Trying to Dance to Syncopated Rhythm:

The D y n a m i c s ofGovernment Funding for Nonprofits

ost nonprofit directors are all toofamiliar with the contractingdance. The dance is complicated—it involves scanning requests forproposals, writing grants, waiting

as the proposed program is evaluated by facelessreview panels, negotiating terms back and forth,and finally, when every move is executed, receiv-ing the signed contract agreement from the city,county, state, or federal agency. Often, whatmakes this process so challenging is not thelength of the grant proposal, the detailed crite-ria used to evaluate it, or the painstaking nego-tiations. It is the different expectations,processes, and terminology for every govern-ment agency. The dance is so convolutedbecause the songs keep changing and the actualDJ spinning the music changes, as well. Often-times, it feels like the county department playsR&B, and the city Hip Hop; some state agenciesspin rock classics, and others light jazz. Some-times, if contracting processes are occurring atthe same time, nonprofits must dance to two dif-ferent songs simultaneously.

Also troubling for the field of nonprofit man-agement are the consequences of these dances,which are often hidden. The motivation to beginthe dance seems clear—nonprofit agencies needpublic revenue to pay their staff, to cover thecosts of program, to turn on the lights. Thepublic revenue that an organization receivesoften helps legitimate it, a signal to other donorsthat it is a professional and competent operation.Yet, research over the last 15 years suggeststhere are important, albeit unintended, conse-quences of accepting government revenue—for

nonprofit organizations, for the fields withinwhich they work, and for the clients the organi-zation exists to serve.

Changing Reality of Nonprofit-Government RelationshipsWhat is notable to scholars of both U.S. non-profit management and public administration isthe dramatic privatization over the last thirtyyears of services once carried out by the publicsector. The increased reliance by all levels ofgovernment on both nonprofit and for-profitagencies is fueled by a confluence of forces. Forone, the “reinvention of government” hasincreasingly put government in the place ofsteering (that is, deciding public policy priori-ties) rather than rowing (actually providing theservices themselves). Secondly, there continuesto be significant public mistrust in governmentand a wide-spread belief that contracting withprivate organizations allows for more efficientand effective services. Finally, in such an envi-ronment, public managers often have limitedabilities to hire new public workers to respondto new legislative mandates; instead, partneringwith private providers is seen to be a more rea-sonable solution. As a result of these forces,public tax dollars are now going to fund privateorganizations at unprecedented levels.

The particular shape that this trend towardprivatization takes varies considerably from fieldto field, place to place, even service to service.In some fields, such as public health, there issharp competition for public dollars betweenprivate for-profit and nonprofit organizations. Inother fields, such as adult education, this com-

[T]here are

important, albeit

unintended,

consequences of

accepting

government

revenue—

for nonprofit

organizations, for

the fields within

which they work,

and for the clients

the organization

exists to serve.

by Jodi R. Sandfort

ILLUSTR ATION: © MACER AN / CORBIS. REPRINTED FROM THE NONPROFIT QUARTERLY 13

M

petition might exist in the eastern United Statesbut not in the upper Midwest. In some places,county government might contract with for-profit elder care programs for this service whilestate government only contracts with nonprofitproviders. The larger trend, though, reveals thatnonprofits are facing increasingly competitiveenvironments. They are no longer the “preferredprovider” of public services.

For governments at all levels, there are manybenefits from using private organizations toimplement public policy. When faced with leg-islative mandates, public managers can accessexpertise that would be almost impossible toprovide in the public sector. Issuing specializedcontracts also can allow the state to be moreresponsive to the particular needs of smallergroups of people—ethnic minorities, non-English speaking people, and those with dis-abilities. Such contracts also give the state moreflexibility. As legislative priorities change orpolitical winds shift, it is fairly easy to changethe terms of the contracts—or cancel them com-pletely—to reflect the new emphasis. Think, forexample, of the new emphasis on governmentperformance. With this trend in public manage-ment, governments at all levels have altered con-tracting practices to require nonprofit agenciesto provide more evidence about the results ofpublic investment.

