Overhead Rates in City Government Contracts Are Inadequate and Injurious

Among HSC’s most critical charges is remedying the chronic underfunding by government of human services – and increasing the rates at which City and State agencies reimburse human services providers for overhead, also known as “indirect expenses,” is among our highest priorities.

With our advocacy partners, we have researched this matter, gathered data that makes the case, and sought relief from government – and while there remains a significant distance toward resolving the issue, we are gratified to have found allies and achieved incremental progress.

We applaud Comptroller Stringer for undertaking an independent study of the issue, and for recently releasing a report that arrives at conclusions similar to our own: that, based on a sizable sample, the average overhead reimbursement rate extended by City agencies to human services provided is 8.6%; that this percentage is considerably below the actual overhead rate of most providers; and that, as a result, “non-profits are severely hobbled and many vulnerable New Yorkers are deprived of high-quality, critical services.”

Severely hobbled, indeed. No organization can fulfill its promise without sound management and infrastructure and this is certainly the case with nonprofit human services providers.  For services on the ground to achieve the desired effect, they must be supported by high-caliber financial management, human resources, information technology, facilities management, and research and evaluation functions.

To illustrate briefly, afterschool programs cannot help youth excel and forge paths to college without support in recruiting the dozens of specialists that typically staff these programs and serve as mentors and sources of inspiration for young people.  Senior centers, early childhood education facilities, mental health clinics, and supportive housing programs cannot meet their demanding missions if they are contending with the likes of leaky roofs or faulty HVAC systems. And, given that virtually all workplaces are highly dependent on e-mail, cell phones, and the Internet, no professional in any program can be productive without sophisticated technological support.

And, very simply, 8.6% does not cover these expenses. While overhead rates differ across the human services sector depending on variables like organizational size and content of program portfolios, we estimate that the average overhead rate is 15%. That means that an organization receiving $5 million in City contracts automatically incurs a deficit of about $320,000. This is a difficult and, for many human services organizations, an untenable way to operate. But because these organizations are deeply dedicated to service, they continue to accept these terms.  This is an unfair and, ultimately, a damaging practice, that needs to be rectified.

With the adoption of the City’s Fiscal Year 2018 budget last week, Mayor de Blasio and the City Council took steps toward accomplishing just that.  They committed $88 million over the next five years to increase overhead rates in City contracts to 10%, and included $17.6 million of that amount in next year’s budget.

Also very significant is that the budget included $22.7 million designated for a Model Budget initiative designed to increase budgets for selected human services programs to reflect the true and full costs of service provision. This initiative can begin to unravel chronic underfunding issues by examining the real costs of programs, address the salary disparities between human services staff and staff from government with similar responsibilities and qualifications, and understand the true indirect costs associated with running programs and contracting with government. This is not an easy undertaking, but imperative to moving the sector to financial stability.  Programs involved in this effort are services for families dealing with instability, senior centers, services for runaway and homeless youth, and adult protective services, and plans are to extend this practice to additional programs in the upcoming two Fiscal Years.

These investments mean an improvement for human services organizations, and the acknowledgment of the issue by City government leaders is reason for optimism that further gains lie ahead.

HSC will continue to keep this issue atop our agenda to ensure that human services organizations are positioned to help New Yorkers surmount barriers and realize aspirations, and to contribute to a truly equitable City.

Danny Rosenthal, Consultant to Nonprofits & Writer

About Human Services Council

The Human Services Council strengthens New York's nonprofit human services sector, ensuring all New Yorkers across diverse neighborhoods, cultures, and generations reach their full potential.
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