Report: Youth, Family Services Sector Plagued by Bad Contracts, Poor Risk Management

The viability of America’s community-based human services provider network is being challenged by external and internal financial threats, according to a report released today by the Alliance for Strong Families and Communities and the American Public Human Services Association.

The report, “A National Imperative,” calls on government agencies and nonprofits to make significant, and in some cases, costly changes aimed at strengthening the human services field.

“Strengthening the financial health of human services community-based organizations is not just a financial imperative, but a moral one as well,” said Alliance CEO Susan Dreyfus, in a statement released with the report. “The health of CBOs contribute to the sector and its ability to help individuals and families achieve their full potential and contribute to society as a whole.”

The report’s findings and recommendations are based on analysis of more than 200,000 tax filings made by “roughly 40,000 human services CBOs,” and by a survey that drew responses from 177 CBOs and 40 government agencies. This analysis found that a high rate of human services organizations are in regular financial peril with no margin for bad luck or bad news.

Among the findings of the report:

  • One in eight CBOs are “insolvent,” meaning they carry more liabilities than assets.
  • Half operated at a loss, on average, over the past three years.
  • 40 percent lack operating liquidity, and nearly a third do not have enough cash on hand to survive for more than a month.

“At best,” the report said, “less than one-third of organizations maintain a strong financial cushion of reserves covering more than six months of operating expenses.”

The vast majority of funds to the human services sector come from government contracts and grants, and the report says that underfunding and overregulation plague these arrangements.

The report suggests that government agencies make “an explicit choice to underpay,” intentionally providing less funding than they know is necessary for a nonprofit provider to carry out the agreed-upon services.

This often precludes CBOs from making necessary upgrades and improvements. From the report:

A common belief on the part of government agencies is that human services CBOs can and should rely on philanthropic funding to close the gap. One argument is that philanthropic donations represent appropriate ‘skin in the game’ from the communities who benefit from CBO services.

However, the result is that philanthropic donations are used primarily for program-related funding gaps instead of to enhance programs, research and development, testing new approaches, and investing in technology, reserves, people, knowledge and organizational strategy.

Funding gaps are further exacerbated by regulations that restrict the ways a CBO can use those dollars and burden workers with excessive administrative documentation, the report said. In the survey, one Florida CBO executive reported “that social workers at his organization can spend up to 75 percent of their time filling out paperwork to meet reporting requirements.”

These restrictions can prevent CBOs from adequately covering their costs, meeting their needs as organizations, and meeting the needs of the community.

Government agencies rarely factor in the cost of compliance when regulations are added to human services, the report said, and they have also failed to protect CBOs from litigation stemming from work with sometimes troubled clientele.

“The government cannot be held liable for injuries or other grievances resulting from the provision of services,” the report said. “However, when the government fulfills its responsibility to provide these services by contracting with CBOs, CBOs are not afforded the same level of immunity.”

One Pennsylvania CBO executive reported on the survey that “tort lawyers smell blood in the water” with CBOs, and that the organization’s insurance premiums have skyrocketed.

“A National Imperative” does not lay the sector’s problems entirely at the feet of government, suggesting it will ultimately fall to the sector to push back on lowball or overregulated contracts.

“While the temptation to ‘chase revenue’ will always be there, CBOs need to stop pursuing RFPs when there is either lack of clarity around the full costs to deliver the services, or when the contract does not fully fund the indirect and direct costs required,” the report said.

Many CBOs are woefully unprepared for tough times, according to the survey, which asked executives about whether their organizations had instilled 15 different risk management strategies. There were only four of 15 strategies employed by more than half of the sector.

For emergency management, the results were more dire. Just 25 percent of CBOs reported having a plan to maintain “essential operations” during a financial crisis, and only 6 percent had a plan to wind down or pass off operations in the event of closure.

Ten years ago, in the wake of the Great Recession, 10 percent of all human services CBOs went out of business. For some portion of CBOs, particularly smaller ones with weak management controls, the report said mergers or even closure are options that should be considered.

“Mergers may be the correct response when the nature of funding has changed in a way that requires greater scale, efficiency or back-office capability. Smaller CBOs serving limited populations may join a larger organization to obtain access to up-to-date systems and better financing, rather than trying to go it alone.”

“CBOs are very hesitant to partner or merge,” one private funder told report authors. “In a given year, the private market tends to see over 14,000 mergers, while the world of human services sees only 50 to 60.”

Lurking behind these problems are current technology deficits and a looming potential workforce crisis.

One-third of CBO respondents to the survey cited inefficiencies from outdated technology as a top challenge, and 44 percent indicated that high IT costs were a top challenge. More than 40 percent picked technology-related investments for how they would spend additional, flexible funds.

The human capital challenge might rival technology concerns in the near future. The federal Health Resources and Services Administration (HRSA) forecasts by 2025 a “shortage of 20,000-50,000 mental health and substance abuse social workers, a shortage of up to 20,000 psychiatrists, and a shortage of up to 60,000 clinical, counseling and school psychologists.”

The report warns that the potential for lower wages and overburdened workers could create a “doom loop” for the sector, where recruiting new staff becomes difficult, overtaxed staff leave and cause turnover crisis, and the institutional capacity of entire CBOs is threatened.

“A National Imperative” presents five of what it calls “North Star” strategies for improving the sector’s financial strength. They are:

  • Greater commitment to measuring long-term outcomes of the work, with funding calibrated to balance between basic service delivery and outcome achievements
  • Investment in the capacity of CBOs to test and innovate
  • New operating models that emphasize collaborative partnerships, such as shared back-office infrastructure for smaller organizations.
  • New financial policies, based on flexibility and full cost reimbursements, to govern relationships between government and its CBO partners.
  • “Regulatory modernization” aimed at reducing or eliminating duplicative reporting requirements and regulations “that create compliance burdens in excess of their value.

The report estimates that human services CBOs generate $200 billion in revenue each year, with about half of that going to pay 3.2 million employees, about 2 percent of the U.S. workforce.

The report argues that the human services sector represents the best chance for the United States to roll back escalating health care costs, which were estimated at $3.4 trillion in 2016 and are currently projected to reach $5.5 trillion by 2025. It cites research that shows 20 percent of population’s health is determined by access to health care.

Housing, socioeconomic status and health behaviors – all issues addressed by human services CBOs – account for the other 80 percent.

“The research strongly suggests that spending on human services, if properly allocated to effective programs, results in reduced healthcare needs and expenses later,” the report said.

“A National Imperative” was funded by the Kresge and Ballmer foundations. Analysis and writing was done by SeaChange Capital Partners and Oliver Wyman.

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John Kelly, Editor in Chief, The Chronicle of Social Change
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