North Carolina Nonprofits: Coping with Government Budget Cuts

Abstract

EXECUTIVE SUMMARY

POLICY QUESTION:

What challenges do nonprofits receiving state and other government grants and reimbursements for services face in North Carolina? What effects has the recession had on nonprofit organizations, and how can the North Carolina Center for Nonprofits support its members?

RECOMMENDATIONS (PAGE 19):

In the short-term, NCCNP should work with legislators to avoid any further cuts to nonprofit funding. It should also focus its efforts on reducing late government payments to nonprofits by working with agency leaders. Earlier payments will help nonprofits’ cash flow problems. NCCNP should continue to provide professional development opportunities for nonprofit staff and connect organizations with resources.

In the long-term, NCCNP should also encourage state and local governments to include indirect costs for administrative work in grants and reimbursement contracts. It should also provide educational opportunities for nonprofits to learn how to diversify their funding streams to decrease dependency on government funding.

ISSUES FOR NONPROFITS (PAGE 2):

Governments reduce funding for nonprofits during economic downturns

Government finances suffer during economic downturns. Governments collect less tax revenue (income, property, and corporate taxes). Since most states have balanced budget amendments, legislatures have to cut expenditures when revenues decrease. In times of economic hardship, state governments cut funding for programs, expecting nonprofits to deliver programs and services regardless of state support. Many nonprofits provide services with the understanding that they will be reimbursed for those services by the state through grants and reimbursements contracts. When states face revenues shortfalls, payments to nonprofits can be delayed, hurting the organizations’ cash flow.

North Carolina nonprofit organizations face funding cuts from all sources, including local, state, and federal government grants and reimbursements for services. State government cuts in 2009 affected 70 percent of North Carolina’s nonprofit organizations.

Private funders also reduce funding for nonprofits during economic downturns

Legislators can justify budget cuts for nonprofit services by arguing that private funders will sustain nonprofits activities, but historically charitable giving declines during economic downturns. Private foundations are not immune to economic downturns either. In 2008, foundation endowment levels fell by 26 percent. The decreased endowment levels of foundations reduced the required five percent annual grant payout to nonprofits for multiple years after 2008.

Demand for nonprofit services grows during economic downturns

People demand more nonprofit services, specifically services from human welfare organizations during economic hardships. Nonprofits have to do more with less. A 2009 survey of members of the National Council of Nonprofits showed that during the height of the recession, more than half of survey respondents experienced increased demand for their services, higher operating costs and decreasing revenues to meet these higher demands and costs.

Many organizations continue to see new clients; people who never sought social services before find themselves in situations of need. Organizations spend more time acclimating new clients to social service programs and educating them about available resources.

Government system is difficult to navigate and payments are often late

Nonprofits also experience problems with government payments, such as late reimbursements and reduced or revised contracts, during economic downturns. State governments change the terms of previously agreed upon contracts with nonprofit partners, lengthening payment schedules or reducing funding altogether. Contract problems create cash flow problems for nonprofit recipients. In a national survey by the Congressional Research Service, 35 percent of nonprofits reported that they had been affected by declines in overall government support and 33 percent experienced delayed payments from government.

POLICY OPTIONS FOR NCCNP (PAGE 5):

The eight policy options detailed below cover the main ways NCCNP can assist nonprofits in North Carolina:

1. Continue annual survey of government-funded nonprofits and conduct interviews

2. Lobby the North Carolina General Assembly and local governments for increased financial support for nonprofit services

3. Work with government agencies to encourage prompt payments

4. Collect more details on cash flow problems and investigate possible lines of credit for nonprofit organizations

5. Continue to coordinate with government agencies to streamline state funding applications and reporting processes

6. Encourage changes to funding guidelines to include indirect costs

7. Provide staff development assistance to nonprofits

8. Study differences between nonprofits receiving government funding and nonprofits without any government funding