Special Report: How governments can make the nonprofit sector more equitable
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Every day, nonprofits around the United States work to alleviate inequality – from organizations that provide direct assistance to people in marginalized communities to organizations that work on criminal justice reform, racism, and other systemic issues that lead to inequality in the first place. But the fact that the nonprofit sector is deeply focused on the causes and consequences of inequality doesn’t mean the sector itself is immune from these issues. In fact, nonprofit founders, leaders, and employees face many entrenched disparities – a source of inequality in the U.S. economy which is often overlooked.
Nonprofits get a huge portion of their funding from government grants, which means the procurement process has significant implications for nonprofits, the communities they serve, and the local, state, and national economy. This is why that process has to be equitable – a goal that has eluded the nonprofit sector for too long. Many organizations founded and run by people of color face unique obstacles, such as a lack of initial investment from grantors and lower levels of support over time. Although a majority of nonprofit chief executives believe their organizations should reflect the communities they serve, these realities have prevented the sector from being as representative as it should be.
Because government grants comprise such a large portion of nonprofit budgets, one of the best ways to improve equity and representation in the sector is to make the procurement process more streamlined and fair. This means addressing issues such as inadequate reimbursement for the full range of costs nonprofits incur and the needlessly cumbersome grant allocation and renewal process. These problems have a disproportionate impact on BIPOC-led nonprofits, which already operate on thinner margins than their peer organizations, don’t have access to the same networks, and lack many other resources.
As nonprofits take an increasingly active role alongside local governments in the provision of services and as the sector continues to expand, it’s becoming more and more important for the procurement process to account for the barriers faced by BIPOC-led organizations. This doesn’t mean arbitrarily shifting money around – it means developing methods of inclusive, data-driven grant allocation that give effective organizations the support they need.
The causes of inequality in the procurement process
Over the past several decades, nonprofits have taken on a larger and larger role in the delivery of government services. Philip Hackney is a professor at the University of Pittsburgh School of Law who studies the relationship between nonprofits and government, and he observes that “Nonprofits are being asked to fill roles that they weren’t expected to fill in the past. They’re taking over the provision of services in places where the state has moved out, and this has been happening for 30 or 40 years.”
But this doesn’t mean nonprofits have replaced government – in fact, government grants and contracts account for a much larger proportion of nonprofit revenue than individual donations, support from foundations, or any other external source. But in many places, nonprofits have stepped up to provide services, instead of the government.
When people think of the nonprofit sector, they don’t often consider its vast economic impact. According to a Johns Hopkins report, nonprofits collectively employ the third-largest workforce in the United States, outpacing the construction, professional services, and finance industries. In many states, nonprofits account for between 10 and 20 percent of all private employment. Nonprofits aren’t just integral parts of their communities because they provide direct assistance to those in need – they’re also major employers. When an industry provides essential services to communities, receives substantial taxpayer investment, and functions as one of the top employers in the country, it needs to be as equitable as possible.
Nonprofit leaders largely agree in theory, but fall short in practice. A 2018 report by the Center for Effective Philanthropy found that 70 percent of nonprofit CEOs believe it’s “very or extremely important” that their organizations’ staffs are diverse, but just 36 percent said their staffs were, in fact, “very or extremely diverse.” Although 64 percent of nonprofit executives say their board of directors should be diverse and 60 percent say the same for their senior leadership, the gaps between aspiration and reality are even wider in these areas: just 22 percent and 17 percent, respectively. A Battalia Winston study found that 87 percent of nonprofit presidents and executive directors are white.
While these disparities are often addressed in the context of hiring and promotion practices, there’s a more fundamental issue at work: BIPOC-led nonprofits are at a severe financial disadvantage. For example, recent research conducted by the Bridgespan Group and Echoing Green found that black-led nonprofits receive 24 percent less revenues than their white-led counterparts and 76 percent less unrestricted net assets. The Echoing Green applicant pool consists of what Bridgespan describes as some of the “sector’s most promising early-stage organizations,” but the discrepancy in funding between these organizations remains vast: while 492 nonprofits led by black founders received $40 million in 2019, just 396 nonprofits led by white founders received $61 million.
