Testing Nonprofit State Culture: Its Impact on the Health of the Nonprofit Sector

Government is a key player in the health of the nonprofit sector in the United States. Not only do local, state, and federal governments account for more than one-third of the sector’s total revenue (McKeever, Dietz, and Fyffe 2016), they also regulate and monitor nonprofit activity, all of which profoundly impacts the health of the nonprofit sector. The relationship between nonprofits and state government has become more important as resource constraints at the Internal Revenue Service (IRS) have weakened federal oversight of charitable organizations (Mayer 2016), further strengthening the state’s role in regulating nonprofits. Lott and Fremont-Smith find, “State governments have a direct impact on nonprofit charities in several ways: they regulate them, they exempt them from major taxes, and they use them as vehicles to deliver publicly funded services” (2017, 163). However, each state determines how it regulates, exempts, and partners with nonprofits operating within its boundaries. This means a nonprofit operating in one state may have more complex requirements, enjoy greater support or face more opposition from its state government compared to a nonprofit operating in another state. Recent work identified three types of state nonprofit cultures that describe the relationship between government and nonprofits at the state level. In this paper, we explore whether there are significant differences for nonprofits that operate in these three different state nonprofit cultures. Specifically, the paper examines differences between state nonprofit culture and the level of financial risk (assumed in different types of contracts with government agencies) or differences in problems nonprofits report on securing, managing, and reporting on government funds. We begin by discussing the three types of state nonprofit cultures and the government-nonprofit funding relationship. Then, we outline data sources, variables considered, and methods used. The final two sections present the results and findings.

1 State Nonprofit Culture

Political scientists have long discussed the importance of how U.S. states were settled and the role ethnic and religious values played in a state’s political culture, or its “system of shared values that legitimate a preferred set of social relationships” (Lieske 2012, 110–111). A state’s political culture shapes social and political preferences by helping individuals understand who they are, how they should behave, and whether an institution is legitimate (Lieske 2012; Wildavsky 1987). Recent research expands upon state political culture by integrating a state’s political and philanthropic culture with the state’s nonprofit regulatory regime to help explain the state’s nonprofit culture, or the behaviors, values, and norms that define how government and nonprofits interact (Pettijohn and Boris (2017).

To determine a state’s nonprofit culture, Pettijohn and Boris (2017) use Lieske’s (2010) model of social and political culture within states, which considers race and ethnic ancestry, religious preferences, and social structures,^[1] and include variables to measure the political ideology of the state,^[2] state-level regulation of its nonprofit sector,^[3] the state government’s fiscal environment,^[4] and the size of the nonprofit sector.^[5] The analysis identified three distinct state nonprofit cultures in the U.S, which can be discussed by adapting Young’s (2000) work on understanding the government-nonprofit relationship. Pettijohn and Boris (2017) found that within a state, nonprofits operate in ways that complement, supplement, or behave independently from state government.

Nonprofits operating in a complementary state nonprofit culture appear to work with government to provide services. While this is the culture of the fewest number of states, these states have a significant nonprofit presence in terms of revenues and assets. State governments in this group, spend significantly more on education, welfare, and public safety compared to states in the other two culture groups, rely on the federal government for smaller portions of their state budgets, and require individuals to pay a higher percentage of their income in state taxes. These states also tend to elect more Democrats and are more regulated than states in the other two culture groups.

The second state nonprofit culture is one where government and nonprofits appear to supplement each other, or as Young articulates, “nonprofits are seen as fulfilling a demand for public goods left unsatisfied by government” (1999, 33). Here, Pettijohn and Boris (2017) find the supplemental state nonprofit culture consists of states that are relatively healthy, fiscally speaking, with government spending on education, welfare, and public safety no different from the other two state nonprofit culture groups. However, states with the supplemental state nonprofit culture have significantly more nonprofits per capita than states with an individual state nonprofit culture. Since the number of nonprofits per resident is larger than in other states, individuals have more options to exercise choices for association and services that reflect their individual values.

In the final state nonprofit culture, nonprofits appear to operateindependent of government. It is on the opposite end of the spectrum from the complementary state nonprofit culture. These states have the fewest nonprofits and nonprofit dollars per resident even though nonprofits operate with fewer regulations compared to those in both the complementary and supplementary culture states. Independent nonprofit culture states tend to receive a larger percentage of their state budgets from the federal government, but they spend less on education and welfare, while having the healthiest fiscal conditions. These states have individuals contributing larger amounts of funding to nonprofits (based on average itemized contributions), which may indicate the relationship is between individuals and nonprofits with minimum government involvement. Finally, the model reveals a higher percentage of individuals voted for Trump and more Republicans holding statewide elected offices. Table 1 lists the three state nonprofit cultures and the states that belong to each.

2 Government Funding of Nonprofit Organizations

Government funding accounts for nearly one-third of the total nonprofit sector’s revenue (McKeever, Dietz, and Fyffe 2016), but it often comes with requirements that force or strongly encourage nonprofits to alter their behavior and operations. These demands may affect the health of nonprofit organizations receiving government funding. Prior research has extensively studied the impact government funding has on nonprofits in the following areas: governance (Guo 2007; Peterson 1970; Piven and Cloward 1971; Smith and Lipsky 1993), volunteers (Nowland-Foreman 2002; Ebaugh, Chaftez, and Pipes 2005; Smith and Lipsky 1993; Van Til 1988), mission (Rangan 2004; Pettijohn and Boris 2013), political activity (e. g. Chaves, Stephens, and Galaskiewicz 2004), advocacy (e. g. Mosley 2012; Neumayr, Schneider, and Meyer 2015; Salamon 1987), loss of autonomy (Grojnberg 1993), administrative efficiency (Frumkin and Kim 2002; Grojnberg 1993), and strategic decision-making (Verschuere and De Corte 2014). This paper, however, approaches the government-nonprofit relationship from a different perspective. Instead of focusing on the impact government funding has on nonprofits, it focuses on whether there are measurable differences in the government-nonprofit relationship among the three types of state nonprofit culture. Specifically, the paper examines the relationship related to the level of financial risk (assumed in different types of contracts with government agencies) or differences in problems nonprofits report on securing, managing, and reporting on government funds, which may impact the health of the nonprofit sector.

