By David L. Thompson
What’s the most significant policy change affecting nonprofit sustainability in the past several years? It’s not federal or state legislation, or even a new philanthropic program. For the hundreds of thousands of charitable nonprofits that provide services on behalf of governments in communities across America, the answer, hands down, is the new OMB Uniform Guidance.
Why? The federal government, having expressed concern about the sustainability of charitable nonprofits on which governments and the public rely, weighed in on the “Overhead Myth” not with empty finger-wagging urging fairer treatment of nonprofits, but with binding law. That new law mandates that federal agencies and pass-through entities (local, state, and tribal governments or nonprofits using federal funds) hiring nonprofits must reimburse those nonprofits for the administrative/indirect costs they incur.
Government contracts and grants constitute the second largest funding stream for the work of charitable nonprofits (32 percent of the entire sector’s revenue). Yet antiquated government-nonprofit contracting and grant “systems” have caused inefficiencies and stifled innovation, leading to fewer people getting the services they need. It also forces foundations, which provide 2 percent of the sector’s revenues, to allocate their funds to fill in gaps that governments leave behind.
For example, an Urban Institute study found that nationwide more than half of nonprofits with government contracts reported that governments fail to reimburse them for the full cost of services. Of those, half reported that governments impose arbitrary caps preventing recovery of more than 7 percent for the general administrative/overhead costs they incur, and nearly a quarter reported receiving zero reimbursement for indirect costs. Those artificial limits on real costs for necessities – like accounting, insurance, management, office space, phones, technology, training, and utilities – shortchange nonprofits, limiting their efficiency, effectiveness, and impact.
In 2012, the National Council of Nonprofits discovered that draft rules to reform federal grants policies did not address the key issue of indirect costs (sometimes referred to casually as overhead costs). Working through our network of member state associations of nonprofits and national nonprofits, we intervened, persuading the federal Office of Management and Budget to mandate that, effective with new contracts or grants entered after December 26, 2014, nonprofits must be reimbursed for the indirect costs they incurred if being paid by any entity – local, state, tribal, and federal government or nonprofit – using federal funds.
As every front-line nonprofit will attest, having the right to receive reimbursement for indirect costs should make nonprofits more financially sustainable, enabling them to meet their missions more effectively and serve more people.
The OMB Uniform Guidance is now the law of the land (2 Code of Federal Regulations, Part 200). But until fully implemented, this historic reform provides only the promise of better treatment of nonprofits. At this stage, tens of thousands of separate government employees at the local, state, and federal levels in thousands of fragmented departments, agencies, units, and offices across the country must learn about and then apply the new rules consistently. Plus, nonprofits must learn about their new rights and how to allocate costs properly.
These vast systems and cultural changes will not implement themselves. Transforming the promise of better treatment into reality now requires nonprofits and governments to work together, with the support and convening assistance of foundations. Learn more at www.councilofnonprofits.org/omb-uniform-guidance.
The campaign to address the “overhead” issue – at the core of long-term sustainability for so many nonprofit organizations – actually comprises multiple “movements.” Over the next several months, Independent Sector is gathering the leaders of several of these movements in an effort to build greater understanding and, if appropriate, coordination across our various work streams.
David L. Thompson is the Vice President of Public Policy at the National Council of Nonprofits.