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Why Financial Stresses are Threatening ​the Social Services Sector

An interview with President and CEO of Alliance for Strong Families and Communities

America’s social services sector is the heartbeat of its cities. These organizations are tapped into the fundamental warp and woof of the lives of their citizens, helping them live safely, providing access to jobs and health care and advocating on behalf of those who often feel marginalized.

It’s a sector that finds itself facing financial stress, which is thwarting its ability to grow and maintain its critical infrastructure and ability to innovate. But like numerous other industries, this sector is facing significant disruption.

BRINK spoke with Susan Dreyfus, president and CEO of the Alliance for Strong Families and Communities, in an email interview to get a sense of the seriousness of the problems the social services sector is facing and find out what’s being done to course correct the current situation.

BRINK: Define the scope of the U.S. sector.

Susan Dreyfus: Every one of us knows a community-based human services organization whose tax status is nonprofit. These organizations are what I like to call impact organizations in communities across our country—large, small, rural, urban. They are the community-governed organizations who, as economic contributors and employers in their communities, provide crucial services and supports to children, families and adults to ensure they can reach their fullest potential. These organizations are what I like to call “Beacons of Light.”

All of us know someone who has faced life’s challenges, lives with a mental illness, needs quality child care, needs a home, help with food, struggles in school, needs a job, lives with a disability, etc. These organizations are more than just providers of these types of programs and services in communities across America. They are builders of our nation’s human capital and a voice for ensuring that the values our country was founded on are extended to everyone.

BRINK: Give me a general overview of the financial stress that the U.S. nonprofit human services sector is experiencing right now.

Dreyfus: The last door to slam on the Great Recession is a deep financial structural problem in the sector that won’t be easily solved. Every day we talk with great organizations in and outside of our network who are struggling with cash flow, reducing revenues from traditional payers, needing to increase costs to operate, and dealing with long accounts receivables cycles. This makes it hard to invest in the crucial infrastructure for any business, regardless of tax status. We have seen some organizations go out of business, greatly reducing their workforce, and reducing investment in critical capacity areas like technology and knowledge.

Now, don’t get me wrong: Our sector too shares responsibility for the problem and is obligated to be as effective and efficient as it can be, but there are forces outside of the sector’s control like our payers, philanthropy, rapid advances in technology, movement to managed care and third-party payers that are equally a part of the problem and the solution. The only way to solve this issue is for the sector, government, business at all levels, and philanthropy to come together in a spirit of partnership to ensure the sector is a critical player. Everyone in our country from kitchen tables to business to philanthropy, all levels of government to the halls of Congress need to recognize and address this issue. It belongs to all of us.

‘The last door to slam on the Great Recession is a deep financial structural problem in the social services sector.’

BRINK: Can you give me some specific examples of where this financial stress is taking place?

Dreyfus: This issue is not unique to any one type, size or geography of community-based human services nonprofit organization. Our research shows these organizations face financial management challenges in their cash flows, income statements, and on their balance sheets. This creates a lack of capital to invest in efficiency, innovation and crucial capacities any successful business needs to thrive. For example, 30 percent of these community-based human services organizations have less than 30 days of cash and investments to cover operating costs and 50 percent have less than three months. The interesting thing is that these findings do not change appreciably based on the budget size of organizations.

I always ask audiences when I am speaking about the financial health of community-based organizations, “What road builder in America would be asked to build a high-quality road for eighty cents on the dollar? What IT company would accept a contract that restricts what they can pay their leadership or what they understand to be the full costs of their services including crucial organizational infrastructure costs?” Yet, we think nothing of doing this to organizations that we expect to help solve some of society’s toughest challenges.

BRINK: Why is the financial health of the nonprofit human services sector important to the U.S. in general?

Dreyfus: At the end of the day, these organizations in total are responsible for billions of dollars in the U.S. economy and employ millions of people. One example in our network is Neighborhood House Association in San Diego led by Rudy Johnson. Their budget is $95 million per year and their economic contribution to the San Diego community is over $250 million per year! But beyond being economic contributors, they are keeping government costs lower because of their ability to ensure all children can succeed in school, parents have the skills they need for success in parenting and work, and older adults live safely and happily in their homes.

My dad worked in small business, and no small business or large corporation does it alone. They depend on the policies around them to give them every opportunity to be successful, and our sector is no different.

BRINK: How are community issues becoming more complex, and what impact does that have on the nonprofit human services sector?

Dreyfus: Yes, the needs we see people having today are indeed more complex. As a country, we are seeing more people who are working hard and childhood poverty is unconsciously high. This creates a lot of stress on people and families, and they find themselves often involved with more than one human services program. It is not unusual for a youth involved in our juvenile justice system to face a myriad of issues with their mental wellbeing, stability in their home, community and school. Put simply, the needs and issues people are facing are more complex, but our sector has the knowledge and skills to walk alongside them and help them reach their fullest potential. The question is, do we pay for it on the front in lower cost for greater results or on the back-end at mind-numbing higher costs and few great outcomes?

Lastly, a misnomer we often hear from people is that our sector should be “living on a shoe string” and backfilling underfunded contracts with charitable dollars! The sector must be strong and have the capacities and talent it needs for highest performance no different than any other sector. Contracts and grants should be fully funded and charitable dollars should be used to augment our work with people we are serving, build our knowledge, give us the capacity to innovate and to be active in public policy.

BRINK: What are some examples of cross-sector solutions that can help ensure the financial health of the sector?

Dreyfus: There are many. One example is governors and mayors adding nonprofit liaisons to their cabinets like in New York State and New York City. Another example is corporations who are offering their knowledge and dollars to nonprofit human services community-based organizations to help them build their capacities in areas like technology. States and localities are using actuarial models to understand the full cost of the services they are contracting to our sector and paying rates that move them closer to full funding like in Oregon with children’s mental health and foundations like the Ford Foundation who understand how important an organization’s financial health is to performing at a high level.

In the end, we hope to bring light a growing problem in our country that will challenge our economy and the human capital development of our nation if we sit by and let it happen. The problem has multiple causes and cross-sector ownership of the problem and of the solutions will be required.

This interview has been lightly edited for length and clarity.

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