Extending the Interdependence Theory to Local Public Service Provision: Evidence from Iowa

1.1 Voluntary Failures

Salamon (1987) argued that before the widespread government support of nonprofits, the sector suffered from inherent weaknesses endogenous to its voluntary status. These weaknesses include insufficiency, particularism, paternalism, and amateurism. Insufficiency is the inability of nonprofits to generate adequate and reliable resources through private fundraising to fulfill their mission. Salamon suggested philanthropic insufficiency as a by-product of free riders in a system of care in which individual members of society can benefit from the collective goods provided by voluntary organizations without contributing to them because donations are voluntary (Robbins and Lapsley 2008). There is evidence that philanthropic insufficiency is real, and without the support of government funding, the US nonprofit sector today would comprise only a tiny fraction of its current size. Recent data from the National Council on Nonprofits shows that less than 9 % of the nonprofit sector’s total revenue comes from private giving, or roughly 12 % when we factor in revenues from private foundations (Nonprofit Times 2019).

Another source of voluntary failure is philanthropic particularism. Particularism arises when nonprofits and their funders prioritize particular subgroups, resulting in “favoritism” in the distribution of programming or access to organizational services (Salamon 1987, p. 41–42). In practice, this might look like nonprofits engaging in ‘cream-skimming’ or choosing to serve only the easiest cases or those perceived as most “deserving” according to the whims of agency leaders and sponsors. It could also be faith-based or ideological groups preferring to serve only their own kind. While this is not to suggest that identity-based organizations don’t have value, the role of government is to ensure equity and access. Thus, public funding helps correct the problem of particularism by pushing nonprofits away from their exclusive tendencies that often result from reliance on private donors’ preferences and drives nonprofit programming and services toward inclusion.

Philanthropic paternalism is another source of voluntary failure. Paternalism refers to the historical tradition of nonprofits being funded and governed by leaders and boards comprised of largely older, white, and affluent economic elites who engage in decision-making on behalf of nonprofit service recipients without giving them a voice in program planning or determining how services are delivered. Salamon argued that “So long as private charity is the only support for the voluntary sector, those in control of the charitable resources can determine what the sector does and whom it serves” (Salamon 1995, p. 47). The infusion of government funding helps remedy this voluntary failure by requiring nonprofits to engage service populations in agency governance, make agency operations more transparent, and create mechanisms to ensure increased responsiveness. There is evidence that government funding increases opportunities for clients to participate in nonprofit agency governance (LeRoux 2009a) and that greater reliance on government funding is linked to more racial diversity in agency leadership (LeRoux and Medina 2023).

Finally, amateurism is a source of voluntary failure that stems from a nonprofit workforce comprised mainly of volunteers rather than paid staff. While voluntary labor is a unique and inherent asset of the nonprofit sector, voluntary labor accounts for only a fraction of all paid nonprofit workforce hours, reflecting some of the same problems as philanthropic insufficiency (Salamon 1987). Moreover, voluntary labor is unreliable, promoting instabilities in service coverage. When nonprofits are resourced primarily through private funds, they tend toward increased reliance on voluntary labor and vilification of professional services, as volunteers may be considered “charitable” and “better” or otherwise more virtuous than paid employees (Sutton, Baskerville, and Cordery 2010). Government funding helps to overcome the problem of amateurism by enabling nonprofits to scale up their paid workforce to sufficient levels to address a public need.

Many perspectives on interdependence are based on a demand and supply transaction model in which government and nonprofits complement each other’s strengths and compensate for each other’s weaknesses (Smith and Gronbjerg 2006). For example, the model suggests that government funding corrects voluntary failures by imposing rules, restrictions, and obligations on the part of nonprofits that accept government funding. This dependence relationship allows government organizations to supervise the nonprofits and direct the service provision. It further allows the government to embed public values within nonprofits, such as accountability, responsive service delivery, and equitable distribution of services (LeRoux 2009a). The financial resources of the government combined with “steering” capacity in establishing policy priorities and monitoring performance are thus thought to be effective remedies for the inherent weaknesses of the voluntary nonprofit sector.