Although funding gaps are the most visible manifestations of inequality in the nonprofit sector, there are many factors that lead to them. For example, Bridgespan and Echoing Green conducted interviews with more than 50 nonprofit executives, staff, etc. and found that “Leaders of color have inequitable access to social networks that enable connections to the philanthropic community.” BIPOC leaders also face bias, whether unconscious or overt, and outdated forms of evaluation that are distorted by stereotypes.
It’s important to recognize the ways bias and discrimination intersect with other systemic issues (such as inefficiencies in the grant allocation and renewal process), which lead to the difficulty BIPOC-led nonprofits have in securing and maintaining funding. While these are difficult issues to disentangle, there are concrete ways that grantors – particularly the government, given its outsize role in nonprofit funding – can address inequality in a sustainable way.
Why governments should reevaluate their nonprofit contracting systems
The process of approving and renewing government funding for nonprofits is directly tied to the health and diversity of the sector. In many ways, this process is far less streamlined and efficient than it should be, which has particularly harmful consequences for BIPOC-led organizations. While all organizations suffer from the needlessly expensive and time-consuming contracting systems many governments use in their partnerships with the nonprofit sector, the imposition of extra costs is inevitably more painful for organizations with less resources to begin with.
A perennial problem with government-nonprofit relationships is the failure to fully reimburse organizations for the costs they accrue over the life of a project. As a 2019 report by the National Council of Nonprofits explains, “Unlike for-profit contractors that are paid their true costs (including overhead) plus profits, nonprofits must divert time away from programs to raise funds essentially to subsidize governments’ obligations.” This led the Office of Management and Budget to issue rules that require governments to reimburse nonprofits for reasonable indirect costs when federal funding is involved, but insufficient reimbursement is still common.
The negotiation of indirect reimbursement rates is a complicated and burdensome process for nonprofits – especially organizations that don’t have the resources to seek competitive grants and produce contracts that account for indirect costs. According to a 2019 report by the Bridgespan Group: “While state and local governments granting federal money are supposed to provide a minimum reimbursement rate of 10 percent, actual indirect-cost allowances are often lower and sometimes nonexistent.”
Half of the respondents to an Urban Institute survey reported that government grants “excluded or limited reimbursements for program and organizational administrative (overhead) costs.” While 75 percent said governments paid less than 10 percent of their administrative costs, 20 to 25 percent said they covered no administrative expenses at all. As one respondent explained: “There is no government funding for administrative staff. The government reporting demands require massive amounts of unfunded administrative staff time.” This is especially problematic for organizations that are already in a precarious financial position.
According to a BDO study, nonprofits maintain an average of just 8.7 months of operating reserves. However, organizations with $25 million or more in revenue have more than 10 months of reserves, while organizations with less than $25 million have just over six months of reserves. BIPOC-led nonprofits are in a uniquely tenuous financial position – a 2019 report released by ABFE found that just 32 percent of Black-led organizations had four months or more of reserves, compared to 57 percent of White-led organizations.
Beyond inadequate reimbursement rates, there are many other ways in which the government procurement process is needlessly costly and cumbersome. For example, 71 percent of nonprofits report that they encounter inefficiencies that waste taxpayer and grantor dollars. The National Council of Nonprofits has found that these inefficiencies include everything from “complex applications and dysfunctional electronic submission processes to needless duplication and redundancy, and excessive formatting requirements.” Meanwhile, 72 percent of nonprofits deal with “complex and time consuming” reporting processes, such as duplicative audits, inconsistent compliance procedures, and even the “retroactive imposition of reporting requirements.” Almost half of nonprofits report that governments even change contracts when projects are already underway, including cuts to payments and increased service demands.