The particular benefits that the governmentgets when relying upon nonprofits to carry outpublic programs depends significantly on theactual form the public revenue takes. Increas-ingly, there is a wide range of financing toolsused by government. Certainly, contracts areoften the most visible approach. Governmentswant to purchase specific services—employ-ment training, supportive housing for multi-problem families, environmental education—and they do so by issuing contracts. Grants alsoare widely used to disburse public revenue andrespond to an emerging public problem, toencourage new innovation, or to support inter-esting models. Increasingly, governments areproviding subsidies to individuals to help thempay for many services, such as health care, childcare, and housing. In this approach, the con-sumer determines where the public revenuegoes, and thus increases the financial insecurityof the nonprofit organizations that mustcompete for the subsidy with other, more

capitalized private organizations. Public taxpolicy, also, is an important tool used to directrevenue to private organizations. Tax creditsand deductions—for business and individuals—create incentives that directly influence therevenue accessible to nonprofits. The mostobvious example is the U.S. government’spractice of allowing income tax deductions forcharitable contributions. There are, however,many tax credits and deductions—for every-thing from children’s care to financing afford-able housing—that help bring additional revenueinto arenas where nonprofits may benefit.Finally, the most basic tool government uses tofinance nonprofit organizations is the “taxexpenditure” (the amount of money foregone bythe government) that exempts an organizationfrom corporate and many other taxes.

Luckily for nonprofit managers, rarely does aparticular organization receive public revenue

Tax credits and

deductions—for

business and

individuals—create

incentives that

directly influence the

revenue accessible to

nonprofits.

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Government Tools forFinancing Nonprofit

OrganizationsContractsGrantsSubsidies to Individuals (directly or tax credits/

deductions)Low-cost access to capital (tax-exempt bonds, tax-

credit financing)Tax deduction for individual donationsExemption from corporate and other taxes

through all of these mechanisms. Certainfunding tools tend to predominate in particularpolicy fields. For example, tax credit financingis common in low-income housing and economicdevelopment. Contracts are widespread in childwelfare and employment services. Public grantsare common for private colleges, universities,and arts organizations. However, over time, itseems there has been a trend moving from pro-ducer-side subsidies (contracts, grants) towardconsumer-side subsidies (vouchers, tax deduc-tions).1 This change has significant managementimplications.

As many managers know from firsthandexperience, there are trade-offs with each formof public revenue. While contracts are fairly pre-dictable, they often require a number of neworganizational procedures. While subsidies toindividuals might be less predictable, they allowthe agency to retain more control over the typesand quality of services provided. The particularway managers weigh these trade-offs is oftenquite complicated. They make calculations inrelation to the other sources of funding available(such as individual donations, foundationgrants, earned income) and the need, at the endof the day, to cover program costs or respond tonew community needs. Yet, often what gets over-looked are the unintended consequences for theagencies of receiving public revenue.

Organizational ConsequencesIt will not surprise many managers to learn thatresearchers find that one of the most significantchanges organizations experience when theyreceive public revenue is increased managementcomplexity. This takes many forms. For one,organizations must track program results, jugglevarious budgetary parameters and reimburse-ment practices, and document adherence topublic rules. The costs of these activities are sig-nificant. In fact, large nonprofit agencies aremore successful in absorbing these tasks, asthey are more likely than small agencies to havea larger proportion of their revenue come fromgovernment sources.

Secondly, because of public rules, managersare often required to pull volunteers from assist-ing with government-supported programs anduse them for more routine tasks. This, in turn,alters the types of volunteers who can beengaged by the agency, as there is often less

intrinsic reward in these more routine tasks.Thirdly, there is some evidence that as manage-ment becomes more complex, and program-matic knowledge more technical because ofpublic requirements, the relationship betweenboard and staff changes. Because staff controlsthe managerial and technical resources theagency depends upon for revenue, they gainmore power. As the amount of governmentrevenue increases, boards often feel drawn totheir fiduciary role and less focused on theirresponsibilities for governance and direction.

Another consequence for organizationsreceiv ing public dollars is the increasingdemands on the executive directors’ time. Topmanagers and leaders must focus on morediverse stakeholders, moving beyond the tradi-tional customers, board, staff, and donors, andattending to the concerns of regulators, electedofficials, and public administrators. Suddenlythere are more parties—sometimes with con-trary interests—that exert influence over thetype of program or service provided by theorganization. Agencies often grapple with thechal lenge of balancing these competingdemands, advocating on behalf of their clientsand yet not offending their government funders.This tension may well challenge the mission ofmany nonprofits and increase the likelihood of“mission creep.”

