As I placed the telephone back into its recharging cradle, a melancholy feeling surged inside and I started regretting that I had even called for the interview. Her name is Louise. Louise asked me not to use her last name, or the name of the now defunct charity for this article.
Louise headed a well respected 501-C-3 in Provo, Utah which is now non-operational. Louise was fighting back tears as her crackling voice told me in detail about her passion - how she and a small group of others rallied to make a real difference in Utah, and about her dealings with good old Uncle Sam. Uncle Sam and Louise had an agreement – in writing - at least that’s what she thought. Louise doesn’t trust Uncle Sam anymore and I don’t blame her.
In the world of philanthropy, federal matching grants and federal reimbursement grants are sticking the proverbial sword right through the fiscal hearts of many not-for-profits. It’s a horrible death to watch and it’s occurring at an unprecedented rate. It’s called death by federal reimbursement funding and it’s affecting every single entity that depends on federal government reimbursement money, including nursing homes and public hospitals.
A horse by any other name, or so the old saying goes, is still a horse. It’s the same with reimbursement grants – and while the federal government offers the biggest payouts, they also make things so hard on the average 501-C-3 recipient to collect, that death by reimbursement is inevitable if you don’t know exactly what you’re getting into and are fiscally prepared beforehand.
Reimbursement grants can be made by any form of granting entity, but are popular inside the federal government award system. A prime and easy to understand example of a simple reimbursement grant is the Pell Grant. The college or university fronts the money for books and classes upfront and Uncle Sam pays them back. Reimbursement grants, also called matching grants; also called challenge grants, is how the now famous NPR or National Public Radio came into and stays in existence.
If you don’t know what you're getting into with these grants, you easily can get hurt.
Challenge Grants
Challenge grants require the organization to raise a set amount of money to be partially or fully matched by another set. If you’ve ever listened to an NPR radio station’s pledge drive, this is a tactic that they use with great success. The advantage that every dollar raised is leveraged to bring in more money. In addition, a challenge grant can be very motivating. Challenge grants can come in different forms. Here are just a few examples:
- If you raise $15,000.00, the secondary source will match that dollar-for-dollar ;
- If you raise 80 percent of that $15,000.00, the secondary source will give you the remaining 20 percent;
- The secondary source will match every dollar for dollar up to a set amount, say $7,500.00.
Matching Grants
Matching grants, also known as cost sharing grants, are comparable to challenge grants with the exclusion that the funding time-line may vary and is often times prolonged. A good example is that a matching grant might require you to have the match in-hand before you apply, or inside of a set period of time after you receive the grant. On the other hand, a matching-grant contributor might merely require that you show hard proof of the match in your final yearly report before you get the money.
Reimbursement Grants
Reimbursement grants, which are total-sum grants made up of several smaller grants, many times mandate you spend some or the entire set amount before submitting hard proof for reimbursement. Usually this proof includes copies of invoices and cancelled checks, sometimes photographs along with your request for reimbursement and sometimes physical inspections from the awarding entity.
In federal reimbursement grants, usually each qualified subset of expense has limits according to the size of the smaller grant in-kind. The limitations of the smaller grants subsets making up the total grant award can kill an organization - fast.
As mentioned earlier, the Pell Grant is the perfect example of a federally sponsored reimbursement grant made up of subsets of smaller awards. Moreover many reimbursement grants are co-op grants where reimbursement costs are shared by the state. This means organizations must obtain approval for reimbursement from two separate governmental entities, both holding fast to often time different rules.
Most federal reimbursement grants contain wording that explicitly states:
· Grantees are required to match 100% of federal funds from non-Federal sources first;
· The awarding agency many times holds back a percentage of the receivable payments and only releases those funds at the end of the contract;
· The awarding agency retains the right to make final payment determinations.
Neither Louise nor those working with her had a true grasp of the algebraic formulas Uncle Sam uses for balance sheet adjustments of the reimbursement modalities; no knowledge of what reimbursement percentage the state of Utah confiscated and Louise didn’t have an understanding of the timeline involved.
