Withholding from state grants to nonprofits

Consistent Oversight of Nonprofits is Essential, But Must Not Reduce Grant Awards

On January 31, 2013, a bill (H.B. 58) was introduced in the N.C. House of Representatives to improve accountability of nonprofits with state grants. An identical bill (S.144) was introduced in the N.C. Senate on February 27. H.B. 58 would do three things:

  1. Require state agencies to use performance-based contracts with nonprofits that compare reporting organizations actual outputs and outcomes against benchmarks in their contracts;
  2. Electronically stop payments to nonprofits on the Suspension of Funding list; and
  3. Allow state agencies to withhold up to 2% of grant awards to fund their oversight of nonprofits.

The bill is based on a November 2009 Program Evaluation Division report on state oversight of nonprofit grantees.  Identical legislation was introduced in 2010 but did not pass.

Nonprofits support many of the recommendations in the report and bill. However, the section of the bill that allows state agencies to withhold up to 2% of grants to nonprofits would harm North Carolinians in all 100 counties that benefit from nonprofits’ essential services. A coalition of more than 230 nonprofits opposes this part of H.B. 58.

How would these proposals affect N.C. nonprofits that are state grantees?

1.  Withholding up to 2% of grant awards to fund oversight.

  • Nonprofits strongly oppose this recommendation.
  • In the current economic climate, nonprofits are being asked to provide more services with fewer resources. In NC, 93% of nonprofits had an increase in demand for services last year, and 58% were unable to meet this demand. Private donations to nonprofits have dropped by 11% since 2007.
  • Nonprofits operate on tight budgets, so decreases in revenue lead directly to cuts in services.
  • This 2% withholding would be on top of recent state and local funding cuts for nonprofits.
  • Reducing state grants by 2% will cut deeply into the essential community services that nonprofits provide. This will mean: 2% fewer meals served to those in need; 2% less help for women experiencing domestic abuse; 2% reduction in services to protect children’s safety; 2% fewer people served by free clinics; 2% cuts in programs for seniors and people with developmental disabilities; and 2% fewer mentoring programs for students.
  • This also could lead to job loss among nonprofits, which employ one out of every 9 workers in NC.
  • Many agencies already use strong performance benchmarks for nonprofit grantees. Nonetheless, they may seek to withhold from nonprofits’ grants if this bill is passed. This would reduce critical services for North Carolinians without adding improved performance measures.
  • For some nonprofits with federal grants that flow through state agencies, this may violate the terms of their federal grants.
  • The Center and other nonprofits are prepared to work on alternative ways to support oversight.

2.  Requiring performance-based contracts.

  • Nonprofits agree that it’s important for state agencies to establish clear expectations and concrete benchmarks at the outset of grants.
  • It’s essential that these performance benchmarks be carefully tailored for each grant to provide the best return on investment and to ensure fair, reasonable, and appropriate performance standards for nonprofit grantees.
  • For nonprofit programs with grants through multiple state agencies, it's essential that performance measures are consistent throughout all grants. Otherwise, this adds administrative expenses for the nonprofit and reduces outcomes for both sets of performance measures.
  • To get the most effective benchmarks of performance, it's essential that state agencies consult with nonprofits from the outset.

3.  Electronically stopping funding to nonprofits on the Suspension of Funding (SOF) list.

  • Some fully compliant nonprofits appear on the SOF list due to agency reporting errors.
  • Before enacting a law that would electronically stop funding for nonprofits on the SOF list, it’s essential to have a system in place so that only noncompliant nonprofits appear on the list.