True Grit: Exploring Nonprofit Sector Resilience Following Economic Recessions

1 Defining Nonprofit Resilience

We begin by defining key terms, acknowledging the various and sometimes conflicting definitions we found in the prior literature. First, we adopted from Chen (2021b, p. 1), Meyer (1982), and Staw, Sandelands, and Dutton (1981) a definition of resilience as the “ability or capacity of an organization to maintain or recover to at least its original performance level after a disruptive event.” Some literature has framed resilience with a more limited view, describing survival as the ability or capacity to persist following an adverse event and continue to provide services (For examples, see: Irvin and Furneaux 2021; Searing, Wiley, and Young 2021) or stability as in maintaining operating capacity (For examples, see: Calabrese 2018; Kim and Mason 2020). As Young and Searing explain, “resilience is not simply about survival but also maintenance of viability, dynamism and effectiveness over time” (2022, p. 4). We distinguish resilience as not merely survival following an adverse event but rather maintaining or amelioration of organizational performance to pre-event conditions or levels (Chen 2021a,b), reflecting recovery (i.e. returning to normal state) and rebound (i.e. bouncing back). We also found literature describing resilience as strategies, activities, and characteristics of the nonprofit that equipped them to cope with or navigate the event (For example, see: Geller, Salamon, and Mengel 2010; Salamon, Geller, and Spence 2009). These strategies, activities, and characteristics are essentially a means to an end, and our research focuses more on the end result.

Next, a study of nonprofit resilience is essentially a study of performance. Performance analysis evaluates how the nonprofit carries out its mission, and financial performance is often a proxy for mission performance since nonprofits need resources for their mission-related activities. An inquiry about performance following an adverse event explores both the financial vulnerability and resilience of a nonprofit organization or the sector as a whole. Particularly, financial vulnerability refers to the capacity of a nonprofit to sustain its financial performance when facing an adverse event. In contrast, financial resilience, as defined earlier, refers to the capacity of nonprofits to maintain their original level of services after an adverse event. Research on nonprofit financial performance has robust findings of factors and characteristics that predict vulnerability, such as the equity ratio, administration costs, operating margins (surplus), and revenue diversification (Greenlee and Trussel 2000; Hager 2001; Hung and Hager 2019; Keating et al. 2005; Trussel 2002; Tuckman and Chang 1991), size, age, subsector (Searing 2018; Trussel and Greenlee 2004), and contextual factors (Never 2014; Prentice 2016). Our research complements this vulnerability research by examining what equips nonprofits to maintain their performance following an adverse event.

We also see a need to understand both organizational and sector resilience. Organizational-level research examines strategies or characteristics that equip the organization to be resilient from an internal perspective (For example, see Chen 2021b; Hutton et al. 2021; Witmer and Mellinger 2016). Looking more broadly at mission sub-sectors or the entire nonprofit sector allows us to understand what happens between organizations. For example, research focused on particular mission-specific sub-sectors, such as international NGOs (Kerlin 2013) or social service organizations (Pennerstorfer, Reitzinger, and Schneider 2020), helps us understand how events impact the performance of specific mission areas. We aim to substantiate Salamon’s “resilient sector” claim by considering the entire nonprofit sector, which includes its various subsectors. This approach utilizes a broader sampling frame than previous research.

2 Evaluating Sector Resilience

In this section, we provide more details about our study’s research purpose and related hypotheses. First, the primary intention of our research is to confirm Salamon’s “resilient sector” assumption. To that end, we look across the past three decades to answer this research question: Is the nonprofit sector resilient (i.e. return to pre-event performance) following periods of economic recession? Since this study encompasses the entire nonprofit sector, we are drawn to universally impactful events, such as a pandemic or economic recession, rather than those that impact only particular sub-sectors or specific geographic regions. To understand resilience, our study’s timeframe accounts for a sufficient time period following the event, as limiting a timeframe to the event or immediate aftermath may be evidence of coping strategies rather than recovery to pre-event levels.

