State Oversight Board Issues Recommendations to Improve Nonprofit Contracting Practices in California
The state’s independent oversight agency, the Little Hoover Commission (LHC), has issued 12 urgent policy recommendations for reforming California’s grantmaking and contracting processes to strengthen partnerships with nonprofits. These reforms align closely with policy solutions long advocated by CalNonprofits.
The LHC found that current processes impede the effective delivery of vital services to California’s most vulnerable populations by burdening nonprofits with barriers that inhibit sustainable partnerships. The recommendations are designed to correct these pervasive challenges across state government by improving administrative consistency and correcting systemic inefficiencies.
Payments: Ensuring Timely and Adequate Funding
These recommendations directly tackle the cash flow crises caused by the state’s reliance on reimbursement, which disproportionately harms smaller, less-resourced nonprofits.
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| 1. Mandate Advance Payments: Require, at a minimum, a 25% upfront payment for all nonprofit contracts. Ultimately, grant 100% of advance funding to established nonprofits in good standing with the state (3+ years) to end the practice of nonprofits subsidizing state services. | Solves Cash Flow: Allows organizations to hire staff and start programs immediately without taking out loans or using scarce reserves.
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| 2. Amend Prompt Payment Act by 2026: The state should establish a grant payment schedule that ensures all 501(c)(3) organizations with a state contract are paid in a timely manner, while providing flexibility for state agencies working with lower-capacity nonprofits. Amend the Prompt Payment Act to reflect these agreed-upon timelines. | Ensures Consistency: Provides a unified, accountable system for timely payment, reducing service disruptions and the deterrent effects of slow payment.
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| 3. Sufficient Indirect Cost Coverage: Require the state to sufficiently reimburse indirect costs; at the very least, this could include setting a minimum rate tied to the federal de minimis rate (15%) and allowing for higher negotiated rates. | Ends Subsidization: Prevents nonprofits from having to use their own reserves to cover essential overhead costs like rent, utilities, and administration for state programs.
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Contract Terms: Ensuring Fair and Sustainable Partnerships
These reforms promote stability and flexibility, allowing nonprofits to focus on long-term outcomes rather than duplicative processes.
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| 4. Maximize Grant Duration & Simplify Renewals: State agencies must issue grants for the maximum length authorized by the Legislature and implement a pathway for easier grant renewals, especially for high-performing nonprofits that achieved prior contractual metrics. | Increases Stability: Reduces administrative burden on both state and nonprofits, allowing for multi-year planning, better staff recruitment/retention, and improved program continuity.
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| 5. Standardize Emergency Amendments: Create a standardized, fast-track process for state agencies and nonprofits to amend contracts during a state of emergency (like natural disasters or health crises). | Ensures Continuity: Allows nonprofits to quickly adjust service delivery, locations, or budgets to meet urgent community needs without risking contract non-compliance. |
Compliance: Balancing Accountability with Efficiency
These recommendations address the burdensome and ineffective administrative requirements that pull nonprofit staff away from service delivery.
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| 6. Audit and Harmonize Reporting Requirements: The state must audit all grant reporting requirements, and where possible, harmonize state requirements with federal ones and reduce reporting frequencies. | Reduces Administrative Burden: Eliminates redundant data collection and frees up staff time for program implementation and measuring real outcomes/impact.
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| 7. Require Feedback on Rejected Submissions: State agencies must be required to provide substantive feedback to nonprofits on why applications or documents are rejected, moving beyond general form letters. | Promotes Equity & Improvement: Helps smaller, less-resourced nonprofits understand state expectations, improve future proposals, and build institutional knowledge. |
Creating the Infrastructure for Successful Partnerships
These foundational reforms create a permanent structure for unified, efficient, and equitable grant and contract administration across the entire state bureaucracy.
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| 8. Establish a Nonprofit Liaison in State Government: Create a dedicated liaison office, such as within the Governor’s Office, to serve as an interagency coordinator and a resource for nonprofits. This is in line with CalNonprofits’ proposal to establish the Office of Nonprofit Empowerment. | Creates Unified Approach: Addresses the problem of inconsistent grant administration across the state’s 236 different agencies, boards, and commissions.
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| 9. Standardize Contract Templates and Terms: Develop uniform contract language and standard terms and conditions for all state grants and contracts used by nonprofits, including centralized guidance for advance pay. | Streamlines Process: Reduces legal review time and confusion, making it easier and faster for nonprofits to enter into agreements with the state.
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| 10. Improve Technical Assistance and Peer Learning: State agencies should allocate resources to provide technical assistance and capacity-building for both agencies and nonprofits to improve grant and contract administration processes. | Fulfills AB 590/AB 156 Mandate: Ensures that prioritizing grants to smaller, community-led organizations does not fail due to lack of administrative support from the state.
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| 11. Establish a Uniform Portal for State Grant Reporting: Create a single, modern, user-friendly electronic portal for nonprofits to experience an efficient grant management system for all state grants. | Improves Efficiency: Replaces archaic systems (like paper checks and fragmented communication) with a streamlined, digital interface, reducing administrative friction.
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| 12. Streamline grant management processes within the State Controller’s Office: The state should create a specialized grant payment processing unit, which would include the use of electronic funds transfers for grants. | Modernization of archaic payment processes with the Controller’s Office so that nonprofits are paid more efficiently. |
*An earlier version of this page listed recommendation #6 incorrectly, and the information has now been rectified.