In many ways, COVID-19 has led to a reassessment of this status quo. For example, nonprofits in New York City requested the suspension of contractual performance-based pay, arguing that it’s impossible to meet certain targets (such as program participation rates) in the middle of a pandemic. This led City Comptroller Scott Stringer to ask Mayor Bill de Blasio’s office to “forgive missed contract obligations if they are related to COVID-19.” Meanwhile, a group of nonprofits – along with New York State Assemblyman Michael Blake and City Councilman Keith Powers – sent a letter to state and local officials requesting contract advances and “flexibility in budgetary guidance and reporting” to help organizations get through the pandemic.
As an article in The City noted, these requests should be considered within a broader context: “Nonprofits across the city [New York] that rely on city funding have long complained that it takes months, if not years, for contracts to be finalized. The problem is particularly bad with City Council grants, they say.” Nonprofits across the country have been contending with onerous practices like these for too long, which doesn’t just impede the delivery of vital services to their communities – it perpetuates systemic inequality in the nonprofit sector. It’s clearly time for governments to fundamentally rethink their partnerships with nonprofits, and this process should begin with how they negotiate, enforce, and honor their contracts.
Working toward a more equitable procurement process
The relationship between government and the nonprofit sector is a major factor in the health of communities around the country. While there are many problems with how these relationships currently function, there’s also increasing awareness of these problems, which means the path to reform is clearer than ever. Nonprofits and governments have powerful incentives to make the procurement process less arduous and more equitable, from increasing transparency and accountability to ensuring that effective BIPOC-led organizations aren’t overlooked. With that in mind, here are the top ways governments can improve their procurement processes to reduce the strain on nonprofits and bring more diverse organizations into the fold.
1. Streamline the process of applying for, receiving, and tracking grants.
Government grants are the mainstay of nonprofits’ external funding, which is why the grant allocation and evaluation process shouldn’t be nearly as resource-intensive or inefficient as it is.
Governments can address this issue by simplifying and systematizing their application and reporting requirements; fixing bugs in electronic submission processes and providing clearer instructions on how these processes should be used; eliminating duplicative requests and audits; clearly communicating compliance procedures and making sure they’re consistent across projects and organizations; establishing transparent guidelines and expectations at the outset of projects; and refraining from adjustments to contracts that have already been signed.
2. Ensure that nonprofits are compensated for all the work they do.
Nonprofits should never have to work for free – particularly when they’re already in a difficult financial position, as organizations founded by people of color disproportionately are. Equitable compensation begins with transparency, which means governments and nonprofits should outline the full scope of projects – as well as possible contingencies and added costs – right from the beginning, which will prevent surprises later on.
Governments should also develop flexible reimbursement policies that account for changing circumstances. COVID-19 has demonstrated why governments and nonprofits should be realistic about unforeseen obstacles and costs, as well as the importance of reimbursing organizations in a fair and timely manner. Many nonprofits in the United States are facing the possibility of permanent closure amid COVID-19, and BIPOC-led organizations are confronting a particularly severe set of financial and logistical challenges.
3. Focus on inclusive, data-driven grant allocation and support.
Governments shouldn’t just prioritize equitable procurement because it will increase equity in the nonprofit sector – they should do so because it will direct resources to the most effective organizations in their communities. This is why governments should account for the unique obstacles BIPOC-led organizations face in the procurement process, such as a lack of access to funding networks and other sources of support.
These organizations often have a solid track record and significant stakeholder support, but they’re unable to scale because they don’t have the same resources as their peers. Governments should control for these variables when making decisions about which organizations to support. This is one of the reasons why technology can be a powerful equalizer in the nonprofit sector, as it allows organizations to demonstrate their effectiveness in an objective way and present these data to grantors. Governments should also work with other grantors and nonprofits to promote educational resources that will give all organizations access to best practices on how to be competitive in the grant allocation and procurement process.
As the United States continues to grapple with entrenched inequalities in every corner of our society and economy, the nonprofit sector has an indispensable role to play in addressing the root causes of those disparities – from poverty to bias in the criminal justice system. This is all the more reason why inequality within the nonprofit sector has to be resisted, as it leads to worse outcomes for organizations and the communities they serve. Governments can do their part in this effort by recalibrating their relationships with the nonprofit sector and giving all effective organizations a seat at the table.