Next, we conducted a thorough review of existing literature to identify factors that either contribute to or hinder nonprofit resilience. We draw upon this research to understand how generalizable these findings are across adverse recession events and across the entirety of the nonprofit sector. Refer to Table 1 for a summary of this prior research’s sampling frame, the triggering events that necessitated a recovery, and the factors that contributed to or hindered resilience. Since we seek to examine resilience across multiple recession events and the entire nonprofit sector, we use these factors to frame hypotheses for our current study.

3 Methods

4 Results

To assess our main research question, we illustrate the trends of each dependent variable in a consolidated figure (refer to Figure 1). Tracing this trend line across the years in the analysis, we observe instances where the ratios fall below zero, indicating declines associated with and immediately following the recession years. However, the overall trend lines show growth and recovery of the sector over time, demonstrating the general resilience of the nonprofit sector. This observation aligns with Salamon’s portrayal of the nonprofit sector as resilient.

Figure 1:

The trends of total expense and total revenue growth after economic recessions.

Next, we used fixed effects panel regression to analyze the proposed hypotheses. Table 2 provides descriptive statistics of each variable used in the panel regression. On average, nonprofits have a positive total expense growth rate, and the highest growth rate occurs after Recession Period 1 1990–1991. Nonprofits also have a positive total revenue growth rate on average, but revenue growth is relatively slower compared to the growth of total expenses. The age of nonprofits ranges from 0 to 118, with an average of 19. Regarding revenue source, on average, about 58 % of nonprofits’ revenue comes from contributions, while around 37 % is derived from earned revenue. Table 3 shows the subsector distribution of the five major subsectors. The human services subsector has the most nonprofit organizations in numbers, making up nearly 37 % of all nonprofits in this study. Tables 4-1–4-6 shows the correlation between variables. The fixed effect panel regression results are shown in Table 5. As described in the method section, two measures of nonprofit resilience (total expense resilience and total revenue resilience) were used, and their results are depicted separately (Table 6).

5 Discussion

This study explored the resilience of the nonprofit sector, examining how organizational characteristics, strategies, and community factors contribute to nonprofit recovery following economic recessions. Our descriptive analysis reveals that, in general, the nonprofit sector demonstrates resilience by recovering after recessionary periods, returning to pre-recession levels, and experiencing growth over time. Our analysis used factors relating to organizational resilience to assess the sector’s overall resilience. The findings hold insights about nonprofit vulnerabilities, which are useful for policymakers and philanthropic funders to understand the intricacies of why some organizations may not survive, even as the overall sector persists. The findings imply that one-size-fits-all or fits-most solutions are insufficient to equip the sector’s resilience, but instead, targeted policy solutions and philanthropic support directed to organizations with known vulnerabilities would best preserve the resilience of the overall sector.

As we investigated various factors contributing to this resilience, the only factor that consistently equips resilience nearly across all recession periods is organizational size, as larger organizations tended to recover to pre-event performance. This finding follows the liability of smallness theory and other empirical studies that the dynamics of the nonprofit sector favor larger nonprofits, which are buoyed by financial security and professionalized capacity (for examples, see: Chen 2021a; Lin and Wang 2016; Morreale 2011; Smith and Phillips 2016). With our focus on resilience, not merely survival, larger organizations are more likely to recover following an adverse event and smaller organizations experience an impact that challenges their resilience. Acknowledging this, we consider that both research and policy should endeavor to understand what equips the resilience of smaller nonprofits in terms of strategies, capacities, and policy interventions.

The age of nonprofit organizations was found to be a significant factor, particularly in relation to revenue measures. Inconsistent with the argument of liability of newness theory, age was a liability to resilience in terms of total revenue. These findings may imply that younger nonprofits need to consider how to maintain their sustainability and develop the capacity to bounce back when facing adverse events. These lessons of both size and age instruct nonprofit practitioners who lead smaller, younger nonprofits to proactively leverage support for their organization, as well as communicate their needs so that their organization can withstand disruptive environmental conditions.