The key contributions of Salamon’s interdependence theory can thus be distilled in two points: demonstrating that nonprofit sector growth is largely a function of government funding/spending, and second, that government funding corrects voluntary failures in a way that shapes nonprofit organizational behavioral outcomes and produces public value. However, several criticisms have been leveled at this theory, which we will briefly examine.

1.2 Critiques of Interdependence Theory

While many scholars have built on Salamon’s initial work on interdependence theory (e.g. Lapsley 2004; Lecy and Van Slyke 2013; O’Donovan 2019), several scholars have also raised questions about this theory. Anheier (2005) comments positively on Salamon’s thesis but argues for studies investigating when and how the critical elements of this theory develop. Smith (2000) argues that the interdependence theory falls short in explaining the co-existence of nonprofits, for-profits, and government in the same industry, such as child welfare, homecare, and hospitals. Moreover, if nonprofits can provide important benefits to public service delivery, Smith (2000) questions the absence of nonprofits in the 1960s when extensive, severe government and market failures had existed in social and health policy for decades.

The other conceptual weakness of this model highlighted by Swanstorm and Koschinsky (2000) is that it places importance on market failure, efficiency, and public goods and, in doing so, marginalizes the role of nonprofit organizations that can provide opportunities for citizen participation and empowerment. Their critique of the interdependence theory lies in its limited applicability, given that it was conceived in the context of health and social service areas (Swanstorm and Koschinsky 2000; Wolpert 2003). For example, Dollery and Wallis (2004) studied social care in Australia and confirmed the relevance of Salamon’s theory to the development of this sector. Similarly, other efforts to apply or test Salamon’s interdependence theory by Robbins and Lapsley (2008), LeRoux (2009a), Sutton, Baskerville, and Cordery (2010), Nemțeanu, Coita, and Tarcza (2021) are all situated in the health and human service areas.

There is a concern that the interdependence theory may not be conceptually applicable when governments and nonprofits are partnering to deliver other types of services (Swanstorm and Koschinsky 2000). Some notable exceptions include works by Salamon and his colleagues during the Ronald Reagan’s administration (such as Salamon 1986; Salamon and Abramson 1982) in which they examined health, arts and humanities, education, and housing along with social services. In our research, we engage with this fundamental critique by examining whether and to what extent government-nonprofit partnerships exist for local public services and how government funding shapes the nature of nonprofit service delivery.

2.1 Resource Dependence Theory

Resource dependence theory (Pfeffer and Salancik 2003) emphasizes that organizations collaborate to manage external dependencies and uncertainties in their environment. Resource dependence theory is widely applied to understand the motivations for collaboration. For example, Omar, Leach, and March (2014) find that nonprofit organizations are driven by resource motives that may include human resources, financial, technological, infrastructure, and channels to attract participants to these programs (AbouAssi, Makhlouf, and Whalen 2016).

2.2 Institutional Theory

Institutional theory suggests the survival of an organization is significantly improved by conformity with the norms and social expectations of the institutional environment (Meyer and Rowan 1977; Meyer and Scott 1992). Studies utilizing institutional theories focus on explaining why organizations ally with others. A non-profit organization may establish a relationship with other organizations to meet necessary legal or regulatory requirements and, in doing so (complying with the environment), eventually increases its survival (Oliver 1990) and legitimacy (Barringer and Harrison 2000).

2.3 Principal-Agent Theory

The principle-agent theory assumes that there is goal incongruence and information asymmetry between principals and agents. Individuals are assumed to act in self-interest, pursuing their own goals. Therefore, the goals of agents’ may not always align with the principals’ goals. Due to this misalignment of interests, agency costs arise. In collaboration studies, scholars have primarily used agency theory to understand how to minimize agency costs by incentivizing the agents (Crocker and Slemrod 2007; Tosi et al. 2003) or increasing monitoring (Dickinson and Villeval 2008).

2.4 Network Theories

Network theories are rooted in the argument that organizations tend to rely on other organizations when faced with an uncertain environment. This reliance is usually based on trust and commitment among organizations that are part of the bigger network (Larson 1992). Network theories are predominantly used to understand the factors that help achieve successful collaborative outcomes such as interdependence, trust, shared norms, and leadership within the network (Agranoff and McGuire 1998; Milward, Provan, and Else 1993; Provan and Milward 1995).

