Bankrupt Detroit to Hundreds of Nonprofit Vendors: Contracts May Be Cancelled

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July 3, 2014; Detroit Free Press

This is an event in the trajectory of the Detroit bankruptcy that was entirely predictable—we did so at the time of the announcement—and somehow sidestepped by almost everyone as the bankruptcy negotiations proceeded. Going into the July 4th holiday, Detroit filed with the bankruptcy court a list of hundreds of vendor contracts that it says it will no longer honor.

The contractors include for-profit and nonprofit entities, among them providers of a variety of services that the city used to deliver itself but outsourced in order to reduce the size and scope of city government. The city provided the courts with a list of all of the contracts that it no longer intends to honor, but did not provide dollar amounts for what the city might owe these entities for services already delivered. Our reading of the 52-page filing of contractors to be summarily terminated reveals well-known nonprofits that provide valuable services for people in need as well as small groups with relatively low profiles for which the denial of payments, either promised as part of ongoing contracts or for work already completed, can be truly devastating.

Particularly shocking aspects in the list of nonprofits to be axed are the following:

  1. Indications that many of the contracts to be terminated are longstanding, dating back to the Empowerment Zone and other programs. Our guess is that a bankrupt city like Detroit hasn’t been particularly quick on past payments to begin with, and many Detroit human service nonprofits may have been waiting a very long time for reimbursements that the city now says it won’t deliver under any circumstances.
  2. Shockingly, some of the nonprofit contractors to be left unpaid were recruited only in the past few years as Detroit contracted out safety net services in order to alleviate the city’s need to pay staff to deliver services or to oversee programs. Those nonprofits have to be feeling a little like victims in a bait-and-switch scam.
  3. Truly sad are the planned nonprofit contract payments for nonprofits delivering programs such as homeless services, emergency shelter, supportive housing, substance abuse treatment and counseling, domestic violence prevention, Head Start services, services for persons with disabilities, and notably, employment and training or workforce development programs.
  4. With no dollar amounts attached to the groups in the Detroit list, some of these contracts might be dormant, with the nonprofits not having done anything on them in some time and therefore having nothing to collect. It’s unclear, but somehow we doubt it; we’re guessing that most of these contracts are still alive—perhaps the ones held by Goodwill Industries of Greater Detroit (eight in workforce development, undoubtedly for persons with disabilities), Focus: HOPE (three job training-oriented contracts), U-SNAP BAC (a longtime community development corporation with three contracts), Jewish Vocational Service (eight workforce development contracts), Detroit Urban League (18 contracts), Detroit Rescue Mission Ministries (nine contracts for emergency shelter and transitional housing, among other services), and Arab-American service providers such as the Arab American and Chaldean Council and the Arab Community Center for Economic and Social Services (18 workforce development-oriented contracts). There’s no question that some nonprofits might not be delivering much in the way of quality work for Detroit’s poor, but we can identify dozens of groups on the to-be-cut list that are credible, worthwhile mainstays of ensuring that the beleaguered citizens of Detroit receive needed services. With these cuts, what happens to these Detroiters now? Where are they supposed to turn?
  5. The National Council of Nonprofits has been studying the ongoing problems nonprofits have with state and local government contracting agencies, including late payments, unannounced and unanticipated contract modifications, and delayed contract start dates. Ironically, the front page of the National Council’s website announces, “Celebrating a Revolutionary Development in Paying Full Costs for Nonprofit Service Delivery.” That’s all dealing with the normal issues that nonprofits face with government agencies, not the surprise announcement of what appears to be across-the-board terminations by bankrupt municipal governments. The National Council’s next challenge may have to be revolutionary protections for nonprofits facing abrupt, unilateral, just about no-recourse contract and payment terminations.

What is the future of Detroit’s nonprofits? Sitting behind major creditors like the pension funds and bond holders, with even some of the latter receiving much less on the dollar than they might be owed, what do you think the position of these nonprofits might be in the long line of claimants on whatever might be left?

This week, Detroit’s 32,000 retirees as well as current and former city workers will be voting on the pension-related aspects of the bankruptcy plan, whether non-uniformed pensioners will accept a 4.5 percent pension cut plus the elimination of cost of living allowances and whether some cost of living allowances will be cut for retired police and firefighters. The city’s nonprofit vendors are not being asked to submit their votes on the likely cuts they will suffer on whatever funds they might still be owed—our guess is a probable loss of some 90 cents on the dollar, if not more. No one is asking the nonprofit vendors to vote on the new $450 million arena for the Detroit Red Wings, three-fourths of the money for which to come from tax dollars. It is difficult to imagine some of Detroit’s tiny nonprofits pursuing legal action comparable to well-heeled creditors like Syncora, which just won at the Sixth Circuit Court of Appeals challenging part of the Detroit bankruptcy plan.

In 1975, President Gerald R. Ford—a Michigander—was lambasted for two words he never actually said, but were plastered on the front page of the New York Daily News as his response to New York’s plea for federal assistance to avoid bankruptcy: “Drop Dead.” The meaning of this filing by the bankrupt Detroit run by emergency manager Kevyn Orr is not too dissimilar: nonprofits, drop nearly dead.—Rick Cohen

  • Floyd

    NGO’s should never be recieving government funding.

  • Anne Hays Egan, New Ventures Consulting

    This is deeply troubling. I’m glad you made reference to the Urban Institute & NCNA’s joint work on state contracting. NCNA has excellent summaries of the issues on their website, which I recommend everyone read.

    What the Urban Institute and NCNA have discovered is that the majority of nonprofits nationwide report that they see growing problems with state contracting with problems that include changing contracts mid-stream, cancelling contracts, partial funding often paired with increasingly heavy requirements, and excessive application and reporting requirements.

    The Detroit situation is a significant milestone in a very disturbing trend. Since so many states are now facing severe fiscal challenges, with pressures on the administrative and legislative branches to cut costs, this should be a “front burner” issue for every community service provider. Thanks for your article.