Government Support for Nonprofit Organizations: Trends and Strategies

1. Chapter 13: Government Support

2. Nonprofit/Government Models • Supplementary to government – nonprofits provide public goods and services to fill gaps left by government programs and services • Complimentary to government – nonprofits work with government, use government funds and work somewhat in a partnership • Adversaries of government – nonprofits may oppose current government policy and advocate for change

3. Nonprofit Revenue from Government Funds • In 2010, almost one-third of nonprofit revenue came from public sources including: • 8.9 percent from grants • 23.2 percent from payments for goods and services • Hospitals and other nonprofit health care institutions receive the largest portion of government funds in reimbursement under Medicare and Medicaid. • Government payments represent 65 percent of funding for human service organizations.

4. Patterns of Support The 1960s: • The introduction of Medicare and Medicaid • Major federal student aid programs • National Endowments for the Arts and Humanities The 1970s: • The introduction of drug and alcohol treatment programs • Domestic violence shelters, runaway youth shelters • Rape crisis programs The 1980s: • The development of block grants • States expanded their spending

5. Grants, Contracts and Fees Grants • Government funding made directly to an organization • Requires nonprofit to provide specific goods/services to the government or its citizens • May be paid upfront or in installments Contracts • Legal agreement; recipient is obligated to provide goods/services to achieve defined results • Failure to provide services could result in breech of contract Fees • Nonprofit eligible to charge fees which are reimbursed by the government (Medicare, student aid grants, etc.)

7. Opportunities for Government Support • Public officials perceive that purposes of nonprofits more closely align with the purposes of government • Nonprofits have closer relationships with local officials than do for-profit firms • Dependence on government contracts makes nonprofits more flexible and responsive to government officials • Government officials trust nonprofits more, monitor them less than for-profits, and may award contracts for longer periods of time

8. Challenges in Working with Government • Some government grants require nonprofits to obtain matching funds to cover portions of the program costs • Government funds rarely support indirect costs such as administrative expenses (rent, fundraising, etc.) • Payments may be delayed forcing the nonprofit to use other sources of funding in order to maintain services • Terms of contracts may change unilaterally after approval • Costs of administering the grant are usually not covered by the award • Contracts are increasingly performance-based and payment or renewal may be contingent on meeting outcomes goals • Contacts may be terminated during the grant period

9. Improving Relationships Government Nonprofits Help create feedback mechanisms on contracting processes Participate in efforts to simplify and standardize Encourage foundations and private funders to accept standard reporting formats Build capacity to support government grants • Standardize and simplify applications and reporting formats • Create feedback mechanisms • Collect/report data on contracting practices and assess their impact on nonprofits

10. Seeking Government Support • Identify grant opportunities • Seek out suitable matches for funding requests • Read the request for proposals (RFP) to determine suitability • Evaluate grant opportunities • Assess using criteria: eligibility, conditions, match requirements, allowable costs, program purpose, funding amount • Ensure that the purpose, terms and conditions of the grant are consistent with the organization’s mission and values • Prepare and submit applications or proposals • Follow the specific guidelines in the RFP • Use collaboration when appropriate • Solicit letters of endorsement as needed

11. Nonprofits in the Policy Arena If nonprofits hope to secure and continue government funding, they must be involved in the public policy process in the following ways: • Maintain relationships with individuals in government • Maintain ongoing engagement with their communities, constituencies, and public agencies and officials • Participate as a member of an association representing the interests of multiple nonprofits

12. Chapter 14: Financial Management

13. Your Nonprofit • Where does your organization get most of its income? • 1. Government grants • 2. Fundraising • 3. Earned income • 4. Other

14. Your Nonprofit • What are your organization’s primary expenses? • 1. Staffing • 2. Expenses related to programs/services • 3. Operational expenses • 4. Other

15. Your Nonprofit • Who in your organization does the accounting? • 1. A designated staff person or department • 2. The director • 3. A non-staff person (volunteer or consultant) • 4. Other/don’t know

16. Key Concepts • Bookkeeping-- the methods and systems by which financial transactions are recorded, either by hand or on a computer • Accounting -- the rules by which financial transactions are classified and reported • Financial accounting -- financial information published for use outside the organization • Managerial accounting -- information that is used internally, but is not required to be made available to others • Financial management -- relies on accounting statements for data but focuses on their meaning The key in bookkeeping is accuracy; in accounting, consistency and following the rules; and in financial management, making judgments and establishing policies to guide the organization’s financial life.

