The nonprofit gold rush
S.F. spends billions on nonprofit contracts without adequate oversight. It's a recipe for disaster.

By Matthew Hirsch

Most public officials don't know how to efficiently manage a government that does most of its work through third parties.

Stephen Goldsmith, Kennedy School of Government and William D. Eggers, Manhattan Institute New York Times, 2/21/05

WHEN A SAN Francisco Muni driver or hospital worker or cop starts racking up a lot of overtime, the local newspapers are all over the story. When Recreation and Park Department workers are caught slacking off on the job, it's big news.

If the city were badly underpaying employees, or using nonunion workers to do city jobs, or letting top departmental executives take home fat salaries while scrimping on frontline services, the public would howl.

That's because it's relatively easy to find out how the city spends public money: employee salaries and work records and just about everything else that's done to deliver public services are matters of public record.

But a lot of the public services San Francisco residents and businesses rely on – and pay for – aren't delivered by city employees.

In fact, since 2002, a Bay Guardian investigation shows, the city has distributed more than $1.5 billion to nonprofit organizations that provide services ranging from housing and health care to carefully planned celebrations of dead people in U.S. history. As a yearly average, that amounts to about 10 percent of all city spending, or 20 percent of the city's General Fund.

The contracts run the spectrum from a $39 million subsidized child care contract to a $42,000 program providing acupuncture at the county jail.

And unlike city agencies, those nonprofits don't have to comply with sunshine laws, make line-item budgets available, or fully account for where the taxpayers' money is going.

They're run by nonelected boards that often meet behind closed doors, effectively making public policy decisions without direct public input or oversight.

Many are not audited according to generally accepted accounting principles, while others have public contracts that were never competitively bid on.

With so much money at stake and so little oversight, it's not surprising that there have been real problems – like the San Francisco Neighbors Resource Center, which diverted public money to former secretary of state Kevin Shelley's campaign, and the San Francisco League of Urban Gardeners, which allegedly used public money to influence last year's San Francisco mayoral race.

But anytime somebody proposes to strengthen transparency and accountability, representatives from the nonprofit sector always line up in opposition.

The private government

There's a long history of nonprofits delivering public services in the city. Twenty-five years ago, not-for-profits already controlled a third of publicly funded services in the city, according to the Washington, D.C.-based Urban Institute. And though nobody is currently tracking comparable statistics, that figure has almost certainly increased.

Today, some observers say, outsourcing and privatization are the trends of the future.

But as government grows increasingly dependent on nonprofit organizations to manage social programs, public money is increasingly going down rat holes where it's very hard to track.

Twelve years ago, when then-president George H. Bush proposed turning the delivery of social services over to nonprofits, he spoke of "a thousand points of light" – defining these private outfits as do-gooders with high moral and public policy principles. And in many – probably most – cases that's accurate: many nonprofits are managed with great care, and many deliver services that are essential to people's lives.

In fact, people tend to have a much higher comfort level with nonprofits than they do with for-profit government contractors like Halliburton and Bechtel. But just because an agency is nonprofit doesn't mean there won't be problems.

Financial accountants who audit nonprofit contracts say the system is awash with the potential for fraud and mismanagement. Just ask Shelley, who resigned last month after he came under investigation in connection with the San Francisco Neighbors Resource Center, which received $120,000 in city funding.

In August, the San Francisco Chronicle reported that Shelley's political campaign received a large contribution of funds that had been diverted from the San Francisco Neighbors Resource Center, which was founded by one of Shelley's influential allies, Julie Lee. The money was intended for a San Francisco community center that was never built.

The record is littered with other examples of how to violate the public trust (see "Nonprofits Gone Wild!," page 20).

Congress and the state legislature are both pushing reforms that aim at bringing greater financial accountability to nonprofits. And some San Francisco activists and officials are proposing reforms that would bring local recipients of public funds into the light of day.

Resistant to change

There are more than 835 nonprofit organizations vying for a slice of the public contracting pie. It's a cottage industry of service providers: giants of the business like the Children's Council, Progress Foundation, and the San Francisco Convention and Visitors Bureau, some of which operate on more public funding than entire city agencies (see chart).

