For Cash-Strapped Social Service Agencies, an Entrepreneur Comes Forward

Published July 7, 2010

A Chicago social service agency director desperate to keep his operation going asked Tom Begley for a $75,000 loan. Before Begley could finish due diligence, the agency closed, a victim of the biggest deadbeat in Illinois: the state government.

In the two years since then the state has become an even bigger deadbeat. Illinois now owes nearly $6 billion to state contractors. The state started the current fiscal year with a $13 billion budget deficit.

On July 7 Illinois Comptroller Dan Hynes reported, “Illinois ended (Fiscal 2010) in the worst fiscal position in its history. … (T)he delay in paying vouchers was 153 working days this June compared to 99 days at this time last year.”

Begley realized where money is owed, money might be had. After almost two years laying the groundwork, he has opened Alpharetta Industries to help social service agencies that are in financial trouble because of late payments by the federal, state, or local governments. The business is named for its headquarters town, Alpharetta, Georgia.

No Other Money Source
“We’re finding with the economy being what it is, so many of these social service agencies cannot withstand these delays in payment,” said Marianne Spraggins, chief administrative officer at Alpharetta Industries. “They can’t go to a bank, or if they do, credit lines are exhausted or banks have tighter underwriting standards, and they won’t lend money.”

Alpharetta has created a computer platform for the sale and purchase of the government receivables these agencies are owed. “Illinois is our first target, for obvious reasons,” Spraggins said.

The service comes with a price: Two partial payments instead of all money at once, and 8 percent of whatever amount of receivables are purchased. But for some social service providers, the price could be worth it.

“For a provider who’s trying to keep doors open and has no other alternative, this is a lifesaver,” Spraggins said. “If providers can go to a bank and get a better rate, they should do it. But if they can’t, we can get them money and do it quickly.”

Supply, Demand
Greg Blankenship, president of the Illinois Alliance for Growth, said some state vendors have no other alternative. His organization has been sharply critical of Illinois’s deadbeat ways and tax, spending, and borrowing practices.

“That private business is jumping to aid these social service agencies in their time of need is a great example of how supply can meet demand in a free market,” he said. “There is something to be said for that.”

Mulling All Options
One agency that has Alpharetta’s services in mind as a last resort is MAGIC (Metropolitan Area Group for Igniting Civilization, Inc.), in Chicago.

“We do have a funding gap,” said Executive Director Bryan Echols. “We’re being proactive in trying to find solutions. We’re just being responsible by seeing what’s out there.”

Echols said he believes MAGIC can avoid using Alpharetta’s services, but he wants to be prepared in case money dries up.

“We recently have received some state dollars and [private] grants. It could be because of diligence on the part of our financial staff. They’re sending a ton of emails and making a ton of phone calls to Springfield [the state capital]. There are also a lot of volunteers calling on our behalf.”

MAGIC’s main programs center on youth and teen empowerment and leadership, though persons up to 40 years old use its services, Echols said. Those older participants are in a program for persons with serious spinal cord injuries.

Out $1 Million
The McHenry County Mental Health Board has provided cash advances to four contracted agencies totaling $500,000 even as it waits for the state to pay $500,000 it owes the Mental Health Board.

“Right now we’re out $1 million,” said Sandy Lewis, executive director of the board, which helps fund agencies that provide mental health, substance abuse, and developmental disability services in northeastern Illinois.

The Mental Health Board receives local property tax revenues in addition to state funding, so it has a cushion many other agencies do not have. But that cushion has worn thin as the state is about six months in arrears.

Still, Lewis said she would be “a little concerned” about using Alpharetta’s services. “I would advise any agency to look closely at the structural issue of this.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.

SIDEBAR

How Alpharetta’s Debt Brokering Works

Alpharetta Industries will consider posting on its Web site accounts that are 60 days or more past due for potential debt buyers to consider.

“It’s not an investment or loan. It’s an outright sale of the receivable,” said Marianne Spraggins of Alpharetta Industries. “We don’t look at the credit of the provider at all. Our purchasers are determining how much faith they have in the ultimate debtor and their willingness to withstand the delay in payment. We qualify the provider by making sure it’s in good standing with the state. The receiver can post whatever receivables it wants. A purchaser can review that and decide what to buy.

“Once consummated, it’s a 90-day transaction. We’re making a bet the state will pay within 90 days after that.”

A portion of the payment is held back until the debtor pays the bill. Various factors determine the payment split. In the worst case that Illinois presents, it’s a 71-21 split: 71 percent of the receivable amount immediately and another 21 percent after the state pays, totaling 92 percent of the receivable.

—Steve Stanek

Internet Info

Alpharetta Industries: http://www.alpharettai.org/