Repost: Non-Profits In An Era Of Institutional Collapse

Things sure seem to have changed at the New York Times. After a couple of decades of being the veritable mouthpiece of the non-profiteers, the Times has recently been raising questions about how much New York City and State pay them, much of it under the Medicaid program, and how little is received in return. In the latest article, the Times examined at-home services for the disabled, for which the city state and federal governments pay $45 to $67 per hour to non-profit organizations that dispatch aides paid $9 to $15 per hour. The huge profit margin allows the non-profits to pay big salaries to those who run them.

This is just one example of what has happened in the city’s “non-profit” “charities” over the years. They have become a big part of the reason that New Yorkers pay so much in taxes, and receive so little in return. What is particularly disturbing is that this problem has infected a type of organization that was thought of as the solution 40 to 50 years ago, due the failures and ripoffs of public employee unions, government bureaucracies, and government contractors.

Note: this was written in 2011, in response to the aforementioned New York Times article. Recently the federal government has demanded that New York City and State pay it back $1.5 billion in improper and fraudulent Medicaid payments. So far, for just one year – 2010. And since the federal government only covers half of New York’s Medicaid spending, that means that New York City and State have already paid at least $1.5 billion extra due improper and fraudulent Medicaid payments. Per year, with the prospect of that doubling. Additional commentary will follow the rest of the original post.

It’s hard to believe now, but at one time government agencies, from the military on down, were considered examples of well-run, efficient organizations with dedicated staff. Prior to the progressive era of the early 1900s, all government was, and was assumed to be, corrupt due to patronage appointments for government workers and kickbacks for government contractors. Progressive Democrats, however, challenged the corruption of political machines because they wanted the government to do more to meet people’s needs. Progressive Republicans worked toward the same goals, because they wanted government to do the limited number of things everyone believed had to be done, at a lower tax rate.

Note: these were the original progressives, and the original meaning of the term. It now apparently means something else.

During the Great Depression, with fewer quality employment opportunities in business, hundreds of thousands of dedicated workers flocked to government service. When the federal government successfully organized victory in World War II, the reputation of government agencies soared further. A golden age of public service followed.

Which was then ended by the public employee unions. After reversing a perceived imbalance in the well being of public employees relative to their private sector counterparts, they quickly moved on to decreasing the amount of work government workers did. Protecting sloth with procedural impediments to termination, reducing the number of days worked in a year and hours in a day, and increasing the years in retirement relative to the years actually worked.

As a result, in the 1970s taxes soared and services collapsed in whatever places the unions had the most power, particularly New York City. In a triumph of union power, most recently repeated, soaring pension costs led to soaring taxes that drove businesses out of town, while collapsing services did the same to residents. The schools stopped educating the children, the police stopped protecting people from crime, the transit system became dirty and unreliable, and garbage filled the streets, as all the money was diverted to the early retired. What people paid for government and received in return is far more for less than the public employees themselves would have tolerated when they went shopping, and used their power of choice to ensure private sector workers gave them a good deal. The public employees, in fact, exercised their right to move out of town, to suburbs with lower taxes and better services.

The consequences of public sloth extended to the social services sphere, where public agencies were thought to be incapable of actually helping the poor, or even uninterested in doing so. That perception was reinforced by the 1972 Willowbrook scandal, where the mentally retarded were found to be living in horrific conditions in state institutions as indifferent government employees did little.

The right wing response to government agency sloth has been “privitization,” having the government contract with for-profit businesses to provide the services that governments used to provide directly. But government contracting has been rife with sloth and corruption as well, and in the same era that people were finding out that the mentally retarded were being neglected by government agencies, they were also finding out that senior citizens were being abused by for-profit nursing home companies, during the 1970s nursing home scandals.

Robbed by public employee unions and by businesses, New York City turned, en masse, to the non-profit sector. The public employees and their unions stayed, and eventually collected their pensions, but the actual work would be done by others. Surely people could trust those who would dedicate their lives to charities in exchange for the modest pay they provide? Perhaps this era explains the “non-profit good, for profit bad” reporting of the Times up until a few years ago.

