Nonprofits Struggle With State Budget Impasses, Cuts

ReVive Center for Housing and Healing provides temporary and permanent housing, as well as supportive services to Chicago's homeless. (Image via ReVive Center for Housing and Healing)

States have faced record-breaking budget impasses this year. Tensions increasingly are occurring in these states with political battles between governors and opposite party-controlled general assemblies, resulting in reduced or withheld funding that limits social service agencies’ abilities and could have dire effects on the communities they serve.

Massachusetts, Oregon, South Carolina, Washington and Wisconsin passed their budgets within a month of the start of the 2016 fiscal year, which is July 1 for all states except Alabama, Michigan, New York and Texas. New Hampshire and North Carolina pushed their impasses into September.

Pennsylvania and Illinois suffered the most pain, with the former passing its budget just days before it hit the nine-month mark and the latter still trying to approve a budget. On May 1, it’ll enter month No. 10 without a budget.

But even those located in a state able to pass its budget on time aren’t unaffected. Deficits could appear midyear (or about eight months in, as it did in Connecticut this year). State (and even federal) budget processes have been unpredictable recently, so here’s a look at how nonprofits are coping in some of the hardest hit states.

Pennsylvania begins to recover

Pennsylvanians didn’t see an end in sight to the budget impasse until Gov. Tom Wolf, a Democrat who had butted heads with the Republican-controlled General Assembly, announced he would not sign the budget bill—but would allow it to go into effect without his signature in order to end the stalemate. That happened March 28. Since then, most nonprofits have received their overdue funds.

“The majority of nonprofits have been receiving their payments for the last several weeks,” Samantha Balbier, executive director of the Greater Pittsburgh Nonprofit Partnership (GPNP), said. "And there are a couple of line items where nonprofits, especially on workforce development, haven’t received payments yet, so I know of at least two that are waiting for those payments to be made."

The affected nonprofits are recouping slowly, but they have added debt during the close-to-nine-month standoff that the state will not reimburse.

“They’re not recovering completely,” Balbier said. “So they’re able to replenish some of their reserves and pay down some of their debt, but there’s debt service that they will have to pay—the interest that they’ll have to pay on the money they borrowed.”

GPNP surveyed nonprofits within its 12-county coverage area throughout the budget impasse, Balbier said. The group learned of their struggles as they used cash reserves, extended their lines of credit, worked with vendors to establish payment plans, froze hiring and pay raises, and used credit cards in order to maintain operations. They also discovered a group of 131 organizations borrowed a total of $160 million from their cash reserves, lines of credit or both.

“Nonprofits who primarily provide services that are not Medicaid reimbursable—because Medicaid dollars continued to flow in Pennsylvania—were the nonprofits that were the hardest hit,” she said. “Ninety percent of nonprofits were experiencing severe cash-flow problems by December of 2015. A few nonprofits had to close and/or cut back services, but the vast majority of nonprofits prepared themselves for what they knew was going to be a budget impasse last year. They just didn’t expect it to be as long.”

After a rough fiscal year 2016, Balbier is concerned about whether Pennsylvania nonprofits can handle a repeat of this next year, especially since their cash reserves are depleted and banks are hesitant to lend as much based on the lengthy impasse this year. And even if they did, she noted bond ratings have increased as a result of the impasse, so interest rates likely will too.

“We’re very proud of the nonprofits in Pennsylvania for being as well-equipped as they were to get through the last budget impasse, so that the community was not as negatively impacted as could have been,” she said. “But I think going into this next budget year, the nonprofit organizations are much more compromised than they were last year, and so our guess is that we will start to see services actually not being provided at the community level. And so it’s the constituents and people of Pennsylvania that will suffer the most.”

Connecticut anticipates deep cuts

But passing the budget on time isn’t the only challenge. Connecticut passed its budget a day before its July 1 start. However, in March, Gov. Dannel P. Malloy announced a shortfall of more than $220 million. He proposed $65 million in cuts, with steep slashes to social services, but the General Assembly approved a different plan that spread the reductions out, lessening the damage to social services. Those cuts went into effect April 1, but the governor predicted a $900 million deficit for upcoming fiscal year.

While Connecticut human services nonprofits haven’t seen any dips in funding yet—the state’s Department of Mental Health and Addiction Services (DMHAS) absorbed the cuts for fiscal year 2016— their funding has been stagnant for the past 15 to 20 years, Luis B. Perez, president and CEO of Mental Health Connecticut, which advocates and provides in-home services for those with mental disabilities in western Connecticut, said.

Originally, the governor called to cut $7.2 million from DMHAS in March, but the General Assembly curtailed the cuts to $2.2 million in an effort to spread the pain across all departments. The reductions may have seemed out of the blue to some, but not to Perez and his organization.

“The anticipated budget cuts—they were really not unanticipated,” he said. “We knew that the predictions in terms of revenue coming into the state and the ability for the state to continue to upkeep with its budget and financial responsibilities were not going to match up. It’s sort of like, 'The British are coming. The British are coming.' Well, guess what? The British are here and they didn’t just come by sea. They came by land as well because it has been quite devastating.”

Mental Health Connecticut has increased its budget from $10.8 million in 2013 to $12.8 million in fiscal year 2015. Its reliance on the state dropped from 90 to 80 percent in that same time frame by seeking federal and foundation funds, as well as increasing its donor base.

