Social bankruptcy in the era of ‘too big to fail’

Last week, the Human Services Council released a report outlining many factors that contribute to an “operating environment (that) makes viability extraordinarily difficult for the state’s nonprofit providers,” as Nonprofit Quarterly’s Ruth McCambridge described the report’s findings.

But while McCambridge gently chastised the report for “dump(ing) nearly all of the responsibility on government,” it seems germane to explore just how dissimilar the nonprofit sector’s “operating environment” – crafted by government regulators – is from that of other sectors. This comparison is by no means an attempt to absolve the nonprofit sector of its sins (and New York Nonprofit Media looks forward to holding up the mirror that the Human Services Council rightfully implores its members to gaze into). It is simply meant to highlight deliberate choices made by government to encourage prosperity in some sectors while inhibiting growth in others.

So, for a stark point of contrast, let’s take a look at the financial sector. The largest financial institutions, many of which reside here in New York City, are raking in extraordinary profits. Their shareholder-first model is fueled by high-frequency trading that ordinary investors can’t compete with; deals that utilize complex financial instruments all too similar to those that incited the Great Recession; and inflated valuations spurred by corporate buybacks of stock.

And – as if the bread-and-butter of their businesses weren’t dubious enough – when they’re caught doing something truly egregious (like laundering hundreds of millions of dollars for the Sinaloa drug cartel, as HSBC was in 2013), they pay a slap-on-the-wrist fine and keep on keepin’ on. Yes, “Sheriff” Ben Lawsky helped bring in $8.3 billion in settlements with several financial institutions, but those deals barely make a dent in offenders’ bottom lines. HSBC racked up $15.5 billion in profits in 2015 alone.

Compare this with the climate in which social services nonprofits operate as they carry out government-mandated programming for an estimated 2.5 million New Yorkers. Nonprofits are stifled by duplicitous and uncoordinated program audits which are – inexplicably – commonly designed to measure outputs (how many people were served) as opposed to outcomes (whether those people were served effectively). They are saddled with a series of unfunded mandates that, while laudable, force nonprofits to internalize the costs of new regulations. I have no doubt that many organizations would eagerly train their staffs in LGBTQ competency, for example, were it not for the $66,000 unreimbursed bill that one nonprofit reported.

And should a social service employee fall under suspicion, the process is a far cry from the insulated world of finance litigation. The state’s Justice Center for the Protection of People With Special Needs investigates “every incident reported in state-operated, -certified or -licensed facilities and programs,” a commendable endeavor to ensure the safety of vulnerable clients. However, even though only 2.7 percent of reported incidents were substantiated in 2014, 33 percent prompted costly and time-consuming investigations wherein nonprofits were forced to put staff on paid leave and hire substitutes as the probes dragged on. One nonprofit estimated that its annual cost of compliance with the Justice Center is $100,000, not exactly a drop in the bucket for an organization living on the margins.

Indeed, the difference between these two “operating environments” is striking. And while nonprofits do bear responsibility for performing increased risk assessments in this harsh environment, it’s important to reiterate what that “risk” is: taking on additional programs to help needy New Yorkers. 

Increasingly, nonprofits are shouldering more of these “risks” alone. As the Human Service Council’s report outlines, nonprofits’ contracts with government agencies rarely pay the full cost of services, with the expectation that private fundraising will make up the difference. Furthermore, contracts virtually ignore overhead costs related to programs, like habitually rising rent, insurance, equipment and maintenance costs. In a remarkable example highlighted in the report’s appendices, the city Department of Youth and Community Development’s own auditor calculated the indirect cost rate of one program to be almost 19 percent, only to relay the agency’s maximum offer: 10 percent. It’s anybody’s guess where the agency expects that extra 9 percent to come from. 

The simple fact that opening another safe haven for mentally ill homeless individuals, or another pre-K site for underserved youth, or another adult literacy program at a community settlement house, is considered a “risky” proposition should give every citizen pause about our collective priorities.

The Human Service Council’s report underscores that those collective priorities need serious realignment. At a time of widening income inequality, persistent institutional racism and xenophobic political movements, our government should prioritize strengthening organizations that help neighborhoods thrive, not coddling institutions that put our economy at risk. It’s time for us to realize that our communities and the organizations that serve them should be the ones considered “too big to fail,” not the denizens of Wall Street.