NFPs in the dark on rising costs: expert

Posted on 14 Mar 2024

By Matthew Schulz, journalist, Institute of Community Directors Australia

Finance Calculator shutterstock 585387518

One of the country’s leading experts on not-for-profit finances says it’s time for a major shake-up in sector funding.

Professor David Gilchrist, director of the Centre for Public Value at the University of Western Australia, believes that governments have got it all wrong when it comes to costs, and therefore funding for community-based service providers.

Prof Gilchrist said rising costs were front of mind for many organisational leaders, “given the level of inflation experienced across the nation, impacting the sector’s financial viability and its capacity to continue to employ staff”.

His comments come in the lead-up to budget season, with the federal government set to release its budget in mid-May before states and territories follow suit.

David Gilchrist
Professor David Gilchrist of the Centre for Public Value at the University of WA.

Many Australian organisations lodged federal pre-budget submissions in late January seeking increased spending in their area.

Yet Professor Gilchrist said organisations faced an uphill battle when arguing for a funding boost, because budget provisions did not reflect the cost of delivering services but instead were based on “historical funding levels [and] how much money the government has got to spend”.

Prof Gilchrist said state, federal and territory governments used indexes based on consumer prices and wages to estimate costs for the sector, but these had little relationship to the actual costs incurred by the community sector. As a result, these estimates did not represent the real cost increases experienced by the sector.

“Organisations aren't funded anywhere near the comprehensive cost of service delivery, they're funded based on these historical ideas of what the cost should be,” Prof Gilchrist said.

Prof Gilchrist has studied the costs of service delivery and sector sustainability for more than two decades and recently reported on his findings in a series of economic papers examining the indexing of community sector costs.

Those investigations – and work commissioned by several state Councils of Social Services to support pre-budget submissions – have found those indexes wanting.

“Australian governments are simply not collecting any data on what it costs to deliver services that are funded by them. Not being able to frame or base a budget in real data means that that budget is almost invariably inaccurate from the get-go,” Prof Gilchrist said.

“We don’t really know what the service mix is, or how the costs actually work, and what kinds of cost increases impact the sector.”

“Ultimately this failing is borne by people in need of services and support, leaving them as the unwillingly ‘shock absorbers’ of poor financial modelling and inadequate funding.”

Instead of investing in hard empirical data, Prof Gilchrist explained, governments rely on “proxies” for pricing information, such as the Consumer Price Index (CPI) or the Wage Price Index (WPI), but said these aren’t up to scratch for measuring changes in costs in the community sector.

The CPI “basket of goods”, for example, is designed to measure the costs of running a household, yet “most of those costs don't really have ramifications in the not-for-profit and charitable sector”.

He said costs from that CPI basket that are borne by NFPs and charities – such as transportation and insurance – were rising faster than those of other goods, meaning their rate of increase was not properly represented.

For many community organisations, labour needs and costs were rising. Aged care, disability services, child protection and migrant support, for example, were expected to deliver highly specific and complex services that required an experienced and well-trained workforce.

He said that an estimated 70% of the budget of many NFPs went to recruiting, paying and training that workforce, yet current indexation did not match spending increases in those areas.

Other cost pressures affecting organisations included the rapid rise in insurance and subscription payments for software, he said.

He said that despite being one of the largest employers in the country and providing essential community support and services, the NFP sector had suffered a “severe lack of investment”.

“We don’t really know what the service mix is, or how the costs actually work, and what kinds of cost increases impact the sector.”

“I think for obvious reasons, the indexation model [for the NFP sector] is incorrect, and it's largely used because we haven't taken the time or invested in working out what the indexation model should be”.

“This is alarming given the annual turnover of the charities sector was $190 billion at the last count.”

Professor Gilchrist proposed the creation of two “fit for purpose” indexes:

  • a community sector producer price index
  • a community sector labour price index.

He proposed that the Australian Bureau of Statistics (ABS) generate these indexes every six months in the same way it calculates those indexes for other economic sectors.

The community sector index, for example, would operate in the same way as other sector indexes, but it would assess a basket of goods and services tailored to the needs of not-for-profits, charities and human service organisations.

The University of WA has already proposed a formula that could be used in Western Australia, with specific variations to account for that state, such as higher transport costs. The UWA has also examined its application in other states and territories.

Prof Gilchrist predicted the index would be welcomed by both the sector and treasury officials as a way of ending “continuous circular arguments” about payments, instead introducing an “arms-length calculation of costs in a way that is statistically relevant and reliable”.

This would enable realistic and evidence-based budget talks between officials and providers, allowing both to focus on identifying and meeting needs.

While there could be “substantial increases” across community sector budgets as a result of indexation adjustments, those costs were “not enormous” in comparison to other budget spending, he said.

Prof Gilchrist said he would propose that sector leaders support the new indices in the Not-for-Profit Sector Development Blueprint (NFP Blueprint), currently being developed.

Prof Gilchrist is acting as an expert adviser to the federal government’s collaborative program to “develop a suite of sector-led workable and effective options” for reforms to strengthen the sector.

More information

Research activities of the Centre for Public Value, UWA

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