While theories of resource dependence, institutions, agency, and network explain how strategic decision-making can lead to collaboration to increase financial, material, human resources or efficiency and performance, interdependence theory specifically helps to understand how government funding alleviates inherent weaknesses in nonprofit organizations and help achieve public outcomes.

Applying various theories to understand government-nonprofit partnerships, several scholars have also highlighted the negative aspects of these partnerships. For example, relying on agency theory, Gazley (2008) found that most partnerships involving non-profit organizations and government are unequal. They do not entail “shared decision-making” as government agencies lead most partnerships. Moreover, government contracting with nonprofits to provide welfare services significantly reduces specialized responsiveness to clients and compromises the larger social welfare vision as government funding and support is accompanied by certain rules and regulations and political constraints (Lipsky and Smith 1989).

3.1 Data Collection and Analysis

The first phase of our study aims to examine the overall prevalence of nonprofit involvement in local public service delivery. While it is common for local governments to outsource services to other governments as well as for-profits and nonprofits, we have lacked the type of data to determine the extent of nonprofit involvement in local public service delivery. The best estimates of local government outsourcing come from the International City and County Managers’s Association (ICMA) alternative service delivery surveys. While these data are non-representative and notoriously flawed in other ways (Lamothe, Lamothe and Bell 2018), Homsy and Warner (2014) used this data to estimate that roughly 10 % of all municipal services are provided by nonprofits. However, they also conclude that our understanding of private contracts is inadequate and “more attention needs to be given to the evaluation of private contracts and intermunicipal agreements” (Homsy and Warner 2014, p. 53).

Our quantitative analysis allows overcoming these previous data limitations by examining the prevalence of nonprofits in local public service delivery using a comprehensive dataset of written government-nonprofit service agreements. Iowa is the only known US state with a statutory requirement for local governments to register every service contract and agreement with other government units, as well as private entities (for-profit and nonprofit), into a state registry, which comprises the Iowa 28E database (Iowa Code, Chapter 28E, Section 8)^[1] The uniqueness of this dataset allows us to form a comprehensive picture of nonprofit involvement in local service delivery in one state for service partnerships that are formalized into a written agreement.

The current filing system for the service agreements with the state of Iowa contains a single category, “Private or Nonprofit,” to indicate whether the service-providing partner belongs to the private for-profit or nonprofit sector. We distinguished private for-profit entities from nonprofit collaboration partners for the full dataset, verifying the status of organizations determined to be nonprofits through Guidestar.org. The full data set of service agreements spans January 1993 to December 2018, and the Iowa Secretary of States office groups these agreements into 33 service areas. We limit our analysis to the 9 service areas in which there was the largest number of agreements with nonprofits, as shown in Table 1.

The second phase of our study involved collecting and analyzing qualitative data from three cases representing government-nonprofit partnerships, selected based on our findings from phase one. In a mixed-methods explanatory sequential design, “the quantitative results inform the types of participants to be purposively selected for the qualitative phase and the types of questions that will be asked of participants” (Creswell and Creswell 2018, p. 222). After identifying the public service areas in which nonprofits are most commonly found as service partners to local government in phase one, we selected one case for in-depth analysis from the top three service areas in which nonprofits are most prevalent: information services, risk management, and parks and recreation.

The research team examined the written service agreements in the top three service areas to identify potential organizations for focused case studies. It is important to note that the units of analysis or cases here are the 28E agreements that represent government partnerships with one or more nonprofits. The process we used for case selection within the three areas of risk management, information services, and parks and recreation included: (1) a review of service agreements that contain details of the nature of the nonprofit’s role, (2) examining publicly available data about the organization(s) named in the 28E agreement, and (3) identification of a top leader from the nonprofit named in the 28E partnership to invite for a semi-structured interview.