3 Data, Variables, and Methods

This analysis uses data from the Urban Institute’s 2013 Nonprofit-Government Contracting and Grants survey, which asks nonprofit leaders about their relationships with government in 2012. The national, randomly drawn sample of 20,000 nonprofits organization consisted of 80,098 501(c)(3) nonprofit organizations in the Urban Institute’s National Center for Charitable Statistics (NCCS) database. The sample was limited to those nonprofits required to file an annual financial statement (Form 990) with the U.S. Internal Review Service and reported more than $100,000 in expenditures. The study does not include hospitals or higher education institutions as well as nonprofits not likely to have government contracts and grants. To ensure a representative sample, prior to selection, organizations were stratified by state, type of nonprofit, and size of nonprofit. Smaller states were oversampled to ensure adequate sample sizes for state-level analysis.

The final response rate was 33 % with 4,024 organizations responding (see Pettijohn and Boris 2013 for more information). This analysis focuses on the responses from 2,611 nonprofits reporting government funding.^[6] These survey data are merged with core data from NCCS for 2012, which provided financial information about the organizations, and with Pettijohn and Boris (2017) classification of states according to their state nonprofit culture.

Table 2 outlines the dependent and independent variables used in the analysis. To isolate the impact of state culture on government-nonprofit relations, a number of variables are included in the analysis. Here, we control for funder characteristics (level of government the nonprofit receives funding from, number of agencies the nonprofit receives funding from, and number of contracts or grants) and organizational characteristics (size based on organization’s expenses and type of nonprofit based on National Taxonomy of Exempt Entities (NTEE) code).

The non-linear, binary nature of the first four dependent variables indicates a logit model is the most appropriate approach to test the first four hypotheses (Gujarati and Porter 2009). For the remaining two hypotheses, where the dependent variable is non-continuous but ordered, ordered logit is the most appropriate statistical test (Gujarati and Porter 2009). The results report odds ratios and robust standard errors. All analyses are weighted to represent the nonprofit sector with government funding within each state (except as noted).

4 Descriptive Statistics

We begin by examining the size and scope of the funding relationships between nonprofits and governments. We find, on average, nonprofits in a complementary culture state received more government funding, both in terms of the average number of agreements and dollars, than those in an independent culture state (Table 3). As Salamon (1995) notes, the complementary view often involves government financing services that are delivered by nonprofits. These nonprofits also received grants from more government agencies than other states.

We find that while the fiscal condition of the states with independent cultures are healthier than states with complementary state cultures, the nonprofit sectors in the independent state culture group tend to be weaker. That is, states in the independent state culture group not only had significantly smaller nonprofit sectors per capita, but also nonprofits with government funding were more likely to report a deficit at the end of 2012. Nonprofits operating in independent culture states were also significantly more likely to cut health insurance, retirement, and other staff benefits for their employees, and they were more likely to take out loans or lines of credit than nonprofits in states that complemented or supplemented government services. This suggests an inverse relationship between the fiscal conditions of state government and nonprofits in the state. It also suggests the importance of government funding for the health of nonprofits since higher average contributions did not compensate for lower levels of government funding. Table 4 includes descriptive statistics for the percent of respondents receiving government funding from each level of government by state nonprofit culture.

The results for the size and scope of the government-nonprofit relationship are as one might expect. That is, when we consider the driving factors that determine which state culture a state falls into, we see an overlap of characteristics in state nonprofit culture categories and the size and scope of the government-nonprofit funding relationship. For example, we expect nonprofits in complementary culture states to partner with government to provide services. We also expect nonprofits in supplementary culture states to have less funding, since government is providing services at a level the average citizen desires, which may not fully satisfy some citizens who turn to nonprofits to fill their needs. Finally, nonprofits in independent culture states receive less government funding, which reinforces the finding that in these states nonprofits and government are more independent of each other.

5 Analytic Results and Discussion

While the results for the six hypotheses are mixed, there are measureable differences in the government-nonprofit funding relationship among state nonprofit cultures (Table 5). Nonprofits operating in the independent culture states were significantly more likely to report a cost reimbursement contract, but they were also more likely to report a cost sharing or matching requirement. As for experiencing problems with government agencies, nonprofits in independent culture states were significantly less likely to report problems securing, managing, and reporting on government funding than their counterparts. These findings are discussed in greater detail below.

6 Conclusion

This paper expands research on the government-nonprofit relationship by testing three distinct nonprofit cultures among the 50 states. There are significant differences in government-nonprofit funding relationships in the complementary, supplementary and independent state cultures, which means nonprofits operating in certain state nonprofit cultures face different types and degrees of risk to their organization’s overall health. The strength of the nonprofit infrastructure also varies somewhat among the different state cultures. Future research will allow us to probe the implications of these and other aspects of diverse state cultures and will enrich our understanding of the interactions of nonprofits and state governments.