PNY Urges NY State and NYC to Follow Both the Law and the Spirit of OMB Guidance on Indirect Costs

Wednesday, August 17, 2016

PNY Urges NY State and NYC to Follow Both the Law and the Spirit
of OMB Guidance on Indirect Costs

by Michael Hamill Remaley, SVP, Public Policy & Communications
This piece was originally published as the feature article of the August 2016 issue of the New York PhilanthroPost Policy Edition. 

Earlier this month, the Philanthropy New York Board of Directors approved two official statements regarding indirect costs in government contracts with nonprofits:

  1. We urge New York State and New York City to immediately act in compliance with federal OMB Guidance on Indirect Costs
  2. We encourage State and City to develop contracting procedures that will consistently reimburse nonprofits for their full federally-negotiated indirect cost rate on all contracts, whether or not federal funds are involved.

As we wrote in our call for input from members, 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. A 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 to be 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, have created a situation where too many service providers just survive with perpetually inadequate resources.These are positions that are strongly supported by Philanthropy New York’s membership – borne out of many discussions with our Public Policy Committee, an open comment period for members on these specific positions over the month of July and a final Board vote this month. The PNY Board also approved a set of activities related to these positions, including direct communications with NY State and NYC officials drawing attention to these positions and working with our nonprofit partners to advance them.

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. 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, RFPs have been generated by both City and State that do not reflect the new rules. Also, neither the City nor the State have yet indicated that they will ensure all of its agencies 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. 

For both government and philanthropy, funding adequate indirect cost rates in contract budgets is just one very necessary step. According to recent research from SeaChange Captial Partners, “New York City nonprofits are fragile: 10 percent are insolvent (18 percent in health and human services); as many as 40 percent have virtually no cash reserves and over 40 percent have lost money over the last three years… Less than 30 percent are financially strong.”  As the SeaChange report documents, the challenges go way beyond the indirect cost rate issue, but this is an important factor. Given that the nonprofit sector accounts for upwards of 18 percent of the city’s total private workforce and serves every New York community in countless ways, these issues have vast implications.

With these newly adopted official statements, Philanthropy New York stands with the many other leaders in the nonprofit, government and business sectors who are speaking out to support actions that will preserve and grow the long-term health of the nonprofit sector.

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