Once the cases were identified, we used approaches to collect and analyze qualitative data typical to case studies (Nowell and Albrecht 2019; Yin 2017; McNabb 2017). In our cases, this included analysis of the 28E agreement document, analysis of online documents and records pertaining to the nonprofit, including financial statements, board of director information and organizational history, and transcripts of interviews conducted via Zoom with the Executive Director of each organization. The research team met on multiple occasions to process our interpretations of the data and place the findings in the context of our larger study. We now turn to the findings of our study.

4.1 Risk Management: Iowa League of Cities and the Iowa Municipal Workers’ Compensation Association

The Iowa Municipal Workers’ Compensation Association (IMWCA) was formed in 1981 as a 28e organization, defined within the language of the 28e statutes of the State of Iowa as “efficient use of [local governmental] powers by enabling them to provide joint services and facilities with other agencies and to cooperate in other ways of mutual advantage.” The Iowa League of Cities coordinated cities to create the IMWCA after many had their workers’ compensation insurance coverage canceled by private carriers. The Iowa League of Cities continues in an administrative role for the IMWCA. The Iowa League of Cities is a unique civil society organization that describes itself as an “instrumentality of government.” The Iowa League of Cities is not a registered 501(c) organization; rather it adheres to the tax-exempt provisions of IRS section 115, in which they are a “literal extension of local government authority.”

The IMWCA has 249 service agreements with cities, counties, and other 28e organizations. The IMWCA states its purpose as “… here to help members keep employees safe through education and risk management. We are a risk-sharing pool committed to partnering with cities, counties and local government entities to provide a high-quality workers’ compensation program” (https://www.imwca.org/about-us-imwca/why-choose-imwca/). The IMWCA itself is an independent insurance risk pool entity administered by the Iowa League of Cities which began as The League of Iowa Municipalities, founded in 1898 and changed its name in 1996. The Iowa League of cities “is a grassroots organization controlled by its members. The purpose of the League is the improvement of municipal government and the administration thereof through cooperative effort and the promotion of the general welfare of the cities of Iowa” (League 2021). The IMWCA is governed by a nine-member Board of Trustees of city and county officials elected by the board members. According to the current executive director, the board carefully selects members to best “represent the diversity of towns and cities across the state.”

The IMWCA’s general goals are to “formulate, develop, and administer, on behalf of the member political subdivisions, a joint self-insurance program to stabilize costs related to members’ workers’ compensation liabilities. Program components include claims management, member education, and loss control services” (IMWCA 2020). In the early 1980s when the IMWCA was organized, municipalities all over the United States struggled to secure appropriate worker’s compensation and liability insurance from private insurance carriers. The current executive director of the Iowa League of Cities described the history by sharing, “We had mayors that approached the League at the time and said look we can’t get insurance … so they approached the League, as these group of mayors, the League went ahead, and … began the investigation and basically set the risk pool up.”

While the Iowa League of Cities did not have the current expertise or capacity to create an insurance risk pool, the initiative was seen as part of its mission because it “exists to provide services to cities, and this was a big need.” Despite the need to “learn from the ground up”, the Iowa League of Cities expanded its staff so that the IMWCA would not be administered by a third-party vendor but could remain closely connected to the League. The benefits have been substantial, including that “city governments and county governments …. they’re better served. The IMWCA prides itself … in understanding the unique risk that cities and counties face. Those are all unique jobs and they have unique risks, and we can provide them with the policies and the guidance.”

Another benefit of the Iowa League of Cities’ role as the administrative organization of the IMWCA is oversight and “boots on the ground” support of member municipalities. The IMWCA has risk managers who “go out and meet with members, and what they do is … inspect the city’s facilities. That puts us with the people in a sense … They understand and work very closely with our membership services side.” Over time, the IMWCA’s membership of governmental entities participating in the risk pool for worker’s compensation insurance has grown, with few members leaving. The boards of the Iowa League of Cities and the IMWCA share a comptroller, and the Iowa League of Cities Executive Director is a non-voting member of IMWCA. This board interlock provides for information sharing about the fiscal health of the insurance risk pool. IMWCA, as administered by the Iowa League of Cities, an instrumentality of local government, can provide consistency and stability in its risk insurance pool service. The executive of The Iowa League of Cities, and the head administrator of the IMWCA, said, “I think that the benefit that they see is the standard market can see some roller coaster you know … I’m not always the cheapest, but I’m at least consistent. You know what you’re getting, you know the services. I’m not going to raise your prices a lot, but I’m also not going to discount them, so there’s a consistency to the rates.”

