09/05/2013 10:45 pm ET Updated Nov 05, 2013

Dangling In The Wind: How Does the State Fund Nonprofits?

Some call it earmarking, some call it outsourcing, and some call it funding the safety net. But grants-in-aid to nongovernmental organizations are one way to provide affordable services without expanding government employment, retirement costs, and programs. With sequestration and the drumbeat to cut, cut, cut, we should not turn our backs on this vital sector.

The State of Hawaii and all our counties have their own process for allocating these funds. Below is a snapshot of how it is done, and how it might be improved.

Anyone interested in public education and public/private partnerships should pay close attention to how affiliated nonprofits are treated. Capital Improvement Project (CIP) grants are one of the "tools" available to assist public education outside of the formal departments of education.

Many may not know that some essential services funded by government are completely delivered by nonprofits. Nonprofits extend government's ability to deal with homelessness, children's mental health, substance abuse, meals on wheels for seniors, domestic violence, community health centers and a lot of other social issues by partnering with nonprofits.

In Hawaii, the State Legislature takes the lead in this, requiring submission of detailed forms, answers to a wide range of questions, and detailed budgets. Here is what the law (Chapter 42f of our Hawaii Revised Statutes) requires to ensure accountability:

• The recipient must agree not to use the funds for lobbying or entertainment, must not discriminate against anyone, must be incorporated by the state, have by-laws or policies that permit it to conduct the activities under the grant, and must allow various agencies full access to its internal documents for ongoing monitoring of the grant.

• If awarded to a nonprofit, it must be recognized by the IRS, and cannot have board members who have conflicts or receive compensation.

• The agency assigned the grant must execute a contract with the recipient which shall be effective the first day of the fiscal year, i.e. July 1, and shall monitor it for ongoing compliance. Regular allotments may be part of the payment schedule.

• If the funds are not allocated within 90 days of the effective date (roughly October 1) the governor must notify the recipient of the status and whether the funds will be withheld.

At times the Hawaii Legislature has held hearings on all Chapter 42F applications, but these have been pro-forma -- 3 minutes for each -- and seldom provide substantive input or opportunities for meaningful question and answer exchanges. In the past, diligent committee chairs have found highly intelligent staff to read all applications and rate them. Other times, the entire process has been hidden from public view or input, with decisions coming at the end of the session with the posting of a list. Neither of these practices provides significant transparent or objective scrutiny. This could be part of the reason that the executive agencies have sought to impose their own criteria for release of the funds.

Once the budget bill is passed and signed into law, the executive branch often imposes additional red tape before a nonprofit can receive the funds. The Hawaii Budget Department has taken the position that a recipient must have proof of commitments for all costs of a building project before release of the funds (while it is common practice for other funders to not be the first dollars in a project).

The "no first dollars" policy has been also adopted by the counties. It is a catch-22 for even the best of the nonprofits. Another "no win" unstated policy is to severely limit the "overhead" or capacity support for a program. In other words: you can open the preschool, but forget about hiring staff.

At the same time, agencies do not appear interested in ongoing monitoring once funds are released. This provision of ongoing monitoring, combined with the allocation system, may impose unrealistic workloads on agencies for which GIA monitoring is a low priority. And if a particular agency is distracted or otherwise busy, it can take many months to have the funds released. Recently it took over one year before a nonprofit saw the money.

In short, without being already trusted and well connected, nonprofits often "get no respect" from agencies. Nonprofits cannot hire staff; programs cannot begin. If the grant is to fund part of a new building, everything is delayed.

The nonprofit grant-in-aid funding is one of the few avenues for government support of both early education preschool and charter school facilities. For whatever reason, in the past Hawaii has declined to see provision of quality learning environments as an obligation beyond the traditional public schools.

Here are a few ways to make this funding more efficient and effective.

1. The review process should be more open and transparent -- less based on individual connections.

2. The State Legislature and the State Executive Branch should get on the same page, use the same forms, share analysis, and streamline the approval, review and release process. Departmental review should come before a grant is included in the budget, not months after the new fiscal year begins.

3. The State (and counties) should drop the "no first dollars" requirement. If no one wants to be first in funding, the project is crippled.

4. The Legislature should amend the law to require a coherent GIA strategy by introducing a specific funding bills listing all the capital improvement grants. This way, all applications will get a public hearing.

Nonprofits play a key role in our social safety net and public education. We can improve the process and create more public confidence in these decisions.