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What Nonprofits Can Learn from the Illinois Budget Crisis
Illinois is in the midst of a state budget stalemate, with both political parties claiming they have been unable (or unwilling) to find common ground for almost 11 months. As a professional services firm serving nonprofits throughout the state, we wondered how the stand-off was affecting social service, higher education, and health care organizations. So we sent a short questionnaire to a few of our clients. While the number of respondents in our poll was not statistically significant, the insights we received gives us a snapshot of how the crisis is hitting some organizations. It may also hold lessons for nonprofits across the country that are facing a major disruption of revenue.
Answers reveal nonprofit stress points
The questions we asked were fairly simple. We wanted to know how the budget impasse has affected operations. In other words, what are the current stress points for these organizations? We learned that:
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- Programs that were in a break-even position in prior years are now in a deficit position.
- Payment streams for existing contracts are slow to nonexistent.
- Organizations are staying committed to their cause, and told us they can’t just drop programs and shut out those in need; they have a mission and they are committed to carrying it out.
- Some organizations have eliminated services and programs, but certain programs are affected more than others.
- Frustration and mistrust are high, with some feeling there is no rhyme or reason as to how funds are being appropriated by the state.
Uncertainty at social services agencies
Not surprisingly, the social service agencies we heard from have been affected by the deadlock. They report daily stress not knowing if they will be receiving funds from the state for the services they continue to provide. Without a state budget, they are finding it impossible to plan their own operations and cash flows. Ultimately, the biggest loser is the people in need.
A somewhat better outlook for federal qualified health centers
One group, federal qualified health centers (FQHCs), has not felt the pinch as much as others. FQHCs have only been affected on programs indirectly related to health care that can rely on other social service organizations to provide services to them. Cash flow under their health programs has held up, even though it might not be in as strong of a position as is prior years.
The health care landscape for FQHC’s is changing and there are a large number of Medicaid patients being served by these organizations. However, most of those patients are members of managed care organizations (MCOs). So even though the FQHC doesn’t get in the middle of payment delays from the state, the MCO does. Some MCOs are holding back payments as a hedge against budget cuts when a spending plan is eventually passed.
The FQHCs we talked to said these holdbacks have not had a major effect. Their big concern is with budgeting payments. So even though they have not been affected from a revenue standpoint, they are still experiencing stress as they manage cash inflows and outflows.
Budget crisis management strategies
We also wanted to know what these organizations are doing to get by. Responses were broken down into four categories: borrowing, cutting staff, cutting programs, and using reserves.
A number of organizations are borrowing from lines of credit (LOC) to fund unpaid claims from the state. But as time goes on, borrowing is monitored by lenders and LOCs have limits and other provisions that must be met. Some organizations are relying on consent decree payments, while others are being creative in the management of normal cash flows and have been able to stay away from additional debt. Some organizations are re-examining their finance package and considering mortgage options or permanent financing as a way to manage their cash situation. Of course, additional borrowing means having to budget and paying additional interest costs.
Program and staff cuts typically go hand in hand. Most organizations we heard from have reduced services in certain programs and have closed others since their fiscal years started. They are trying to adjust to changes in direct assistance. The depth of cuts depends on the program and the specific organization.
Certain organizations have kept programs intact while others have seen staff reductions to the extent that the level of care, control, or the ability to meet time and service commitments is not compromised. A common theme was temporarily holding positions open or instituting hiring freezes. This creates even more stress for nonprofits because services quality is affected by how committed they can be to all programs and all people.
Some organizations are getting through the crisis by spending down reserves. Some have not (or will not) use investment reserves until their line of credit is exhausted. There are others that have not used reserves except for normal budgeted transfers from reserves for operating purposes. Others are adjusting cash flows with the help of the board of directors and discussing options if the crisis continues.
A few organizations have put off capital projects and expansion while others are in aggressive pursuit of private and other government funding. Again, these are challenges that put stress on operations and outside funding sources. We can only hope that foundations are helping by providing short-term assistance in the form of grants and donations. But that can be a slow process and cannot be relied upon for short-term needs.
Other coping strategies
As the standoff drags on, organizations told us they have considered or are now considering:
- Monitoring of receivable balances to react quickly once a budget is passed.
- Risk tolerance of management and governance are being addressed.
- Seeking new funding sources such as Medicaid.
- Reviewing their contract with the state to see if grantor versus vendor relationship with the state might help the current situation.
When will it end?
Late in April the Illinois Legislature passed and the governor signed a measure that frees up $600 million in funding for the state’s public universities and community colleges. The appropriation should keep higher education running through the fall semester, but the crystal ball remains foggy after that.
Our nonprofit clients had several views:
- Not sure when or how it will end
- No end in sight — maybe in 2018
- I never thought it would go this long; we need true leadership on both sides
- Some time in 2017, after the November general election
- One respondent just filled in the blank with question marks
Lessons going forward
This is a difficult time for everyone, from the nonprofits and the clients they serve, to the vendors waiting in line to get paid. But if there is a silver lining in the situation, it might be a heightened awareness of the tenuous hold that many organizations have on their very existence.
You don’t have to be operating in Illinois to be faced with a funding shortfall, and it doesn’t have be the result of political squabbles. Best practices would dictate that you assume the worst will happen and work with your board and finance committee to come up with an emergency response plan that anticipates the risks and outlines steps to take in similar circumstances.
If you’re caught off guard by a dramatic funding shortfall there are some things you can do to reduce the stress and maintain your integrity:
- Be up front with vendors. Negotiate with them to come up with payment plans that are realistic and allow you to still receive their services. Being proactive demonstrates your integrity.
- Call upon the expertise of board members, and solicit ideas from other significant stakeholders.
- When the crisis is past, consider what it will take to restore and attain the reserve levels you will need in the future.
- Strive to make programs at least self-sustaining rather than cash drains.
- Seek to diversify your funding sources.
The Illinois legislature will eventually pass a budget and things will return to some sort of new normal. One of the most valuable products of the whole exercise may be the realization that what has happened once can happen again. Be prepared.