4.2 Information services: The Iowa County Recorders Association

The Iowa County Recorders Association, established in 2007 as a 501(c)4, has a stated mission “To provide access to county and statewide land records and related information.” In the Iowa 28E data, the Iowa County Recorders Association has 99 agreements with all the counties across the state, which create an online system for registering and searching land records. The Iowa County Recorders Association was a loose organization, not yet established as nonprofit, prior to The County Land Record Information System, now known as the Electronic Services Systems (ESS).

The County Land Record Information System was created in 2003, which allowed for records to be electronically archived to reduce the cost of storing physical, and paper records in land recording offices throughout the state (https://iowalandrecords.org/history). In 2005, the Iowa Land Records website was launched, and the next year electronic documents for recording could be submitted through the website. As stated on The Iowa County Recorders Association website about their history, “the service owes its origin to the passage of Uniform Electronic Transactions Act (UETA). Iowa was the first to create a statewide system for electronic recording” of land records and documents relating to land ownership and sales.

The current executive director of the Iowa County Recorders Association (ICRA) described the history by saying, “It all began back in like the year 2001, with a group of recorders creating a Task Force to try and figure out how to do online records … then we had to pick a project manager, and then by 2005 we were up and running.” In order to establish ESS as a 28e organization, it was organized as a separate entity using formal service agreements with each of the state’s counties. For the ICRA though, the ESS is seen as “one and the same. In order for us to integrate with our state government and county government, the board of supervisors in each county had to sign in [the 28e agreement].” As stated in a memo to all counties in late 2021 seeking support for new state-level legislation, “The 28E agreement was established in 2005 as directed by the Iowa Legislature, for the purpose of having a more formal governance and administrative structure for managing Iowa Land Records. Since then, the system has been managed with the support of the Iowa County Recorders Association.”

On the ICRA 2020 IRS 990 tax form, they report $31,262,809 in gross receipts and $30,482,890 in expenses, with most expenses being paid to independent contractors and information technology firms for the maintenance of their online ESS platform. In 2020, the Iowa County Recorders Association had four employees and eight independent governing board members. The organization also reported two main program activities in 2020, including, “Meetings were held and new county websites have been established to streamline and make publicly available documents retrievable online by county constituents” and “To provide education to county recorders and improve recording methods in the state of Iowa.”

The ESS has a Board of Directors and several committees that include members from the six districts of the ICRA and key stakeholders. Additionally, ICRA recorders comprise the full board of Iowa Land Records. There are subcommittees for ESS coordination, stakeholder engagement, finance, standards, and marketing and communications. According to their website, the ESS includes stakeholders from county-level informational technology departments, land title professionals, and legal professionals. The executive director shared that these stakeholders are included to “make the ESS relevant and useful. We want people to actually go online and find the information they need.”

Along with managing the ESS, the ICRA maintains a directory of county recorders’ contact information, hosts webinars and trainings about the roles of recorders and the importance of land records for public and industry usage in real estate transactions and offers instructional videos on using the ESS. The ICRA also states that for ESS “It is our mission to connect the public to real estate records electronically and to simplify document submission. As a subdivision of the State of Iowa, governed by the Iowa County Recorders Association, it is our duty to openly share our reports and policies.”

The current executive director of ICRA explained the need for the organization to expand when ESS came online by sharing, “The project manager that the association hired and paid started it all. Now there are much staff, and ESS has its own building.” At the beginning, the Iowa Land Recorders initiative did not have funds of its own, but rather utilized a fee-for-service approach. The executive director of ICRA stated, “it took a lot of years to get back to where Iowa Land was producing all of the funds to run it … before that counties had to fund it, so we had to bring the balance sheet up to zero.”

The ICRA also sees its role as intrinsically tied to government because of the expectations that, “you have to be held accountable for everything because it is public recorders.” The ICRA is also active in state-level advocacy activity that is driven by the needs of county recorders and maintenance of the ESS.