Much of the existing research focuses on theeffects of contracting, and some suggest that thesize and history of an organization influence theeffects of government contracts on agency oper-ation. To respond to the increased managementcomplexity, for example, small community-based organizations find themselves hiring moreprofessional staff that have skills at programassessment, budget negotiation and financialmanagement. Scholars worry that increasing thenumber of staff with these types of skills pullsthe organizations from their intimate knowledgeof community concerns. On the other hand,large, well-established nonprofits often mustchange their programming to respond to gov-ernment parameters or service standards. Thiscan create discontent, as long-term staff grapplewith a mandate to deliver services that might notjibe with their experience or standards ofquality.

All organizations must confront the realitythat when government funds support their pro-

It will not surprise

many managers to

learn that

researchers find that

one of the most

significant changes

organizations

experience when

they receive public

revenue is increased

management

complexity.

FALL 2004 • WWW.NONPROFITQUARTERLY.ORG REPRINTED FROM THE NONPROFIT QUARTERLY 15

gramming, they also have less control over deter-mining the client base. Public funds often comewith specific eligibility criteria, which definewho should receive programming. In somerespects, this might be positive, allowing a non-profit to expand to service groups of people thatthey might not otherwise reach. But it may alsoprovide incentives to help those who require theleast amount of service, thereby diluting theirpotential effectiveness among target groups.

In the face of these realities, innovative non-profit managers develop strategies to cope. Someorganizations refuse to accept governmentmoney. Others create structures that buffer theorganization from external control, such as staffthat focus exclusively on fulfilling governmentreporting requirements, or management infor-mation systems driven by the results desired byorganizational leaders rather than multiplefunders. Some organizations dedicate significantresources to monitoring public-sector activitiesby serving on advisory committees, participat-ing in coalitions, or maintaining relationshipswith key legislators. Such experiences canprovide the organization with valuable informa-tion about public-sector priorities and opportu-nities for exerting influence. Finally, manyorganizations try to build a strong fund reserveto cushion themselves from the financial chal-lenges stemming from delayed reimbursementprocesses and political uncertainty.

Field ConsequencesThe actual form of government financing signif-icantly influences the very structure of the field.For example, in the 1970s and early 1980s, whenstate and local governments began funding childcare for low-income parents, many began byissuing contracts. Organizations providing childcare could bid and receive contracts that guar-anteed a certain number of slots would be paidby the government. When, in the late 1980s,federal legislation mandated that some of thissubsidy be provided directly to parents—toallow them to choose any childcare provider—the whole field shifted to accommodate a lesssecure, more tenuous revenue stream. Nonprofitcenters found themselves competing with for-profit centers, family childcare homes, and evenfriends or neighbors, since all could receivepublic money. Organizations began to do moreextensive marketing and relied much more on

intermediary organizations that providedparents with information about childcareopenings.

The work of public officials also altersdepending upon the form of government financ-ing. The work done to support government grantprograms is quite different from that done tosupport tax credit financing. The work of nego-tiating contract terms is quite distinct fromdoing market surveys to ascertain a fair level ofpublic subsidy for individuals. As such, the par-ticular terms of a policy field—the things that getdiscussed in heated staff meetings and becomethe focus of community networks for advo-cacy—are often determined by the financingtool that government uses within that field. Addi-tionally, the ease by which nonprofits can formalliances with their public-sector compatriots isoften shaped by the financing tool used by thepublic sector. As a result, although not immedi-ately apparent, the form of public financing maybe as significant to a nonprofit’s policy field asthe amount of public financing it garners.

Social Consequences As scholars reflect upon the changes in theAmerican state—and the increased relianceupon private actors to carry out public policy—they evoke images of a “hollow state.”2 Althoughtax dollars pay for many services, from commu-nity theatre to summer youth activities, the“publicness” of these services is not visible.People remember the great production at theirlocal theatre, the music camp and the youthsports events held during the summer by thenonprofit, and don’t connect it to the work of thegovernment. Some would argue that this is oneof the most positive consequences of the use ofpublic dollars to fund nonprofits. These agenciesreceive more support, and people in communi-ties do not attribute it to the long-arm of govern-ment. On the flip side, some scholars areconcerned that private organizations do notoften provide citizens with due process thatcould be guaranteed by the public sector ifprogram quality is low or the treatment theyreceived unfair. While nonprofits might be moreresponsive to particular concerns, political sci-entists worry that often they are not veryaccountable to the public, that they rarely deliverpublic programs equitably, and that little isknown about their effectiveness.

[T]he particular

terms of a policy

field—the things

that get discussed in

heated staff

meetings and

become the focus of

community networks

for advocacy—are

often determined by

the financing tool

that government

uses within that field.