And then there are small players like the many independent arts organizations and the National Forensic Science Technology Center, which in 2003 collected about $19,000 for work with the San Francisco Police Department.

Most of those groups are probably providing the services they've been hired to provide. But how – and at what cost?

There's a lot that doesn't show up in an audit – or anywhere else. Here's just one recent example:

Last month we contacted the Corporation of the Fine Arts Museums, which runs the Palace of the Legion of Honor and the M.H. de Young Memorial Museum, to find out why COFAM selected the world's largest food-service provider over a local catering company to manage its concessions services. We wanted to see the competing bids and the criteria used in making the final decision.

It's the sort of information any public agency would have to provide immediately. But although COFAM has received $3.5 million in public dollars over the past three years, Harry Parker, the director of the museums, refused to answer our question. In effect, he told us the museums are controlled by a public-private partnership – but only the private half of the partnership handles the concessions contract.

Under the city's Sunshine Ordinance, the Fine Arts Museums, a city agency that funded COFAM, would have been required to provide the bid data. But since the money went through a private nonprofit, the details are secret.

COFAM is covered by the city's Nonprofit Public Access Ordinance. But that seven-year-old law is very limited: it only requires nonprofits to release basic budget and tax information – documents that are already on file at local and state government offices.

Even if a nonprofit were to withhold its financials, all the city contracting department or the Sunshine Ordinance Task Force could do is file an "advisory opinion" stating how the organization should comply with the ordinance. And the opinion would be nonbinding.

That bothers advocates of open government.

"The window of scrutiny really ought to follow the money," Terry Francke, director of Californians Aware, told us.

But every time activists have tried to tighten up the law, representatives from local nonprofits have showed up in force and managed to squelch the idea. They say the additional oversight would be costly and could jeopardize the privacy of sensitive social service providers, even those that are happy to take public money to do what amounts to public work. "We've just always seen the Sunshine Ordinance as applicable to government," Steve Fields, executive director of Progress Foundation, one of the largest recipients of city funds, told us. "We're not opposed to the accountability. We're just saying let's look at what applies best in the nonprofit sector that doesn't undermine our strengths."

Francke has heard that argument again and again, and he doesn't buy it. If the Board of Supervisors can discuss sensitive social programs without exposing service recipients, he argues, so can the nonprofits.

"I think they're simply unused to having strangers watch them make decisions about the money they get," Francke said.

Fields insists there's no real secrecy – the work his group does for the city, running mental health clinics, is well documented.

"I think one of the things people generally haven't understood about the nonprofit sector in the city and county of San Francisco is we are highly scrutinized," he said. "Our accountability far exceeds anything that happens in the public sector."

Fine. Would Fields be willing to give out his full payroll, so we can see how much all the employees serving the public with taxpayer cash are paid?

No, he told us. That's private information.

Counting the cash

How does the city keep track of roughly half a billion dollars a year that's given out to nonprofits? There's no citywide standard. Each department comes up with its own rules.

The human service departments that get the most funding from the state and federal governments, known as the "Big Four," run the most sophisticated contracting operations in the city. That's because the state and the feds demand that these departments – the Mayor's Office of Community Development, the Department of Public Health, the Department of Human Services, and the Department of Children, Youth, and Their Families – meet higher standards.

Even so, these large departments have nowhere near the staff they need to monitor a combined $400 million a year in contracts. The Department of Human Services, for example, has 19 people in its contract administration division to oversee 242 contracts and nearly 100 third-party organizations.

"In order to get out and do those 100 site visits each year, [we're] moving," said David Curto, director of DHS contract administration.

To do monitoring and oversight the way Curto thinks it should be done, he told us he would need to double his staff.

The smaller departments are a whole different story. Many don't have an in-house contracts division. That means at times the people checking on nonprofit contracts may have no background in accounting, according to Hydeh Ghaffari, who audits nonprofits that hold public contracts in the Bay Area, including San Francisco.

"Monitoring has absolutely nothing to do with the financial aspects of an organization," Ghaffari told us.

