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What Are the Determinants of Nonprofit Net Assets?

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?

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  1. 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

  2. Presentation Outline • Explanation of Net Assets • Policy Relevance • Existing Literature/Theories • Net Assets and Uncertainty • Empirical Section - Data, Models, Variables • Results and Conclusions

  3. What Are Net Assets? • Annual surpluses that an organization accumulates: Revenue - Expenses = Surplus/(Deficit) • Accumulates on balance sheet: Assets - Liabilities = Net Assets

  4. 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.

  5. Motivation • Almost no literature empirically addresses this question. • Nonprofit literature seemed in opposition to experiences with charities.

  6. 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.

  7. 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.

  8. 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.

  9. 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

  10. 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)

  11. Behavioral Theories of Nonprofits (con’t) 3) Subsidizing Behavior - Nonprofits provide services that cannot be supported on their own - Breakeven operations assumed

  12. Behavioral Theories of Nonprofits (con’t) 4) Net Assets as Goal - Especially as hedge against revenue uncertainty (slack resource) - Potential agency problems

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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.

  18. 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%)

  19. 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

  20. 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)

  21. 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)

  22. 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

  23. Independent Variables: C Based on population need: • Change in state welfare recipients per capita (DHHS) • Change in state unemployment rates (BLS)

  24. Independent Variables: R • Government funding • Donations from individuals • Self-generated • Investment revenue All derived from Form 990 data

  25. Independent Variables: O • Size (total revenues) - 990 data • Number of employees - 990 data • Attorney General oversight - OH AG

  26. 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

  27. Regression Results, TNA – All Subsectors Except for community heterogeneity variable, proxies for output have little effect (although significant).

  28. Regression Results, con’t

  29. Regression Results, con’t Small effects again, although significant.

  30. Regression Results, con’t

  31. Regression Results, con’t

  32. Change in Variables When Excluding Restrictions

  33. 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.

  34. 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).

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