Late payments hurting nonprofits
Dorian Walker, the executive director of Family Survivor Network, told us he went without pay for all of 2020 so his nonprofit could afford to continue delivering services to youth impacted by violence in Baltimore. The reason for Walker’s salary sacrifice? Late payments his organization was owed by the city.
Our research shows that payments to nonprofits are frequently delayed a year or more past their original due dates.
For a large nonprofit, with reserves and a line of credit, this gap often represents an unplanned bridge-loan to the city. For small ones, like Walker’s, it’s an existential threat.
On Nov. 8, Baltimore voters passed a charter amendment, found in “Question J,” to create the Department of Accounts Payable in the city Comptroller’s Office, shifting the responsibility for vendor payments away from the mayor’s Department of Finance. The change was proposed after a city-wide audit found that Baltimore failed to meet its own performance standards requiring that invoices be paid within 30 days.
But late payments are not the only problem. The city regularly leaves contract approval until well after the work begins, delaying a nonprofit’s ability to submit an invoice for services, and that means the late payments are even later than they appear on paper.
Working with the Abell Foundation, we analyzed Community Development Block Grants (CDBG), which provide critical investments in affordable housing and economic development. Our report was published this month. Out of 115 CDBG grants totaling $27 million across two years, the median contract was not approved until 438 days after its start date. Only one contract was approved before the start of service delivery.
These delays produce significant costs and financial strain for nonprofits working with the city. Because there’s no expectation that payment will begin at the time of service delivery, nonprofits can only pursue grants with the city if they know they can front the money for the work or have outside support. “We build our own reserves as a coping mechanism and have learned to say no to reapplying to grants that have hurt us in the past,” one CEO told us. Such delays carry disproportionate impact for smaller nonprofits and decrease the number of applicants for what should be highly competitive grants.
Nonprofits insist year-long payment delays long predate COVID. Still, as we noted in our report, Housing Commissioner Alice Kennedy emphasized the pandemic’s impact on operations and staff capacity, as well as the priority given to emergency relief funding. Moreover, the federal government’s delay in approving its yearly budget and CDBG allocation further postpones the time when local jurisdictions are notified of their official award amount, a contracting issue outside the city’s control. “Organizations must assess whether they have the organizational and financial capacity to receive funding that comes with many strings attached and is not able to be immediately available,” Kennedy said.
City officials also noted that errors by nonprofits were the cause of many delays. However, a high-functioning system should be resilient to human error and capable of supporting small nonprofits without full back offices.
Representatives from the comptroller’s office confirmed that the move of Accounts Payable into their office would not alleviate this problem, but instead represents an incremental step forward in repairing the process. We agree. It would signal a shift toward collaboration between the mayor and comptroller, which will be critical to elevating procurement to a strategic function. But clearly, they must go further.
To address the root causes of late payments, we identified five areas for improvement with actionable first steps.
First: Authorize first-quarter prepayment to reduce the burden of late payment and consider moving away from reimbursement grants entirely in the long term. The legal feasibility for direct pre-financing should also be assessed, along with the steps and barriers to involving a third party.
Second: Map, align, and digitize contracting so that it’s simple and transparent for both city partners and city staff. As part of this, create a publicly available and consistently formatted nonprofit contracting process map with each step in the workflow outlined from award to completion, each with 311-style service level agreements.
Third: Assign a contract improvement team that can diagnose and troubleshoot bottlenecks, without adding another approver to the process. We think CitiStat or the Comptroller are well positioned to evaluate and elevate these cross-cutting issues.
Fourth: Encourage invoicing from
Day 1 to enable the city to better track its contracting backlog and eliminate the burden of accounting for work done many months prior. Financial management software should be used for invoicing across all city agencies and to alert nonprofits to new norms.
Fifth: Expedite renewals and increase multiyear contracts to remove the hassle of long contract processes that have all but predetermined outcomes. Do this by reviewing requirements in contract renewal processes and the justifications for all one-year grants.
Baltimore’s procurement issues are acute but not exceptional. Cities across the country are increasingly identifying procurement reform as a critical step in addressing the root cause of inefficiencies and inequities that spur from government spending. A reliable contract with the city can allow a nonprofit to expand, serve more residents and build the employment base of the city. It should never result in a missed paycheck — or the end of operations.
Jake Mills ( jmills@hks.harvard.edu) is a Masters in Public Policy candidate at the Harvard Kennedy School of Government. Brendan Hellweg (bhellweg@hks. harvard.edu) is a Joint Masters in Public Policy and Business Administration at the Kennedy School and Harvard Business School, and spent three years working in the Baltimore mayor’s office.