What our experts say.
”How is government affected by the evolution of the nonprofit sector?”
Supply and Demand
Hopefully, with awareness and forethought, but there is little evidence of that! The U.S. nonprofit sector is now a major economic force, controlling significant financial resources. Current estimates put the number of exempt organizations registered with the IRS at close to 1.6 million (up from 790,000 in 1977), including more than 1 million charities and foundations (1). The list includes everything from the Red Cross to hospitals, soup kitchens, industry associations, and hobby clubs. Their combined revenues stood at an eye-popping $1.5 trillion dollars in 2005 (about 12 percent of GDP) and total assets at $3.4 trillion (2). Even so, these figures exclude most of the estimated 350,000 congregations and many small nonprofits that do not have to register with the IRS. They also do not capture the significant role that nonprofits play in mobilizing social agendas and engaging people in their local communities. Clearly, government officials ignore the sector at their peril.
The sector also dominates substantial segments of our service infrastructure, especially in health and human services. Our data for Indiana (2005) show that nonprofits accounted for at least 70 percent of all paid employment (including government) in social assistance, over half of all residential care facilities, and 43 percent for the health and social assistance industries combined (3). Threats to the capacity of nonprofits to deliver these important services will have significant consequences for the social safety net and the quality of life in local communities.
The early warning signs are there – nonprofit revenues trail expenses and private contributions barely keep up with growth in the overall economy. This is aggravated by government efforts to curtail spending and to shift funding mechanisms from supplier to consumer subsidies. Forcing nonprofits to adopt for-profit strategies in order to compete (increasingly with for-profit providers) for subsidy-bearing consumers may increase their efficiency, but may also endanger their ability to attract private philanthropy. And it may leave the most vulnerable members of our communities to fend for themselves when selecting services that are inherently difficult to evaluate. If these trends continue, government will have to pick up the pieces or abandon any pretext of proactively responding to community needs.
(1) Independent Sector, 2002. The New Nonprofit Almanac Desk Reference. (San Francisco: Jossey-Bass); http://www.irs.gov/pub/irs-soi/05db22eo.xls (retrieved Jan 13, 2006).
(2) National Center for Charitable Statistics Dataweb for organizations filing financial information on Form 990 or Form 990 PF with the IRS (extracted 2/27/2007).
(3) Unpublished data. For corresponding earlier analysis, see Kirsten A. Grønbjerg and Erich T. Eschmann. 2005. Indiana Nonprofit Employment: 2005 Report (Bloomington, IN: School of Public and Environmental Affairs). Available online at http://www.indiana.edu/~nonprof/results/inemploy/innonprofitemploy05.htm.
The Power of Persuasion
I would begin by questioning the assumption that government and charitable organizations belong to distinct sectors. In fact, in today’s environment, the government and nonprofit sectors have become so intertwined it is difficult to say where one stops and the other begins. Traditionally, nonprofits depended on government for money.
But that relationship has changed as the government now depends on the nonprofits to carry out their mission and responsibilities. Nonprofits were thought to be an effective service delivery vehicle for government policy, with the advantage of being more flexible than government bureaucracies and closer to the individuals and communities they serve. In return, nonprofit organizations are provided a relatively stable funding source that can be used for basic administrative costs of operating their organizations.
As this relationship evolved, especially in the social services, governmental agencies have become dependent on nonprofit organizations, and many public sector organizations are more focused on ensuring that its constituencies (i.e., nonprofits) have a voice in public policy deliberations, downplaying government’s role as a regulator and overseer of organizations that deliver its services. As a result, it is more difficult to find innovation in public agencies.
Today, policy changes in areas where nonprofits play an important role in service delivery are increasingly difficult because government managers sometimes seem more concerned with managing (and keeping happy) a constituency of nonprofit organizations that deliver services. These managers face the dilemma that they cannot run their programs without their nonprofit partners, limiting the flexibility of government to innovate.
And, when governmental agencies find themselves in the role of needing to initiate change, especially change that will cause any pain to nonprofit service providers, they have few tools to work with. In fact, unless they plan to take away the funding altogether, the only tool that public agencies have to change the nonprofits is the power of persuasion. In other words, authority in government-nonprofit relations where government depends on nonprofits to deliver services and achieve its mission now rests within nonprofit (not governmental) organizations.