16 REPRINTED FROM THE NONPROFIT QUARTERLY WWW.NONPROFITQUARTERLY.ORG • FALL 2004

In the public sector, citizens are seen not justas “customers” but also as “owners” becausethey contribute tax dollars and elect decisionmakers who determine the use of that revenue.Public managers are schooled in the importanceof public accountability, transparency, andequity which, while it might contribute to thefrustrating inefficiencies of government bureau-cracies, help to assure that public organizationsfunction under different values from those ofprivate, for-profit firms. Few nonprofit managersare schooled in these types of values or think ofthe general public as having ownership in theirorganization, even when a sizable proportion oftheir budget comes from public sources. Anarticle published earlier in the Nonprofit Quar-

terly3 suggests that nonprofit board members,too, rarely think of ownership or accountability,other than in fairly narrow terms of generalfiscal oversight or accountability to funders forparticular programmatic results. As private enti-ties, nonprofits may also see themselves as moreaccountable to funders than to citizens, gener-ally. While this is understandable, it raises flagsamong those concerned with keeping publiclyfunded services visible and accessible to thatpublic.

Concluding Thoughts Given all these consequences, why would non-profit managers decide to pursue governmentrevenue streams? For one, public money is typi-cally a fairly stable revenue source; once con-tracts are awarded or tax credits secured,managers can count on the terms being honored.Secondly, the public sector leverages moreresources to address public problems than mostnonprofits ever could hope to leverage alone. Asa result, public revenue helps to guarantee theexpansion of programs so that they come closerto meeting the demand for them. Public revenuealso helps organizations pay for more profes-sional staff and engages nonprofits more directlyin advocacy to influence the implementation ofpublic policy. Finally, receiving public contractsoften increases an organization’s credibility andmay precipitate more grants from private foun-dations or other funders.

Ultimately, each executive director and boardmust weigh these trade-offs. And, like much ofnonprofit management, there are no easyanswers. We do not yet know the full implica-

tions of the dance nonprofits must do—thestruggle to retain balance and grace amidst thesyncopated rhythm—when they allow the publicsector to fund their charitable endeavors. Whatis now clear, though, is that while public dollarsbring many benefits, there are more conse-quences of signing that contract or acceptingthird-party payment than the money it bringsthrough the agency’s door. The many other,more subtle, and perhaps more significant, shiftsthat occur for an organization, its field of work,and for society, will undoubtedly shape the rolenonprofits play in the new century.

Endnotes

1. Kirsten Gronbjerg and Lester Salamon. “Devolution,

Marketization, and the Changing Shape of Government-

Nonprofit Relations.” The Resilient Sector: The State

of Nonprofit America, ed. Lester Salamon. Brookings

Institution Press: Washington, DC, pp. 447-470.

2. H. Brinton Milward and Keith Provan (1994). “Impli-

cations of Contracting Out: New Roles for the Hollow

State.” New Paradigms for Government. Patricia

Ingraham, Barbara Romzek, and Associates. Jossey

Bass: Washington DC, pp. 41-62.

3. Judith Miller (2002). “Who ‘Owns’ Your Nonprofit?”

Nonprofit Quarterly (9:3).

Additional Resources

Elizabeth Boris and C. Eugene Steuerle, ed. (1999).

Nonprofits & Government: Collaboration and Con-

flict. Urban Institute Press: Washington, DC.

Lester Salamon, ed. (2003). The Resilient Sector: The

State of Nonprofit America. Brookings Institution

Press: Washington, DC.

Lester Salamon, ed. (2002). The Tools of Government

Action: A Guide to the New Governance, Oxford Uni-

versity Press: New York.

About the Author

Dr. Jodi Sandfort is the director of the Chil-dren and Families program at the McKnightFoundation in Minneapolis and an associate pro-fessor at the Humphrey Institute of PublicAffairs at the University of Minnesota.

Let’s Talk

Let’s move this topic forward! Any ideas orarguments you’d like to share with theauthors and editors? Contact us at: feed-back@nonprofitquarterly.org.

In the public sector,

citizens are seen not

just as “customers”

but also as “owners”

because they

contribute tax

dollars and elect

decision makers who

determine the use of

that revenue.

FALL 2004 • WWW.NONPROFITQUARTERLY.ORG REPRINTED FROM THE NONPROFIT QUARTERLY 17