As a result of all the non-profit contracting, New York is one of the most contracted out local governments in the entire United States. For FY 2011 at the New York City Administration for Children’s Services, according to the FY 2012 budget proposal, just $529 million of $2.9 billion in total spending went to the wages and benefits of government workers. The rest went to contracts with the agencies that actually do the work of caring for needy children, almost entirely non-profits. The wages and benefits of public employees similarly accounted for only $175 million of the $903 million at the Department of Homeless Services, $582 million of the $1.9 billion spent by the Department of Health and Mental Hygene, and $1.2 billion of the $8.7 billion spent by the Department of Social Services. Most of the rest went for contracts, generally to “non-profit” health and social service providers, with much of the money passing through the Medicaid program.

But it isn’t just health and social services. Almost all of the New York City’s major cultural institutions, its zoos and botanic gardens and museums, though generally owned by the city and partially funded by the city, are run by non-profit organizations. So are the city’s libraries. After Parks Department workers were unable or unwilling to maintain Prospect and Central Parks in the wake of the 1970s fiscal crises, non-profit organizations were formed to do some of the work for them. The new High Line, Hudson River, Governor’s Island and Brooklyn waterfront parks are operated as non-profits from the get go.

It worked for a while, as new organizations inspired the same kind of dedication and sense of mission found in public agencies a generation or two before. But then the rot began to set in, founders were replaced by careerists, and non-profit executive pay began to soar. I recall reading the in the late 1990s, when the dot.comers were getting rich off stock options, that the non-profit sector also needed to offer stock options to attract qualified workers. Perhaps the organizations could purchase options in unrelated for-profit companies so they too could receive big payoffs taxed at just 15.0% under the federal income tax rules? They were serious.

Many non-profits came to be essentially owned and operated by state legislators, their relatives and cronies, with an exchange of funds for support with the collection of signatures and other political assistance. Whatever good work they might have done at one time has become less and less a part of the mission.

And many “non-profit” “charities” now get almost none of their funding from actual donations. They rely on government funding instead, funding that is collected from people in taxes and does not have to be justified to (increasingly, given various non-profit scandals) skeptical donors.

Aside from buildings with rich people’s names on it, the absence of donations shows the attitude of New Yorkers toward the “non-profit” sector. For example, although New York’s private hospitals, by law, remain non-profit “charities,” how many would consider making a donation to one of them? You might as well donate to Exxon. As the Times reported in another previously un-Times like article, many hospital executives make salaries well into the seven figures, and rising.

What is the broader lesson of this sad history? One might conclude that there is no end-run around the hard work of reforming corrupt existing institutions by replacing them, as New York replaced government employees with non-profit contracts. That is a lesson that could perhaps be applied to charter schools. Sure, they might outperform regular public schools while motivated founders are in charge, but after 20 years receiving government money taxpayers have no choice but to contribute, they will surely devolve until just another self-interest group.

Past attempts at reform, however, have only increased my respect for “creative destruction.” Eventually, a culture of entitlement sets in that can only be ended when the exchange once again between those who pay and those who receive payment once again becomes voluntary.

Consider the New York City public schools. There was a huge increase in funding. The central entire administration was mostly sacked and reorganized, along with many principals. Teacher aides were wiped out, along with untenured teachers. But since the schools were not declared “bankrupt,” the United Federation of Teachers contract remained, and within seven years the UFT had ensured that all the additional funding went to earlier retirement for its members. Again. Does anyone really believe the Long Island Railroad, where nearly all the workers AND managers were claiming disability pensions, can be reformed with that culture in place?

In business, consider the case of respected businessman Warren Buffet’s Berkshire Hathaway. He had a successor all picked out, but that successor suddenly resigned after it was discovered he was doing insider information side deals front running Berkshire Hathaway’s own trades. Buffet, according to a recent 60 Minutes report, has now asked his son, a farmer with no interest in finance, to replace him as Chairman of the Board. Perhaps because his soon is the only person he trusts.

Our institutions, it seem, cannot be reformed. They can only be replaced, preferably after bankruptcies that divest the vested interests entirely. But eventually the replacement organizations will also be corrupted, as founders with dreams are replaced with careerists with self-interest in mind. That seems to be true in business, in government, and yes, even in charities.

Perhaps the lesson here is the saddest one. Self-dealers have seized all our institutions, public and private and non-profit, and for the most part cannot be dislodged because of the power they have obtained. The result is a society in decline. How bad will things get before a re-boot becomes possible? Does the struggle to prevent collapse just allow those who have made deals with themselves to take more out?  There may be no good choices in the era of Generation Greed.

Update: Having re-read this, I don’t think I have much to add. On the specific subject of Medicaid, I’ll be comparing state-level data for 2001 and 2011 (most states have not reported 2012) in a post or two in September.

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