Late Payments and Other Tough Stuff

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In an article in Michigan Nonprofit Association’s May-June newsletter, Dione Alexander of the Nonprofit Finance Fund likened running a nonprofit to “walking a tightrope without a safety net while juggling.” This image either paints us as highly skilled and adventurous with nerves of steel—or a bit foolhardy, like kids who jump off the garage on a dare or wander onto a frozen river in November perhaps. There’s no doubt, though, that a really good nonprofit executive is a master of complexity.

There are times, however, when our very competence drives others to take liberties that make our jobs more difficult.

One executive director told me that the state contract that comprises most of her budget requires that her organization never turn anyone away or even put them on a wait list. But they have just been informed that the state will not pay for any work done under this contract since mid April until September—and the amount they will be owed at that time will be between $700,000 and $800,000. The organization has a credit limit far less than that so this makes the near future nerve wracking at best. In short, the state has forcibly taken a loan from this small organization while the agency worries about how to make payroll and tries to convince vendors to wait to be paid. Says the executive, “We’ve always had to ‘slow pay,’ and all the providers have always found a way to make it through so there’s never really been a huge up-in-arms, ‘this-has-got-to-stop’ reaction.”

The problem of states making late payments to nonprofits is growing considerably, as many state budgets become more constrained and that is causing plenty of fall out at the agency level. And we know that late payments on contracts is not the only issue you may have in contracting. The same executive director I spoke to told me that the state is only covering about 80% of the costs of providing the contracted service. These issues are, of course, not new but they are definitely making a bad situation worse for many organizations as nonprofits experience declining revenues from other sources.

We would love to hear back from you about what is happening in your state—good or bad—and how your agency is handling the situation.

Finally, I am pleased to introduce to you two new features on the NPQ website:

  • a daily digest of news about and affecting nonprofits with a smattering of commentary.
  • if you’re not a subscriber to the print magazine, every article in our 10-year archive is now available for individual purchase.

Check in with us over morning coffee and let us know, as always, what you think!

  • Nicole

    I was the Director of a nonprofit organization a few years ago that had similar issues in Georgia. The state was so bad about getting drawdowns back to us, that eventually the Board decided to dissolve, which turned into a community circus. On top of that were budget cuts by almost every funder (this was in 2007), and there were other issues with past performance such as late report submissions, client, complaints because services were cut-because the money wasn’t coming in, and all of this led to more unfavorable reviews to funders. We considered taking out a loan, but I am a business administration major and I was not for this proposal. Closing was the only choice because we did not have enough money to make our payroll, which was the most important issue. I took a break after that drama and I understand how the Director feels. You have to really decided if your organization can afford to do business anymore. You can’t litigate with the state, you already don’t have the money to operate. You board really has some tough decisions to make, I have been on the other side of the table. 🙁

  • John G. Fike, CFRE

    If a state agency is going to a) set a condition that no one can be turned away or put on a wait list; and b)going to cut the amount of funding they pay for services, and c) continue to be late payers, I see only one response that can really be made to this administrative type of public policy making: the nonprofit should stop serving the people, return any state monies held, and simply go out of business.

    There’s really no other way to deal with this type of situation. Anything in the realm of the charity trying to stay in business and serve people sets up a co-dependenr relationship by permiting the state to have its cake and eat it too. If the charity keeps trying to stay alive and serve people then the people are served off somebody else’s dollar.

    Rather than taxpayers paying to make society better through raised taxes, levied to meet the state’s commitment to the social safety net, the contributors and donors are asked by the charity to pay. This means service continues to that service population even though the taxpayers don’t allow the legislators to raise taxes and the state still wants to have responsibility for seeing to it that certain populations are served.

    The state, any state, good economic times or bad, can’t have it both ways. A state should not try to put the burden on Nonprofits to pick up the slack and somehow find money to continue services when the taxpayers and their elected representatives will not raise taxes to keep the state’s commitment to making society better. Public policy shouldn’t be made in this co-dependent way.

    The other issue raised is this: that contributors to charity cannot, in a Depression or Recession that is international in scope, ever hope to give enough money to fulfill a state’s obligations or the federal government’s obligation to making society better and caring for people in need. What we need is a strong commitment by a state or by the federal government to meeting peoples’ needs and carrying out their responsibility for a livable and sustainable society.

    If we just stop serving the needy, and the many people who receive state and charitable services, then hopefully there will be enough hue and cry in the streets, enough expression of dissatisfaction, (god forbid, even mob violence!) that the state’s legislators or federal elected officials will be forced to raise the taxes necessary to keep their commitment to the quality and sustainability of the social fabric.

    We shouldn’t be trying to keep these nonprofits going in the kind of rock-and-a-hard-place siutation you have described.

    Regards,

    John G. Fike, CFRE
    President
    Philanthropy Solutions, LLC.
    Ypsilanti, MI
    http://www.philanthropysolutions.com
    734-484-2166
    http://allthingsfundraising.blogspot.com

  • Greg Cantori

    We provide Program Related Cash Flow loans precisely for this reason. In reality, it provides us, the funder, and the nonprofit an ally in making it known the nonprofit is being used as a bank for public funding. Giving these cash flow loans gives me the information and permission I need to get to the people responsible for the mess. By taking the NPO out of the direct conflict, we can put some uncomfortable pressure on program officers and politicians to get these NPO’s paid on time. The situation has brought these NPO’s to their knees both financially and emotionally. As the others have said, we need to make a statement that if government cannot, or will not, provide these services, then either the NPO

  • Brooks Kelley

    We are in the State of Michigan which is facing a $1.7 Billion dollar deficit at last count. For one grant that actually is Federal pass through, they are allowing billings only 2 times per year. Another state contract that we have is subject to a 7 day cancelation notice. In the past, the State of Michigan has just slowed down on payments under this contract and then stopped actually paying out until after the start of the next fiscal year. They have operated on a cash basis. With the way things are going, I could see them holding off some year doing a payment at the beginning of the next fiscal year and in one month being out of money. So far this contract has not been slow (knock on wood) although I am not sure why. This contract I think is at risk of not being renewed in October since it is funded by the General Fund and the State has no money. (the $1.7 Billion was before the GM bankruptcy.)

  • Jenny Edwards

    I was both horrified and relieved to hear that other nonprofits are experiencing the same as our organization — forced loans to government agencies. Things have definitely gotten worse.

    We assist law enforcement with equine cruelty cases and funding from the county is generally cut off after the first 30 days, but most cases take two years to prosecute. Adding insult to injury, defendants are allowed to “make payments” that are as low as $30 a month – which means we could wait 18 to 20 years !!!! to receive the final payment. And this is just for one horse, when typically we take 30 per year.

    This situation, while always difficult, has become untenable in the current economy, and as a result we have cut staff, every possible expense, and have even been turning away new horses that desperately need our help.