medicaid. Governor Cuomo called for an investigation into excessive executive pay and a Senate panel heard testimonies last month. Nonprofit executive compensation has long been a point of debate.  When funds come from the taxpayer, what is reasonable to pay leaders of organizations providing services to those in need? If pay is limited, can these complex organizations attract top talent? Boards set compensation levels and must have the training and accountability to reasonably find the appropriate balance.

On February 16, Attorney General Schneiderman released his nonprofit reform plan based on the recommendations of the Leadership Committee. Schneiderman announced three initiatives which he described as the “most comprehensive reform to New York’s nonprofit laws in decades.” The initiatives include:

• Nonprofit Revitalization Act: Draft legislation to reform the state’s own oversight process, improve accountability of nonprofit boards, and reduce unnecessary reporting and application burdens.
• New York On BOARD: Companies pledge to get “on board” by creating programs that encourage their employees to serve on nonprofit boards.
• Director’s U: A partnership with a host of colleges and universities to provide free or low cost training to nonprofit directors.

These reforms are a start. The rest of the report’s 38 recommendations should also be reviewed and implemented to lessen the burden on nonprofits, while strengthening oversight.

It is promising to see these examples of cross sector collaboration. The trifecta can be extremely powerful and is sorely needed to address our community’s most pressing challenges.

The real test of course is to see what comes next – and that certainly is everybody’s business.