“Knowing that we have been very overly reliant on state funding, we have been working on diversifying our reliance on that,” Perez said.

The growth and diverse funding certainly helps, but it won’t negate steep budget cuts from the state. Perez estimates his group may have to cut services by 10 percent for fiscal year 2017.

“We’re going to have to reduce the number of people we serve because we want to make sure that if we’re going to serve people, we’re going to serve them with the highest of quality and in a safe environment, and with those kinds of cuts, we just cannot continue to maintain the same capacity, and that’s true of every provider in the state.”

Suzi Craig, senior director of advocacy and development for Mental Health Connecticut, strongly believes diversification of funding streams is vital for the futures of nonprofits that have relied heavily on their states for funding.

“Reliance on state and federal dollars is, I think, going to be challenging for anybody moving forward,” she said. “Building that community of support whether it’s corporate sponsorship, individual giving—really having those programs and testing new waves to build those different communities to really diversify the funding streams is really important. My goal as developmental director is to get us to be at least, within the next three to four years, like Teflon, so we are not susceptible to the changing tides of our funding streams.”

Illinois remains in limbo

In Illinois, nonprofits have found no relief. Gov. Bruce Rauner, a Republican, is up against a Democrat-controlled General Assembly. A few days before the fiscal year started, the governor vetoed the budget that came to his desk because it would have put the state, which has not had a balanced budget since 2001, in a $4 billion deficit for the year.

Currently, Attorney General Lisa Madigan, daughter of House Speaker Michael Madigan, is reviewing a state Supreme Court decision regarding government workers’ pay, which could result in the state halting paycheck disbursements and completely shutting down. Meanwhile, the state recently passed a bill for last-minute, emergency funding for higher education institutions, like Chicago State University, which cancelled spring break in order to end the school year today due to lack of funds and the need to lay off employees by the end of the month.

Nonprofits—like ReVive Center for Housing and Healing, a Chicago-based organization that provides temporary and permanent housing for the homeless, particularly those struggling with addiction—haven’t received any sign of possible relief.

ReVive Center, with a budget of almost $2 million, depends on the state for two contracts—one for addiction services and another for supportive services at Cressey House, a permanent supportive housing locale, and The Royalton Hotel, a former-hotel-turned-affordable-housing unit. While those contracts totaled $56,000 and $259,000, respectively, last year, the state cut the latter almost in half to $131,000 this year, Kevin McCullough, chief operating officer for ReVive Center, said. The addiction treatment funds remained the same because they are federal dollars that passed through the state, but even getting those funds was a bit of a hassle, as nonprofits had to wait for a bill to pass in August in order for the state to release those funds.

While the state money may seem like a small portion of the group’s budget, there are other caveats that make that funding so important. Additional federal funds that come straight from The Department of Housing and Urban Development (HUD) for its Cressey program prevents the ReVive Center from cutting those services.

“They don’t care where we get the money for it,” he said. “Doesn’t matter to them. We have to provide services. And we also have to match that federal [HUD] contract. … We have to provide a 25 percent match, and our rental assistance [contract] is about $300,000, so that state money was incredibly important—not only to make sure we had the funds to provide the services, but it was really helpful in making that federal-match requirement.”

However, since ReVive Center isn’t heavily reliant on state funding, it was able to find ways to fill the gap with money raised from its thrift shop and annual events, like The Art of Giving gala and Real Estate Ends Homelessness networking affair. Another way ReVive Center has survived the impasse is with drastic reductions in staffing costs by giving a 5 percent pay cut to executives; not filling vacant positions, like events and development manager roles; and cutting positions (and services) from the newer, state-funded program at The Royalton House. But each reduction that is part of the organization’s state contract has to be negotiated with the government, whose workers have been empathetic.

“We signed a contract saying we’re going to do X, Y, Z,” he said. “At the end of July, we were like ‘Well, we can do X and Y, but we really can’t do Z.’ And now, it’s at a point that having not gotten paid anything from those contracts, and we have another opportunity—somebody has let us know that they’ll be leaving—we’re going back to the state and saying, ’We can barely do X, and it’s just costing us too much money.’”

At this point, ReVive Center is just hoping for the budget to be passed soon, as it has exhausted its line of credit and reserves—just one month’s worth of money—and is out of options.

“It is as bare-boned as it can possibly be,” McCullough said. “If any employee left at this point, we’d have to refill [the position] or close the program. There’s just not a whole lot left to cut. … It’s still incredibly tough. Not having that $130,000 is making us look at every bill that we pay, and I’ve got lots of vendors that are not very happy with me because I’m paying bills very slowly.”

Even looking ahead to fiscal year 2017 is difficult, as McCullough and the staff have no way of knowing whether the funding in the next budget will be available on time either. They began discussing the issue earlier this month, but have not come to a conclusion yet.

“It’s one of the back and forths that ‘Well, let’s not plan on having that money.’ ‘Well, they’re going to do something at some point, we think, and the services are needed.’ We don’t want to continue to cut services for folks who need it the most,” he said. “We haven’t decided how we’re going to proceed. We’re entering realms that none of us have ever experienced before. I’ve worked in nonprofits for almost 30 years and this has never been anything that I’ve dealt with or even heard of.”