4.3 Parks and Recreation: Bravo Greater Des Moines

Bravo Greater Des Moines was established in 2004 as a 501(c)3 organization to “leverage community resources to maximize the impact of arts, culture, and heritage to advance regional priorities”. The organization began in 2004 as a “collaboration of nine central Iowa local governments to provide reliable funding and leadership to the arts, culture, and heritage community” (https://bravogreaterdesmoines.org/). Currently, 17 municipalities have committed a portion of their hotel-motel tax revenue to Bravo Greater Des Moines to administer a grantmaking program.

This grantmaking program funds operating and capital support for other arts, culture, and heritage non-profits in the region. Bravo also notes on its website that they “provide leadership to the community in arts and cultural planning initiatives and leveraging impact for the enhancement and elevation of quality of life for residents and visitors.” In 2018, Bravo stated on its IRS 990 form that its main program expenses relate to “a competitive grant program to provide financial support for the administration, operations, capital. Improvements, and programs of local 501(c) (3) organizations and/or government agencies.”

Bravo’s current operating model depends on a portion of hotel-motel tax revenue committed to the organization through 28e agreements with local municipalities. On their 2018 IRS 990 form, Bravo reported $5,164,932 in current revenue with $4,793,460 in expenses. The vast majority of Bravo’s revenue is from hotel-motel tax revenue from member municipalities, but the organization does also host a yearly fundraiser to offset administrative expenses like employee salaries. The organization also reported that its governing board has 35 members and that there are five full-time employees. The current executive director described the history of Bravo Greater Des Moines and its unique funding structure. She shared, “In 2002/2003, our community and business leaders recognized that if we as a metro area wanted to compete for talent, jobs, be a thriving metropolis moving forward, that arts and culture and quality of life were going to have to play a role in that.” As the local leaders came together, they “came up with this idea to have a nonprofit serving a role as a regional arts council. They (business leaders) then went and shopped that idea out, and they felt that it was important that [Bravo] have a dedicated revenue stream.”

One of the main motivations for the business leaders that helped to found Bravo to make it a nonprofit was the benefits of the governance structure and tax-exempt status. The executive director described it as “a governance issue because we’re regional in our collaboration. Every one of our partners has a 28e agreement, and it calls out that a member from that community sits on our board of directors.” Additionally, Bravo is community-based so being established as a nonprofit “was an oversight issue, whereas if it is a private company, there are different layers of accountability.” As a nonprofit, Bravo “has some capacity to do some additional fundraising that if, and so, at some point, maybe there was a thought that it would slowly be hotel-motel taxes that we would also be bringing in additional revenue.”

Bravo also serves in the unique role of offering capacity and a regional perspective, which individual communities and arts and culture nonprofits could not provide before the organization began. The executive director described this role by sharing, “For example, we have a civic center, science enter, and a zoo. They were all going independently and making a pitch to the city, and the city was then having to make a decision on how much to give [each program].It was wildly inefficient for all involved and the nonprofit organizations that were receiving some funds and for the cities too.”

Once Bravo was established, the member cities no longer dealt with grantmaking decisions, but Bravo’s board comprises leaders from the municipalities that contribute hotel-motel tax revenue. The executive director sees their role as an “administrative component” and “that was probably a big selling point” to establish the organization as a nonprofit.

Bravo’s structure as a nonprofit, especially the composition of its board, is seen as a strength compared to regional business organizations structured as governmental entities or for-profit corporations. The executive director describes Bravo’s unique value by sharing, “We do have voice at our table … We have those 17 elected officials, we have 17 corporate and community representatives like a traditional board, and then we have three representatives from organizations we support.”

Bravo has also recognized that its status as a 501(c) can help governmental partners secure unique sources of funding. The executive director said, “We do also occasionally partner on grants that other single organizations in our community would not be eligible for … We currently have a grant in partnership with the National Endowment for the Arts. We are the only entity that would have been eligible for that, so if we hadn’t applied that would have been money left on the table for our community.”

Table 2 shows the major sources of funding for each case, while Table 3 shows how each case matches the four dimensions of voluntary failure arising from a lack of government support.