Philanthropy New York’s Public Policy Committee has voted to recommend that our organization formally approve two separate but related statements concerning indirect costs in government contracts. The next stage in our policy approval process seeks comments from members. We encourage and welcome your feedback.
We will be taking comments until Friday, July 22. You may provide your thoughts by clicking the "ADD NEW COMMENT" link below, or you can email your feedback to info@philanthropynewyork.org. We will share member comments with the PNY Board for its consideration and final decision.
WHY THIS IS IMPORTANT TO PHILANTHROPY:
For decades, philanthropic grants to nonprofits with government contracts have been used to fill in the gaps in those contracts when the government rate did not cover the full costs of delivering services. The key area unfunded for many such contracts has been the administrative rate, overhead, or indirect costs – all different names but with a similar meaning. Funders and nonprofits alike find this a frustrating situation. Far worse, for those nonprofits whose main source of revenue is government contracts, typically human services organizations, governments’ failure to pay nonprofits adequate indirect costs for years, along with other factors, has pushed many organizations to the brink of bankruptcy.
In December 2014, the federal U.S. Office of Management and Budget formally recognized, in new rules called the Uniform Guidance, that when governments hire nonprofits to provide services, those nonprofits legitimately incur and need to be paid for their indirect costs, again, often referred to as overhead or administrative expenses. The new rules expressly require pass-through entities using federal funds (typically state and local governments) to reimburse nonprofits for the reasonable indirect costs they incur when performing services on behalf of governments. Nonprofits that have a previously-negotiated federal indirect cost rate must be paid using that rate. Nonprofits that have never had a federally approved indirect cost rate can elect either the minimum rate of 10 percent of their modified total direct costs or negotiate a higher rate in accordance with federal cost principles. These new rules could be game-changing for the fiscal stability and long-term health of a number of nonprofits, if state and local governments fully comply.
Over the past year-and-a-half, PNY has been engaged in conversations with many nonprofit partners on this issue. Partners include the Human Services Council, Nonprofit Coordinating Committee, National Council of Nonprofits, New York Council of Nonprofits, Lawyers Alliance of New York and other individual nonprofit leaders, along with key officials in New York City and New York State government. While both New York City and State officials have stated that they are in compliance with OMB Guidance, neither have demonstrated that compliance to date. Nor, have our nonprofit partners seen such compliance. Neither the city nor the state have yet indicated that it will embrace the spirit of OMB Guidance, which clearly makes the case for the legitimacy of substantial indirect cost rates in all nonprofit contracting regardless of federal funds. Our nonprofit partners have welcomed our convening the various people on these issues over the past year and say that a supportive statement from PNY would be both welcome and helpful.
Before reading the proposed statements below and weighing in, you may want to read Philanthropy New York’s Issue Guide on OMB Uniform Guidance on Indirect Costs to better understand why this issue is important to the philanthropic sector.
These are the official statements being recommended by the Public Policy Committee (they also appear in their entirety on the open commentary page:
OFFICIAL STAEMENT #1:
Full Implementation of OMB Guidance on Indirect Costs in New York State and City
In December 2014, the federal Office of Management and Budget formally recognized, in new rules called the Uniform Guidance, that when governments hire nonprofits to provide services, those nonprofits incur indirect costs (often referred to as overhead or administrative expenses) and that government should pay for those costs. The Uniform Guidance supersedes all previous OMB directives regarding use of federal funds to pay nonprofits for services delivered under grants and contracts.
The new rules expressly require pass-through entities using federal funds – typically state and local governments – to reimburse nonprofits for the reasonable indirect costs they incur when performing services on behalf of governments. Nonprofits that have previously negotiated a federal indirect cost rate must be paid using that rate. Nonprofits that have never had a federally approved indirect cost rate can elect either the minimum rate of 10 percent of their modified total direct costs or to negotiate a higher rate in accordance with federal cost principles.
As of June 2016, the State of New York and New York City have not implemented contracting procedures that are consistent with the new rules and continue to develop RFPs and contracts with overhead rates that are significantly less than those to which nonprofits are entitled by the federal rules.
Philanthropy New York urges New York State and New York City to immediately act in compliance with OMB Guidance on Indirect Costs.
OFFICIAL STATEMENT #2:
Indirect Costs for All State and City Budget Agreements
Many New York State and New York City contracts with nonprofits involve no federal funds, and are therefore not subject to the OMB Guidance on Indirect Costs. Nonetheless, the basic premise of OMB Guidance – that when governments hire nonprofits to provide services, those nonprofits incur indirect costs and should be paid for those costs – should apply to all contracts, whether or not federal funds are involved. Allowing nonprofits to submit budgets that include appropriate indirect costs on all contracts would not only advance the spirit and intent of OMB Guidance on Indirect Costs, it would also increase predictability in government contracting, and would have the long-term effect of increasing the fiscal stability for the nonprofit sector – an important goal for both the philanthropic and government sectors.
Philanthropy New York encourages New York State and New York City to integrate contracting procedures that will consistently reimburse nonprofits for their full federally-negotiated indirect cost rate or, for nonprofits that don’t have one, a negotiated rate in accordance with federal cost principles or a minimum rate of 10 percent of total direct costs.
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