17. Revenue as the Principal Challenge • Principal financial challenge for most nonprofit organizations is to generate sufficient and reliable revenue • Short-term operating costs • Long-term capital needs • Diverse sources of revenueminimizes risk and maximizes autonomy for an organization • Philanthropic giving • Earned income • Government • Volunteer services • Sources realistically available to a given organization will reflect the benefits it provides through its programs and services

18. Comparing Nonprofit and Personal Finances • Nonprofit’s operating funds -- personal checking account • Payments received are intended to be spent within the same period to pay current bills • Expenses may be limited by a budget, but possible to borrow funds to meet current obligations • Restricted versus unrestricted funds • Nonprofit’s operating reserves -- personal savings account • Invested in very secure, short-term instruments (e.g., bank certificates of deposit or money market funds) • Hope that reserves will not need to be touched, but important that they be preserved and kept liquid in case they are needed • Existence as a hallmark of sound management

19. Comparing Nonprofit and Personal Finances • Nonprofit's board-designated endowments -- personal retirement funds • Money that the organization’s board has decided to invest as an endowment (e.g., operating surplus) • Long-term investment intended to provide additional income in the future • Board has the authority to withdraw the principal if needed • Nonprofit's permanent endowments -- no comparison • Funds given by donors who specified that the principal be retained and be invested in perpetuity • Investment income may be used for current operating expenses • Board has limited or no flexibility in accessing funds

20. Physical Assets • Buildings, vehicles, equipment, and other things • Quite different from monetary assets • Generally illiquid • Often difficult to measure worth • Do not generate income • Possible to liquidate, but that would reflect a relatively dire and undesirable situation

21. Cash-Based Versus Accrual-Based Accounting • Cash basis -- financial transactions are recorded only when money changes hands • Does not include expectations about future expenses (accounts payable) and income (accounts receivable) • Accrual basis -- financial transactions are recorded when there is a binding commitment • Mandated for external financial reporting • Does not track cash flow

22. Rules for Nonprofit Accounting • Established by the Financial Accounting Standards Board (FASB) • No. 93 -- Accounting for Depreciation • No. 95 -- Statement of Cash Flows • No. 116 -- Accounting for Contributions Received and Contributions Made • No. 117 -- Financial Statements of Not-for-Profit Organizations • No. 124 -- Accounting for Certain Investments Held by Not-for-Profit Organizations

23. Nonprofit Financial Statements • Statement of financial position (balance sheet) -- shows a snapshot of the organization’s assets and liabilitiesat a single point in time • Statement of activities (income statement) -- shows the flow of revenues and expenses of the organization, and the resulting changes in net assets, over a period of time (e.g., fiscal year) • Statement of cash flows -- shows cash inflows and outflows over the year • Statement of functional expenses -- shows how expenses are allocated across various categories (e.g., program, fund-raising, and operating) • Relevant concepts • Net assets -- difference between assets and liabilities • Depreciation -- decline in the value of physical assets

28. Financial Ratios • Key question -- how can we interpret financial data and use it to make decisions about the financial management of the organization? • Using ratios to assess financial health • Profitability-- the change in net assets on the statement of activities • Liquidity -- the organization’s use of cash • Asset management -- the organization's use and management of fixed assets • Long-term solvency -- the long-term financial outlook for the organization

29. Endowments • Most endowments are held by large institutions • Harvard University • Salvation Army • Metropolitan Museum of Art • Nature Conservancy • Some endowments are held by smaller organizations • City Year • Volunteers of America • Boy Scouts of America

30. Managing Endowment Funds • Endowment management governed by state law • Total return approach -- strategy of maximizing total of interest, dividends, and appreciation in the value of stocks and other assets • Managing risk by investing in a diverse portfolio • Maximizing long-term growth by drawing on relative strengths of different investments • Spending limit -- determines how much will be available from endowment for expenditure each year • Providing enough payout to meet the needs of current programs • Investing in the value of the principal to keep pace with inflation and provide more income to sustain programs in future years

31. Developing and Managing the Budget • Three budgets for organizations • Operating budget -- all revenues and expenditures • Capital budget -- the purchase or disposal of long-term physical assets • Cash budget -- the flow of cash during the year • Budgets are political documents • Tangible expression of an organization’s real priorities • Reflect considered plans along with the push and pull of political forces • Budgets create incentives that influence behavior • Use-it-or-lose-it approach • Structuring budgets on an organizational or center basis • Developing budget incrementally or allowing for redistribution

32. Financial Policies and Controls • Key distinctions • Internal versus external policies • Prescriptive versus restrictive policies • Accountability and regulatory compliance policies -- policies established by legal requirements • Filing Form 990 • Avoiding conflicts of interest • Financial and financial management policies -- policies established by the governing board • Allowable ranges for specific financial indicators or ratios • Procedures internal financial controls • Data integrity policies -- policies designed to ensure privacy, confidentiality, records retention, the separation of duties, data backup, and other such concerns