Ky. Program Defunded for Having Too Much in Reserves

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June 8, 2012; Source:

Last Tuesday, Kentucky’s Boone and Kenton counties voted to eliminate funding for NorthKey Community Care for the upcoming fiscal year. The two counties had contributed $125,000 and $200,000, respectively, for the current fiscal year. One county cited the recent growth of NorthKey’s surplus and its reluctance to provide adequate financial assistance and community benefits at cost as factors in their decision. The organization has also recently eliminated staff and programs.

NorthKey provides mental health, substance abuse and intellectual disability services for northern Kentucky. “We abolished 31 positions and laid off 21 positions,” said Owen Nichols, the president and CEO of NorthKey. “We identified programs that are not sustainable under managed care and abolished those programs. We were operating one day treatment program for children that the annual budget was $600,000 and we were having to put in a third of that to operate it with revenues from other programs. It was becoming more of a burden for the rest of the organization.”

But Kirk Kavanaugh, Boone County human services director, points out, “It’s not unexpected that since 2010, (NorthKey’s) revenue has decreased…One would expect that during declining revenues, that you would have a significant decrease in cash reserves. Not the case with NorthKey.”

Nichols says that they will pass along some of the cuts made last week to other safety net agencies, “We’ve had to notify other agencies that because of this, we are having to cut funding to them…We can’t absorb all of (the county cuts) this year. The message that is being sent from Boone and Kenton is that they are no longer interested in providing those safety net services for the most poor and disabled people in the community.”

But Kavanaugh says that for an agency like this to make program cuts when it is more than doubling its reserves is unconscionable. “It would seem to me that’s what a surplus is for,” Kavanaugh said. “If agencies or programs don’t have adequate funding, that’s where NorthKey is supposed to come in.”

Likely a critical factor in this scenario is the fact that from 2008 to 2011, NorthKey’s cash and cash equivalents increased from $3.6 million to almost $8.4 million, according to tax documents filed with the Internal Revenue Service. Kavenaugh said, “I would point out that this was during a prolonged economic downturn.”

NPQ can see this from a number of angles. According to its 990s, NorthKey’s revenues in 2010 were more than $30 million, so the $8.4 million is not an unreasonable amount to have in reserves. Some might even say that it is on the low side, but in this case, context is all important. NorthKey is almost completely publicly funded, probably by some bodies which are dealing with reduced revenue pools themselves. It has cut back its services and laid off staff at the same time that it has built up its reserve. So funders are probably justified in seeing this as a diminution of services at a time when everyone is struggling to make ends meet and service needs are very high. Therefore, what might have seemed to be a wise decision to the NorthKey board may end up being a costly political decision in practice. And for those funded by the public sector, politics can mean a great deal. NPQ does wish to point out that there are trend charts on NorthKey’s website that show that the number of clients served has increased every year and that the number of days clients have to wait for an appointment has decreased but these stats are hard to interpret on their own.

This is one of those complex situations where judgments depend upon the angle from which the situation is viewed. We’d love to hear the thoughts of our readers on this situation and how it might have—or even whether it should have—been handled differently.–Ruth McCambridge

  • Nancy

    So what are the rules about reserves? Should a non profit have enough to keep the org running for 6 months, one year etc. what is considered healthy? I run a non profit with a $565k budget and we are fortunate to have several months worthif reserves. What do foundations think are appropriate. Is there a guideline? Thanks

  • ken

    I worked for the agency for nearly 10 years as a mental health and substance abuse counselor in a rural community before leaving to pursue other opportunities. Dr. Nichols and his management team took over after NorthKey’s very competent and compassionate top leadership retired. Within a very short time NorthKey Community Care went from being a quality regional mental health agency with strong connections to the communities it served to an organization corrupted by egos and an outsider’s view of communities needs. As a clinician I do not expect to be pampered or to get rich but I do expect to be permitted to treat my clients and be supported in those efforts. Having worked in business prior to my career change to the helping profession I understand fiscal realities. No organization can provide services without a solid financial base. But the old NorthKey, while being a bit shaky financially at times provided caring, compassionate services to a population in need. Dr. Nichols seems more intent on using his MBA acquired online than using his online acquired PhD in psychology. With His outsiders view (not from the Northern Kentucky area) Dr. Nichols alienated many community leaders by assuming his approach to the needs of the area were supeior to those who had spent lifetime serving this area. In a few short years Dr. Nichols dismantled an agency that took decades to build and was once the pride of Northern Kentucky.

  • Aaron J.

    So, moral of the story: Facing a prolonged economic downturn, an organization is not supposed to put money into reserves.

    How does that make sense? Ignore the fact that they had liabilities of $4.5 million at the end of FY 2011. Oh, and ignore the organization’s annual expenses hovering around $28-30 million a year. Right; let’s ignore those. Otherwise, cutting $225 grand because “they save too much” doesn’t seem so great. I mean, if cutting funding doesn’t coerce an NPO to bring back under-performing programs, I don’t know what will! If the counties want to cut funding, I suppose that’s their prerogative. But they, too, are accountable to the public. If I lived there, I’d be wanting a better explanation than “they saved too much.”

    All in all, who’s to say having [I]less than a third[/I] of your prior year’s expenses in reserves is too much? Some folks suggest having at least 3-6 months’ worth of expenses, limiting them to [B]two to three years'[/B] worth. Depending on the situation, the case might be made that NorthKey doesn’t have enough. And two counties cutting their support may serve to exacerbate the situation rather than remedy it. I imagine NorthKey will be looking at more program cuts in the near future unless it finds a way to replace the revenue it just lost. Good job, Boone and Kenton.

  • Mike

    I fail to see any problem here. A total of $350,000 was cut in funding to an organization whose reserves have increased by almost $5m in the past four years. As a taxpayer, these are the kinds of cuts we need to see more of. If their reserves have increased that much, and the funding total from these two counties was that small, clearly they have significant other revenue streams and no longer need the taxpayer hand-out.

    Isn’t this what we should be encouraging? A non-profit that [B]doesn’t[/B] have its hand out to the government?

  • Mike

    Aaron, aren’t you just making my point for me? Their budget is $28-$30 million; they have other revenue streams. They no longer need the taxpayer hand-out. We’re talking about 1% of the total budget.

    I have no issues with organizations keeping reserves — they need to keep reserves. This organization simply doesn’t need taxpayer money any more.

    And for what it’s worth, your comment illustrates perfectly why government spending continues to increase year after year — no one is willing to give up money for their pet project. This organization did what was necessary to no longer rely on the government. We should be applauding them, not complaining about the loss of a few dollars!