Net impact of government funding on nonprofit fiscal health: burden or benefit?

Abstract

This study examines the impact of federal grant awards on the financial health of recipient nonprofits. Although a modest body of research finds that government grants are beneficial to nonprofit fiscal health, a large Urban Institute study (2010, 2013, 2015) found that nonprofit managers receiving government grants consistently report fiscal harm due to awards that do not cover all program costs, late payments, and significant administrative burden. Those findings raise the question of whether government funding leads to net benefits or net harm for organizations given the administrative and fiscal burdens identified. This study tests that question using a large panel of federal grants to estimate the impact of government awards on three measures of nonprofit financial health. We find that government grants promote an increase in nonprofit size, improve operating margins, and increase financial reserves for recipient organizations. These benefits endure after the receipt of the award.

The program efficiency of environmental and social non-governmental organizations: A comparative study

“…In line with prior works, based on the regression statistics, it can be seen that social NGOs’ efficiency is slightly and negatively influenced by the number of grants from government agencies. The reasons might be that obtaining government funding can be time-consuming [ 83 ] and such funding is often earmarked for particular uses [ 84 ]. Specifically, the level of government financial aid to NGOs is contingent upon the nature of their missions.…”

The effects of commercialization on nonprofit efficiency and the moderating roles of government funding and organizational size

“…However, the results from this study suggest that if nonprofits are looking to become more efficient, they should think about their levels of government funding when pursuing revenue diversification. As previously mentioned in the literature review, securing government funding can be time‐consuming and come with more reporting requirements (Pettijohn et al, 2013; Thornton & Lecy, 2022). Moreover, government funding is often restricted for specific uses (Shon et al, 2019).…”

Unrestricted funding and nonprofit capacities: Developing a conceptual model

“…Individual contributions may allow for more flexibility in spending (Broce, 1986; Grønbjerg, 1993), but can also come with (perceived) donor‐imposed restrictions, largely driven by a strong public norm that overhead costs should be minimized (Shon et al, 2019). Government funding is typically highly restrictive and often does not cover full organizational costs (Grønbjerg, 1993; Hung, 2021; Shon et al, 2019; Thornton & Lecy, 2023). Institutional funders such as (corporate) foundations characteristically provide (fully) restricted project funding, although as mentioned at the start of this article, there has been a recent trend toward more flexible funding models, amplified by the COVID‐19 pandemic (Ayer & Anderson, 2022; Buteau et al, 2021).…”

“…In nonprofit and public administration studies, scholars have examined the effects of restrictions associated with different revenue sources on financial performance and operational expenditures. Government grants, which often come with restrictions on how the money is spent, are found to be negatively related with operating reserves (Cortis & Lee, 2019) and administrative spending (Shon et al, 2019), although a recent study shows that government grants “improve operating margins, and increase financial reserves for recipient organizations” (Thornton & Lecy, 2023, p. 561). Many case studies describe the operational costs that are necessary for acquiring government subsidies and reporting to the funder (Elbers & Arts, 2011; Kender‐Jeziorska, 2019; