NY City Council reexamines nonprofit contract policies

In response to calls from New York City nonprofits to revisit procurement policies that they say have contributed to a “harsh and threatening” operating environment, the City Council’s Committee on Contracts held an oversight hearing on Monday to discuss potential improvements to how the city does business with nonprofit human services providers.

The hearing came just weeks after the release of two comprehensive reports – one by the Human Services Council, a consortium of 170 nonprofit providers, and another from SeaChange Capital Partners, a merchant bank serving the nonprofit sector – which painted grim pictures of the sector’s health. According to the SeaChange report, more than 10 percent of city nonprofits are insolvent, 18 percent of which are human services providers.

However, each report also laid out recommendations that city government could take to improve the health of the nonprofit sector, given that nearly 80 percent of the largest human services nonprofits receive over 90 percent of their funding from government sources.

HSC’s report, for example, highlights the need for city contracts to pay the actual cost of providing services – including so-called indirect costs, like human resources and technological support, and the escalation of wages and rent over time – and to disperse payments in a timely manner, unlike the monthslong delays that nonprofits have grown accustomed to. The report also urges city agencies to codify cooperation with nonprofits earlier in the contracting process, so that potential bidders can inform government partners about the true costs of services before Requests for Proposals are issued. Additionally, the report recommends simplifying and streamlining the city’s current auditory regime, which results in dozens – sometimes hundreds – of program audits, many of which nonprofits claim are duplicitous and unduly time consuming.

“I think that the recommendations that they lay out are a great roadmap for the city as we think about procurement reform,” said Councilwoman Helen Rosenthal, who chairs the Contracts Committee.

Rosenthal also highlighted a double-standard in the city’s contracting policies, which seem to offer more favorable conditions for the private sector, including construction firms, than for nonprofit providers.

“When the city decides to build a $40 million bridge, they hire a construction company with that expertise,” Rosenthal said. “Contractors might complain that the payment for the contract takes too long – and human service providers have the same concern – but the city would never say to a construction company, ‘We’re going to pay you $35 million. Try to get philanthropy, foundations, or other jobs that you do to pay for the remaining $5 million.’”

Rosenthal wondered if the discrepancy between the city’s treatment of the two sectors could be attributed to institutional sexism.

“Construction jobs have historically have been filled with men who were viewed as the breadwinners and glue of the family, as opposed to women, who are historically, and to this day, the employees of the human services world,” Rosenthal said.

Michael Owh, director of the Mayor’s Office of Contract Services, who testified at the hearing on behalf of the de Blasio administration, was receptive to Rosenthal’s call for “retainer-style contracts” with nonprofits who provide consistent programming for the city – such as homeless services, universal pre-kindergarten, and afterschool programs – in an effort to mimic contracting for other government expenditures, like transportation maintenance.  

“One of the things that we’re thinking about is the marriage between the actual services and the technical and capacity building services that we can offer providers,” Owh said. “And if we can do retainer-style contracts for those types of services, then we can actually assist nonprofits as they build programs.”

But Rosenthal pressed Owh on a common complaint from nonprofit providers: the recurrent need to take out lines of credit with private lenders in order to stay afloat while nonprofits wait for government funds to disperse, despite the efforts of the city’s Returnable Grant Fund to provide gap funding for nonprofits. One nonprofit leader who testified at Monday’s hearing, JoAnne Page of The Fortune Society, said that her organization has been forced to cover $67,000 in interest on private loans over the last two years.

Rosenthal also expressed surprise when Allison Sesso, executive director of HSC, testified that nonprofits have yet to see a 2.5 percent cost of living adjustment reflected in their city contracts, despite the city’s announcement of such an increase last July.  

In later testimony, nonprofit leaders continued to highlight the significant difference between overhead rates set by the federal Office of Management and Budget and those agreed to by city agencies, which often provide a much lower rate that becomes increasingly less meaningful as costs rise over the term of a contract.

“We get, initially from the city, 10 percent on most contracts, but because contracts last so long, that 10 percent rate that we start with is usually 3 percent or 5 percent later on in the contract because all of our other bills have to be paid,” said Marla Simpson, executive director of Brooklyn Community Services. “As we pay rent, utilities and insurance, our effective overhead rate goes down. This council, and this administration, has done a wonderful job enhancing funding for this sector. But there will be years when you can’t just add money to reflect the additional costs that we are experiencing.”