Here's how it works, Ghaffari said. The city issues a request for proposals based on the service desired and a dollar amount representing how much the department has in the budget. Nonprofit organizations then bid on the contract, knowing that a low bid can help secure the contract. If an organization bids too low, it can always raise private contributions to make up the difference or request additional funds from the city.

Ghaffari said there's often no way to tell if the city's getting its money's worth. "There is no correlation between what service is being provided and the total cost of service," she told us.

But wouldn't nonprofits hesitate to document their true cost of service if it meant possibly getting less government funding?

"They don't even know the true cost," Ghaffari exclaimed. "They are cringing at the thought that the audits are now open to the public."

Here Ghaffari is referring to the California Nonprofit Integrity Act, a law that took effect in January requiring nonprofits to make their audits available on the same basis as IRS form 990s. Nonprofits with gross revenues exceeding $2 million (excluding government funding) will have to make public annual independent audits based on generally accepted accounting principles.

The law was heavily criticized by the California Association of Nonprofits, which said it sets a dangerous precedent by "establishing government mandates for practices that are best left to individual organizations." But Ghaffari believes it could be a huge boost for public accountability because, she said, cities haven't lived up to the task of fiscal oversight.

"I have been auditing nonprofits for 15 years, and I have yet to go into a nonprofit organization that has had a financial audit by a city government organization," she said.

'Every dollar has a cult following'

Jeff Sheehy, Mayor Gavin Newsom's HIV/AIDS advisor, knows something about nonprofit accountability.

In 1997, Sheehy called a local AIDS nonprofit to get some information about medicines that were available through the AIDS Drug Assistance Program. Sheehy was looking for a new anti-HIV drug on the market because, he said, one of the drugs ADAP offered, called Crixovan, made people feel like shit, and the other one, Ritonavir, really screwed up their eating and sleep schedules. He also wanted to know if he qualified for the program.

The organization, Sheehy told us, didn't provide him information – but a staffer recorded his call as service provided and billed the city. That experience led Sheehy and other gay activists to push for nonprofit reforms. The result was the Nonprofit Public Access Ordinance, which was introduced by Sup. Tom Ammiano.

Now Ammiano said he plans to call for a status report on the nonprofit ordinance with an eye toward strengthening it. Referring to all the local service providers that have run into problems over the years – the San Francisco AIDS Foundation, the Mission Housing Development Corp., Haight Ashbury Free Clinics, and the San Francisco League of Urban Gardeners, to name a few – Ammiano said the public would be better off with a stronger nonprofit accountability law as it was originally proposed. The nonprofits would be better off too, he said.

"I absolutely think they should be under the Sunshine Ordinance," Ammiano told us.

In a recent Bay Guardian interview, Newsom said he is also taking a close look at some of the cozier contractual relationships nonprofits have formed with city departments, including the Mayor's Office of Community Development. Newsom's staff found that some of those contracts were sole-sourced, meaning they were not competitively bid on, and others included preferential treatment that would give the existing contractor a leg up on the competition the next time the contract went out to bid.

"I don't want to dismantle Health and Human Services – no, quite on the contrary – but there needs to be more transparency and accountability," Newsom said. "And I know that a lot of the nonprofits are very defensive about that transparency from the federal grants, transparency from the foundation grants, transparency from state grants as well as requirements at the local level.

"There's a ton of waste and duplication. What's left over for direct service after you're paying for, you know, if five people have office space, and you've got five rents, and you've got five cars, and you've got five reimbursements?"

Newsom is attempting to move toward a citywide standard for contracting, implementing the recommendations of a nonprofit task force that published its proposed reforms nearly two years ago. What's taken so long?

During the interview, Newsom hinted at the anticipated opposition that rises up anytime you threaten to take away somebody's funding in this town.

It's the phenomenon a City Hall staffer once described to me this way: "Every dollar in San Francisco has a cult following."

Momo Chang, Yenie Ra, and Steven T. Jones contributed to this story.

E-mail Matthew Hirsch

For a complete list of city contracts with nonprofits, click here: http://www.sfgov.org/site/uploadedfiles/controller/reports/SumNPVenFY02-05.pdf.