We also found that nonprofit revenue structure is associated with resilience. More specifically, relying on contributions and commercial income allowed nonprofits to be resilient in terms of total revenue growth across all three recession periods and total expense growth during the regression period of 1990. In light of these findings, nonprofits should manage their revenue portfolios mindful of how each source equips their resilience. The nonprofit sector is a rich composite of diverse missions ranging from disaster relief to human services to arts and humanities, and to fulfill their missions, nonprofits need financial resources. Following Wilsker and Young (2010), a benefits theory of nonprofit finances connects a nonprofit’s mission and associated programs or services to its revenue sources, collectively forming its revenue portfolio. Whereas the mission may dictate the sources of revenue, nonprofits should consider how to develop complementary or supplemental sources to maintain stability in light of external instabilities. For example, during the COVID-19 pandemic, nonprofits with public-interfacing programs and operations had to investigate alternative sources to offset lost revenue due to safety protocols that halted in-person activities. Organizations that hold contracts or other fixed sources of funding may also want to develop supplementary sources of unrestricted funding to offset more restricted sources. Moreover, policymakers and administrators who oversee these funding sources may also want to develop funding policies that equip, rather than constrain nonprofit recipients when external perils arise.

Unlike previous studies (for examples, see: Chen 2021b; Kim and Mason 2020), our findings do not support the hypothesized relationship between financial reserves and resilience. One reason might be we use a different measure for financial reserves compared to many previous studies. Our sampling relied upon digitized 990 data, which does not include a direct measure of financial reserves so instead, we used an indirect measure of financial reserves – equity ratio, which cannot differentiate between restricted and unrestricted funds of nonprofits. This may lead to a different result since the measure we employ does not distinguish the liquidity of assets. Additionally, financial reserves may concentrate in large nonprofits, rendering them too small to significantly impact the average nonprofit. Although reserve funds did not achieve statistical significance in our study, this does not imply that they are unimportant in real life. Disasters may impact subsectors to varying degrees. For instance, if a disaster severely affects the arts and small colleges, reserve funds become crucial, as these subsectors rely more on reserves when private donations decrease substantially. Future studies should reconsider this hypothesis and utilize an unrestricted measure of financial reserves.

This study found a community with more concentrated resources and less competition equips the revenue resilience of their nonprofits after the Great Recession. Nonprofit managers should not only consider the organizational characteristics when they prepare for economic downturns but also should monitor their resource environment. If a nonprofit is located in a community with intense competition, its managers should carefully plan for economic downturns. Some other community factors that are not included in this study may impact nonprofit resilience. Given data availability, our study did not include all community-level factors. A future study should investigate the relationship between community factors and nonprofits in situations of economic recession, or other types of adverse events, like natural disasters, which are often felt more locally and may even be more challenging to overcome as they destroy local infrastructure and other local capacities for recovery.

The controls we employed were derived from prior research (Carroll and Stater 2009; Tuckman and Chang 1991), and the findings are insightful for the study and practice of nonprofit resilience. We found that resilience did not significantly vary across subsectors, suggesting that adverse events may affect the nonprofit sector similarly regardless of the specific mission area. Our findings also indicate that when nonprofits experience surpluses, they may still be cautious in their spending following an adverse event. Research should investigate if this tendency is prudent or an unnecessary caution. These findings have the potential to provide nonprofits with valuable insights into the nature of resilience and guide them in understanding the optimal conditions for how prudent rainy-day spending facilitates performance recovery.

Also present in the findings, although not directly reflected in the study hypotheses, are differences across independent variables and their association with resiliency across the three recession periods. While this may seem to challenge the interpretation of the findings, this may also reflect the larger societal context in which recessions occur as well as other factors external to organizations. First, while the NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months,” there is no fixed rule or threshold measure that determines decline. Rather, NBER relies on a number of indicators or measures, including personal income minus government transfers, employment, consumer spending, and industry production. Likewise, economists point to different causes or drivers of recession periods. This study examined three recession periods, and each recession was created by different triggering factors. The 1990–1991 recession can be linked to the Gulf War and resulting oil price shocks, the 2001 recession to the dotcom bubble collapse, and the 2007–2009 recession to a housing market collapse (among others). As a result, the government reacts with different economic strategies such as changing interest rates and/or offering recovery and reinvestment loans or grants, among others. In each of these instances, these exogenous factors may have different relationships with the nonprofit sector, its sub-sectors, and various organizational dimensions. Rather than attempt to control for the myriad variables that make up and impact the state of the economy, which ultimately impacts nonprofits, our analysis focuses on those factors observed for individual organizations and, in most instances, are within the ability of individual organizations to impact. In other words, while it would be challenging for any single organization to set public policy (e.g. interest rates or government response funding) or control other exogenous factors (e.g. housing availability, prices, and loan practices), organizations do have agency over revenues, spending, and savings. We therefore urge organizations to consider the variables that they can manage that explain resilience across different recession periods and suggest future research dig into each of these more specifically since these findings help summarize the insights from prior research.

