A National Imperative: Joining Forces to Strengthen Human Services in America (Jan 2018)

Insolvency rates are highest among small human services CBOs with less than $1million in annual revenue. About 14% of these CBOs are insolvent, compared to 9-10% of CBOs with annual revenue of $1million or higher. Small CBOs also report lower three-year operating margins, with more than half reporting negative margins compared to 30-35% of mid-size and large CBOs. Larger human services CBOs tend to manage their cash reserves more tightly than smaller CBOs , with just 7% of large CBOs with more than $10 million in annual revenue maintaining at least six months of expenses in cash reserves, compared to 17% of mid-size CBOs (with $1-$10 million in revenue) and 34% of small CBOs. However larger CBOs are also more likely to maintain non-cash sources of funding, such as lines of credit and liquid short-term investment accounts. There are a few noteworthy differences in human services CBO financial health based on geographic location . Among them, CBOs in the Mountain region (encompassing AZ, CO, ID, MT, NV, NM, UT, WY) are less likely to be insolvent, with a 9% rate of insolvency compared to a rate of 12% across all CBOs. In addition, CBOs in the East South Central region (AL, KY, MS, and TN) report slightly lower three-year operating margins, with a three-year margin of less than 0.5% at the median, compared to about 1% for all CBOs. Human services CBOs providing housing and shelter-related services face significantly greater financial stress . Nearly 1 in 3 of these CBOs are insolvent, more than 70% lack the liquidity to cover short-term obligations, and 60% report a negative-three year margin – with a median three-year margin of -4.3%. Meanwhile, CBOs providing mental health services maintain slightly lower cash reserves of less than two months of expenses at the median. Public safety CBOs report stronger financial health, with comparatively low rates of insolvency (less than 3%), high margins (more than 4% at the median), and strong cash reserves (about nine months of expenses at the median). CBOs providing food and nutrition-related services and youth development services also report low rates of insolvency (3-5%) and high liquidity. More detailed financial analysis is provided in the appendix. The overwhelming impression from analysis of the 990s is that a significant portion human services CBOs are feeling financial stress and may find it difficult to survive even short-term disruptions to funding or unexpected expenses.

The first four challenges that human services CBOs face are the root causes of their financial stress:

1. Constraints imposed by government contracts 2. Constraints imposed by private philanthropy 3. The regulatory and legal environment 4. Underdeveloped financial risk management capabilities

Each of these challenges is discussed in further detail on the following pages.

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