Blurring the Boundaries
This question is posed in an interesting way. More often than not, we think of how government affects the nonprofit sector – rather than the other way around. For the past 30 years, government has been the largest source of funding for nonprofits – particularly in the area of human services. This “contracting out” by government to nonprofits has been happening for decades – such that, today, we find ourselves in an environment in which the nonprofit sector has become indispensable in providing services previously the responsibility and exclusive domain of government. As a result of this evolution and the blurring of differences between government agencies and nonprofits, the public and nonprofit sectors are less defined. If nonprofits ceased to exist, the public sector would not have the capacity to recover in delivering needed services to our citizens.
I believe that the growth and pervasiveness of the nonprofit sector can lead to positive changes in government. In general, the nonprofit sector has been viewed as a place where “things get done,” where individuals “can make a difference.” In contrast, government is viewed as bureaucratic, formalized, and difficult to change and achieve results. I think that the more government interacts with nonprofits, the more the culture of the public sector will change – less bureaucratic, more flexible, and more accountable to its citizens. Over time, as individuals working within the sector learn to better navigate and become more adept at moving between public and nonprofit organizations, the cultures will change. And, I believe that the nonprofit sector will be the impetus for this change – particularly in terms of transmitting its ideals, values, and standards for performance.
Clint Oster Jr.
Case in Point: Changing How the Skies are Managed
If you had examined how air traffic control services were provided around the world 25 years ago, you would have found that in virtually every country, these services were provided by government employees working in government agencies, typically funded by tax receipts. When you look at air traffic control today, you find that the vast majority of developed countries and many developing ones have made dramatic changes in moving away from government agencies to other forms of organizations and have switched from taxes to user fees. The basic function of air traffic control systems has not changed. It is still to provide continuous separation between aircraft, both on the ground and in the air, so as to avoid collisions and to provide efficient routing between the origin and destination of each flight.
What has changed is the recognition that a government agency may not be the form of organization best suited to provide these services. There are at least three kinds of organizational forms that have proven more effective.
In Canada, for example, NAV CANADA was established as a “non-share capital corporation” that is governed by a board representing users of the system. In essence, it functions as a nonprofit shareholder cooperative. As other examples, in Australia and New Zealand, Airservices Australia and Airways New Zealand were established as government corporations operating on commercial principles. Finally, in the United Kingdom, National Air Traffic Services (NATS) was established as a “public-private partnership” with shares owned by the government, by employees, by airlines, and by the airports. While these organizations have important differences from one another, all seem to be operating with improved safety, improved efficiency, and with better capital investments to modernize their systems.
In the wake of this dramatic worldwide movement away from government agencies, you might wonder if any major country has retained the approach of a government agency funded by taxes. The answer is yes, one country has yet to leave the government agency model – the United States.
Kristen Grønbjerg holds the Efroymson Chair in Philanthropy at the Center on Philanthropy and is a professor of Public and Environmental Affairs in Bloomington, a professor of Philanthropic Studies, and an adjunct professor of Sociology at Indiana University, Bloomington. A native of Denmark, she earned an undergraduate degree in sociology at Pitzer College in Claremont, CA, and MA and Ph.D. degrees in sociology at the University of Chicago. She is an expert in nonprofit and public sector relationships, whose current work examines the scope and community dimensions of the Indiana nonprofit sector.
Debra Mesch is an associate professor of Public and Nonprofit Management and director of the Public Affairs Programs at SPEA IUPUI. Her current research agenda focuses on issues of board diversity, race and gender differences in philanthropic behavior, and executive compensation. Other areas of expertise include human resource management in public and nonprofit organizations, management of volunteers, and national and community service.
David Reingold is director of Ph.D. Programs in Public Affairs and Public Policy and an associate professor at the School of Public and Environmental Affairs. His primary teaching and research areas include urban poverty, social policy, low-income housing policy, civil society, and government performance. In addition, he is managing editor and co-editor of the Journal of Policy Analysis and Management and is on the editorial board of the Journal of Urban Affairs.
Clinton V. Oster Jr. is a professor at the School of Public and Environmental Affairs, IUB, and SPEA’s Associate Dean for Bloomington Programs. His current research centers on aviation safety, airline economics and competition policy, international aviation, aviation infrastructure, and environmental and natural resource policy. He is also an accident investigator for the Indy Racing League. Professor Oster received a B.S.E. from Princeton University, an M.S. from Carnegie-Mellon University, and a Ph.D. from Harvard University.