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What Are the Determinants of Nonprofit Net Assets?. Thad Calabrese Doctoral Candidate, New York University Baruch College - CUNY, School of Public Affairs thad.calabrese@baruch.cuny.edu. Presentation Outline. Explanation of Net Assets Policy Relevance Existing Literature/Theories
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What Are the Determinants of Nonprofit Net Assets? Thad Calabrese Doctoral Candidate, New York University Baruch College - CUNY, School of Public Affairs thad.calabrese@baruch.cuny.edu
Presentation Outline • Explanation of Net Assets • Policy Relevance • Existing Literature/Theories • Net Assets and Uncertainty • Empirical Section - Data, Models, Variables • Results and Conclusions
What Are Net Assets? • Annual surpluses that an organization accumulates: Revenue - Expenses = Surplus/(Deficit) • Accumulates on balance sheet: Assets - Liabilities = Net Assets
More on Net Assets • In for-profit sector, net assets called “Owner’s Equity” - measure of wealth. • Restrictions by donors may make nonprofits unable to access these surpluses.
Motivation • Almost no literature empirically addresses this question. • Nonprofit literature seemed in opposition to experiences with charities.
Policy Relevance Understanding Nonprofit Net Assets • Current benefits for donors/nonprofits (tax expenditures); unclear future benefits; • Wealth concentration within sector; but is it entirely by organizational choice? • Effect on implementation of government policies.
Current Literature: Theories of Nonprofit Organizations • Public Goods Theory - Private suppliers of public goods - Fill demand for additional public goods for those with preferences above the median voter. • Theory silent on financial operations of organizations.
Current Literature, con’t • Contracts Failure Theory - nonprofits more likely to match quality/types of complex services sought. - nondistribution constraint increases trustworthiness of nonprofits. • Theory assumes net assets spent on additional output.
Behavioral Theories of Nonprofits • Maximizing Behavior - usually output (compared to profit in corporate finance) - most assume breakeven operations are goal (if mentioned at all) - Tuckman and Chang (1992) are sole exception
Behavioral Theories of Nonprofits (con’t) • Supply Response - Nonprofits respond to increases in demand for services - Incomplete capital financial markets limit nonprofits (net assets as a source of funds)
Behavioral Theories of Nonprofits (con’t) 3) Subsidizing Behavior - Nonprofits provide services that cannot be supported on their own - Breakeven operations assumed
Behavioral Theories of Nonprofits (con’t) 4) Net Assets as Goal - Especially as hedge against revenue uncertainty (slack resource) - Potential agency problems
Net Assets and the Current Literature • Ignores possibility of donor restrictions; • Assumes breakeven operations (no net assets); • Ignores financial operations completely; • Exceptions to 2 and 3 are: - Chang and Tuckman (1990): descriptive - Tuckman and Chang (1992): cross-sectional - Fisman and Hubbard (2002, 2003): cross-sectional
A Simple Theory of Net Assets & Uncertainty Two-period model: U (Q1 , Q2), where U1 > 0 and U2 >0 The first period budget constraint (no prior NA balance) is: Y1 = v1Q1 + NA1 = v1Q1 + NA1 The second period budget constraint is: Y2 + r1NA1 = v2Q2 + NA2
A Simple Theory (con’t) • Under certainty, each variable in each budget constraint is known/knowable: no reason for precautionary savings • But this assumption is unrealistic, and each variable in the model is affected by uncertainty; net assets become desirable
A Simple Theory (con’t) • Under certainty, each variable in each budget constraint is known/knowable: no reason for precautionary savings • But this assumption is unrealistic, and each variable in the model is affected by uncertainty; net assets become desirable
A Simple Theory (con’t) Net Assets are valued for: • Maximizing preferences in light of uncertainty; • Hedging against uncertainty of expansion of services; • Hedging against uncertainty of subsidization of clients; • Hedging against revenue uncertainty.
Data • Comes from Guidestar-Digitized Database from NCCS based on Form 990 data • Years: 1998 - 2003 • Only data with restriction information • More representative of sector than SOI data • Final sample: 699,717 observations (50%) covering 134,421 organizations (40%)
Empirical Model Net Assets = f (Q, E, C, R, O, t, S) Vectors: Q = Output related O = Other controls E = Expansion t = Year FE C = Subsidization of clients S = Subsector FE R = Revenue
Dependent Variables Net Assets defined in three ways (all natural logs): • Total Net Assets (includes restrictions) • Unrestricted Net Assets (without restrictions) • Unrestricted + Temporarily Restricted Net Assets (earned through operations)
Independent Variables: Q Literature suggests output affected by demographic and population characteristics: • Change in average per capita income (BEA) • Change in proportion of youth population (Census) • Change in proportion of elderly population (Census) • Change in community homogeneity (Census)
Independent Variables: E • Fixed assets (ln PPE) • Capital replacement (ln Depreciation) • Access to debt (Dummy 1 = LT Borrowing) • Organizational borrowing cost (ln Interest Expense/Total Liabilities) • Interact Access to debt*Fixed assets • Interact Access to debt*Capital replacement All derived from Form 990 data
Independent Variables: C Based on population need: • Change in state welfare recipients per capita (DHHS) • Change in state unemployment rates (BLS)
Independent Variables: R • Government funding • Donations from individuals • Self-generated • Investment revenue All derived from Form 990 data
Independent Variables: O • Size (total revenues) - 990 data • Number of employees - 990 data • Attorney General oversight - OH AG
A Few Descriptive Statistics • Average Total Net Assets: ~$430,000 • Average Unrestricted: ~$310,000 • Orgs with Access to Debt: ~26 percent • Average Size: Under $500,000 in revenue
Regression Results, TNA – All Subsectors Except for community heterogeneity variable, proxies for output have little effect (although significant).
Regression Results, con’t Small effects again, although significant.
Conclusions • Sector needs to communicate need for net assets; • Sector not over-retaining on average; • Increased state oversight likely to have minimal effect on net assets; • Progressive spenddown requirements may be warranted.
Current Economic Climate • “Safe” government funds drying up; • Bank credit also drying up. Results suggest that nonprofits might retain rather than spend in current climate (similar to households).