Finally, we remark on the logic of resilience in that resilience findings were not uniform across both dependent variables. We observed a pattern of resilience when using total revenue growth as the dependent variable. Organizational size, age, and revenue structure consistently contribute to revenue growth after recessions. In contrast, our finding for total expense growth is less consistent. Only organizational size – affects nonprofit expense growth after two recessions. Revenue structures and reserve funds are occasionally associated with one of the three recessions. The rationale behind this could be that total expenses reflect the level of mission performance, whereas revenues indicate the resources attracted for that mission. The nonprofits’ capacity to attract resources is more likely to be determined by their characteristics and revenue structures that are out of or less controlled by nonprofits. However, nonprofits’ mission performance level may not be only affected by their characteristics and revenue structures; it may also relate to other factors, such as nonprofit strategic choices based on community needs. Nonprofit professionals should focus on developing multiple channels to build organizational capacity. This “organizational slack” can be drawn upon during crises and used in ordinary times to innovate, refresh, and improve operations (Young and Searing 2022).

Moreover, it is important to note that singularly focusing on one dimension in either the practice or study of resilience may not be sufficient, nor may it account for the fullness of challenges or opportunities nonprofit organizations encounter following an adverse event. Nonprofit resilience requires that both the resource environments as well as the operational decisions of those inside organizations act in concert for the recovery and continued sustenance of organizations and the sector. Thus, research must account for this complexity and duality in its design. Practice must act in concert at the micro level of singular organizations, at the community level, and at the macro level of policymakers and infrastructure organizations.

In sharing our findings, we acknowledge they are not without limitations. First, the measure of the pre-recession trend for the 1990 recession is based on a single year rather than an average of three years as in the other two recession periods due to the data availability, but this may lead to inaccuracy. Besides, our analysis tends to have omitted variable bias. Due to data limitations, we cannot include community-level factors and management strategies in our analysis, which may also contribute to resilience. Third, we cannot obtain a direct measure of financial reserves and use the equity ratio instead. Both restricted and unrestricted funds are included when calculating the equity ratio, and the effect of unrestricted funds on recessions cannot be separated. We did not subtract long-term assets, estimated as net land, buildings, and equipment, from the total assets in our calculation because this approach would drop approximately 60 % of observations. Thus, future research should evaluate a separate measure of unrestricted funds. Finally, our study focused on multiple events across all subsectors, which makes it challenging to capture all nuances of resilience. Whereas some factors, such as reserve funds, were not significant, they may still be capacity supports in the face of adverse events. Future research could explore whether certain factors are useful across all types of adverse events and if some factors are especially beneficial for specific subsectors.

6 Conclusions

Our study investigated the nonprofit sector’s resilience, understanding that the sector is composed of organizations, and that to understand the broader sector’s resilience, organizational factors that reinforce or undermine organizational capacity must be examined. Our findings indicate that organizational size consistently equips nonprofits with resilience across most recession periods and that organizational age and revenue structure consistently contribute to revenue growth after recessions. Our findings indicate a sector that survives and rebounds in performance continues to provide services and programs and demonstrates the resolve of the sector and its organizations. As nonprofits grapple with decisions on allocating finite resources for the sustainability of their organization and policy interventions seek to avoid service disruptions, our research brings attention to aspects of both nonprofit capacity and vulnerability. This information empowers contemporary nonprofit practitioners, funders, and policymakers to draw insights from past trends, enabling them to navigate environmental factors strategically and fortify organizations against inevitable disruptions.