Slow Government Payments Are One Barrier to Nonprofit Stability. Can Philanthropy Help?

Los Angeles City Hall. Nick Alvarez/shutterstock

Governments at the local, state and federal levels frequently partner with nonprofit organizations, which play a crucial role in providing much-needed resources and assistance to communities. During the height of the pandemic, for example, nonprofits distributed food, provided cash support, worked to close the digital divide for students, and launched awareness campaigns about vaccinations, among many other efforts. 

These contracts give nonprofits the financial resources to provide services that the government can’t. But too often, nonprofits face unnecessary burdens brought on by delayed payments and cumbersome bureaucratic processes. This significantly impacts their ability to meet the demand for their services, which have increased since the onset of the pandemic. 

Backed by a handful of local philanthropies, a new report from the Committee for Greater L.A. offers a set of recommended actions the city can take to better support their nonprofit partners. The report, titled “Resetting L.A. City to Meet Urgent Community Needs,” was commissioned by the Committee for Greater L.A. in partnership with Nonprofit Finance Fund (NFF) and HR&A Advisors. It received funding from the Weingart Foundation, the Mayor’s Fund for Los Angeles, the Eli and Edythe Broad Foundation, SoCal Grantmakers, the California Community Foundation and the Smidt Foundation. 

Late last year, Los Angeles Mayor Karen Bass made addressing homelessness a priority, declaring a state of emergency as her first act in office. According to Annie Chang, vice president of community engagement at NFF and the lead author of the report, this moment presented a unique opportunity to address how these partnerships work, especially given nonprofits’ role in providing services for housing insecure Angelenos — a key area of focus for the Committee for Greater LA. 

“There was a lot of excitement over the opportunity to really reset how nonprofits partner with the city,” Chang said. “There’s been a lot of efforts around improving countywide partnerships, but it felt like this moment with Mayor Bass coming in, there was a specific window… to really understand how our nonprofits are a partner in [addressing homelessness] and what you really need to be able to do that work.”

The success of this reset hinges in part on local foundations’ support, as they can play a key role in reducing the financial strain on nonprofits as these potential changes take place. The plan will also have real impacts on philanthropies and their grantees, as difficulty receiving such payments hinders their ability to carry out their missions as they work alongside or hand-in-hand with the public sector. For such collaborative efforts to work, all channels of financial support need to be flowing smoothly.

“We as philanthropy, we see the consequence of [the delay in payments],” said Miguel A. Santana, chair of the Committee for Greater L.A. and executive director of the Weingart Foundation. “Because oftentimes, the nonprofits have to come to us and request additional support to be able to make up for the shortfall that their partnerships with government have created. So I think there’s a lot of interest from philanthropy to really build some urgency around this issue because we see it as being engaged in partnership with our grantees.”

The report’s findings and recommendations

One of the biggest issues nonprofits face in terms of their government contracts are delayed payments. According to Chang, interviews with nonprofit leaders revealed that reimbursements fell between 30 days to several months, and experiences varied by department, with some moving quickly and others lagging behind. The report recommends that all city departments should process payments within 30 days.

“Sometimes, it takes as long as a year to receive funding after they’ve done the work,” Santana said. “So it puts our nonprofit partners in a situation where they have to subsidize government, which is highly ironic, given government is often many times larger… and doesn’t have the same kind of cash flow challenges as a small nonprofit does, and that’s just not a sustainable program.” 

Delayed payments are a particularly big problem, as the report found that 22% of all nonprofit organizations in the city had two months or less of cash on hand, with BIPOC-led organizations being more likely to have less cash on hand than white-led organizations. This impacts which organizations are willing to take on the risk of these contracts, making it less likely that BIPOC-led organizations contract with the city.

“We really want to encourage government and philanthropy to also think about those thresholds that are set because it’s really leaving out those organizations that are most proximate to the community’s needs,” Chang said.

Another major recommendation is for the city to reduce the red tape surrounding these contracts, as onerous reporting requirements take up time that could have been spent providing the services they were contracted to do. Some nonprofits, for example, have to turn in hard copies of their paperwork, Chang said. Others must file duplicates. One organization estimated that its staff spends 50% of their time on reporting requirements, the report found. 

In a press release, Mayor Bass said, “Los Angeles nonprofits confront so many obstacles every day, but city bureaucracy should not be one of them. I am counting on nonprofits to be key partners in our work to urgently address homelessness and in so many other ways, but we will not be successful if they are burdened by unnecessary costs, red tape and delays. Nonprofits are also essential to the economic success of Los Angeles, so eliminating bureaucracy for them benefits us all.”

What philanthropy can do to help

For its part, philanthropy in Los Angeles and beyond can take several steps to improve the financial stability of their local nonprofits, including but not limited to improving how governments fund them. It has long been a goal of philanthropy to supplement and assist government function, and this is one arena where there is a clear role for private funders operating at this intersection.

“First and foremost, philanthropy can be a strong partner to the nonprofit sector by being an advocate,” said Efrain Escobedo, president and CEO of the Center for Nonprofit Management. He added that the pandemic showed how philanthropy could partner with the government to coordinate resources. “In that same vein, philanthropy can be a stronger voice for why equitable contracting is so critical.” 

Another action philanthropy can take is to support and advocate for the establishment of a liaison between nonprofits and the city. Santana noted that reimbursement of contract payments is spread out among multiple departments, meaning there isn’t one point of responsibility to engage with nonprofits. 

“One of the things that we’re calling for at the end of the report is a point of contact within the city’s department that would really serve as a liaison between the nonprofits and the government sector, and not one that’s just kind of trying to make the nonprofits feel better,” Chang said. Instead, the liaison would bring feedback from the nonprofits to the city, advocate on nonprofits’ behalf and work to ensure that payments go out in a timely manner.

But by far, one of the most impactful ways philanthropy can help is by providing multi-year general operating grants. It’s a refrain we’ve heard so many times, and this is yet another reason flexible funding from foundations is so critical.

“Government contracts can sometimes restrict how much you can pay your staff or how much of the funding you can use to support your operations, like buying a computer and things that you need,” said Escobedo. “And that makes it very hard for nonprofits to be the best they can be, and really serve communities when it comes to partnering with the government.”

Flexible funding thereby allows nonprofits that have less cash on hand to take on government contracts. This, in turn, increases inclusivity in who can access government funds — a key item mentioned in the report. 

Philanthropy can also ask nonprofit leaders how they can help organizations be more efficient, scale up the work, and fuel their growth, and whether it would be a benefit to add more staffing.

“When leaders are focused on how they’re going to pay their bills, they’re not focused on how they can better solve homelessness, how they can better address mental health, how they can better address early childhood needs. They’re focused on, ‘How am I going to pay my bills?’” Chang said. “We want these leaders to not have to be focused on that part, but really think strategically about how to serve their communities.”

As many, including the Committee for Greater LA, have argued, simply going back to the way things were prior to the pandemic isn’t enough. Instead, this moment presents an opportunity to create a more equitable and inclusive society, and philanthropy can play a significant role in supporting these changes. 

For Escobedo, the timing is crucial. “Government has been funding nonprofits for many years… but I believe that this particular area of work and nonprofits being able to be resilient with government dollars and be an effective part of the safety net is actually going to be one of the most telling indicators of how transformative our recovery out of the pandemic was,” Escobedo said. “It’s a measure of the role that nonprofits play in advancing systems change in creating more equitable communities.”