Understanding the Real Cost of Nonprofit Work

November 19, 2015

Northeast-Valley-Health-Corporation,-doctor-with-two-childrenBy John E. Kobara

This piece originally appeared in Huffington Post Los Angeles: http://www.huffingtonpost.com/john-e-kobara/understanding-cost-nonprofit-work_b_8556918.html

We know that our government depends on nonprofit organizations to sustain critical portions of our safety net through services like shelters, health clinics and foster youth programs. But a recent Urban Institute report highlights the significant challenges nonprofits in California face when managing multiple government and private contracts and grants, including routine underpayment for the full cost of their work.

It found that more than 5,000 nonprofits in California receive an estimated $14 billion in government contracts and grants each year – more than the annual budgets of 18 states. And one-quarter of California nonprofits rely on government funding for 60 percent or more of their budgets. But 70 percent face trouble due to payments not covering the full cost of services, such as administrative and other “overhead.”

It is clear that we have a double standard when it comes to reasonable overhead costs for nonprofit organizations versus for-profit businesses. Every day, we pay for products and services that are almost entirely “overhead costs” without blinking. We accept paying a premium for a cup of coffee that also covers the cost of the actual cup of coffee. Yet we scoff at nonprofits that attempt to cover comparable total costs from donors, grants and contracts. And nonprofits have no stock options, mega bonuses and executive perks.

Lower overhead does not always equal efficiency, either. In fact, quality and efficiency have a price tag. Doing operations and administrative tasks well has real costs.

When it comes to recognizing the real cost of nonprofits doing business, Los Angeles is on the frontlines of leading innovation and change.

This month, the Los Angeles County Board of Supervisors – a five-member governing body serving more than 10 million constituents across 88 cities – approved a resolution that will strengthen the county’s critical nonprofit sector. The aim is to implement new federal rules that remove the long-held arbitrary “ceiling” or limit on allowable overhead costs for nonprofits. This will enable nonprofits and government agencies to negotiate, better understand and mutually agree upon a more realistic rate for overhead on a case-by-case basis. Los Angeles is the first county to begin an official process to implement these mandates.

The motion is a good step toward greater recognition of the actual costs for organizations that are working to provide basic human services. The federal, and now county, government has recognized that overhead or administrative costs can be legitimate expenses that may be paid for an organization to fully comply with contracts and provide quality service to support our region’s most vulnerable residents.

With the Weingart Foundation and California Association of Nonprofits leading the charge, funders in Los Angeles and around the state have also joined together around this pioneering effort. The current system of grantmaking – how grants are given and methods of oversight and accountability – needs reform. Arbitrary limits on “overhead and administrative costs” are not only unsophisticated, but hurt the viability and sustainability of nonprofits. Every funder needs to be more educated about the real and total costs of delivering services.

We all want to help nonprofits continue to deliver measurable and sustainable outcomes. And in Los Angeles, the message is simple and straight forward: value nonprofits by paying them what it costs to provide the vital and essential services we all depend upon.

Everyone involved in this reform work shares the same goal of ensuring nonprofits have the greatest impact possible in our communities and serve those most in need. Reaching that goal begins with more transparent, open conversations around nonprofit financing and making sure the organizations themselves have the support and partnerships they require to do business.

John E. Kobara is Executive Vice President & COO of the California Community Foundation. Follow him on Twitter @jekobara.

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