Balance Sheet Math Myths
· (Receivables Adjustment) RA = {[(AR/ sales)(sales)]-AR}x{i/[1+(i xh)]}
· (Payables Adjustment) PA = {[(AP/ sales)(sales)]-AP}x{i/[1+(i xh)]}
It’s a common misunderstanding that your organization will get reimbursed dollar for dollar - even if it’s in print… and it’s usually due to overhead expenses, disputed claims and outdated federal and state reimbursement rates. The equations above are but two of the equations used by the federal government in determining reimbursement amounts. What most organizations don’t realize is that while the federal government makes the awards, in co-op agreements, the state takes its share too.
In most programs, reimbursement expenditures are set in stone. A prime example is equipment costs. Equipment costs are generally capped at 50 percent of a set value. Overhead costs can be as high as twenty five percent, depending on organizational oversight control. Depending on the awarding entity, the feds cap overhead reimbursement between zero and a twenty two percent. By undercutting the real cost of what it takes for nonprofits to deliver the goods, the U.S. government is slowly eating away at the capability of the nonprofit service delivery system. As if that weren’t enough, there is no absolute definition of what constitutes overhead costs.
Different standards get applied by each nonprofit, further denying nonprofits the ability to recover their actual costs of delivering services because the government can deny at will. Furthermore, in many cases states set limits on overhead payables received and keep the rest. A nonprofit in Louisiana can receive no more than 9.4 percent, and the state will confiscate the rest. A nonprofit in Maine under the same funding program will receive zero, because the state confiscates the full amount.
To further complicate matters, as with overhead costs, indirect costs and administrative costs are terms that are ambiguous at best, and capable of definition manipulation and reimbursement denial by the federal government.
Another important factor that determines federal reimbursement factors is outdated rates. The difference between what your organization pays out and what the feds allow can be as high as thirty two percent. Let’s say you submit a qualified reimbursement equipment expense for $300.00 and the reimbursement covers fifty percent. You expect $150.00 to be reimbursed, but the feds, using outdates rates cut that by thirty two percent – so your organization receives $112.00.
Time-line Myths
Agencies disperse undisputed approved payments differently. Some disperse funds quarterly, some semi-annually and some only at the end of the contract. When disputes arise, it’s generally due to overhead, administrative and indirect costs in question. When costs are disputed, depending on whether the appeal was filed at the federal or state level, add six to eighteen months for reimbursement.
Determining your organization's capacity for taking on a reimbursement grant can be tricky at best. As a 501-C-3 organization considering federal reimbursement funding opportunities, there are a few ways to help assure its continuation and protect its assets. Learn from Louise.
When considering federal reimbursement grants:
· Don’t apply for federal reimbursement grants if you do not have a minimum of three years operating expenses in hand - period;
· Never count on federal reimbursement grants to keep your organization alive. If your organization is having a hard time finding sustainable funding sources, federal reimbursement grants may be the catalyst to your organizational death. Organizations stay alive through diversified funding strategies, not just one source of funding;
· Be aware of the co-op requirements in reporting and which entity is responsible for specific reimbursements;
· Know the reimbursement rate caps at the federal and state levels. Many caps are set by the individual subset amount of the smaller grants which make up the whole, which are then in turn restricted at the state level;
· Know the non-federal matching and use requirements by heart. Many federal reimbursement grants mandate your non-federal funding be matched up to 100 percent before the feds will pay;
· Learn the definitions of overhead, administrative and indirect costs as they relate to your specific funding opportunity. This is as easy as picking up the telephone and holding a candid conversation with the federal administrator of your funding opportunity. Most are very willing to speak candidly to you and answer your specific questions. I’ve never had a bad experience, even when speaking to a full bird Colonel;
· Learn the math. When people see algebraic equations their brain tends to shut down. In reality algebra is simply using shortcuts for figuring out multi-step equations;
· Know that the federal government most likely will not reimburse your expenses at the rate you expect. Always use the 32 percent rule of depreciation when figuring out your actual receivables.
Louise told me she doesn’t trust Uncle Sam anymore, and I don’t blame her. Her organization fell victim to the economic collapse and she hoped a reimbursement grant would help keep her mission alive. Instead, it destroyed her organization. Organizational death by federal reimbursement grant is a horrible thing to watch.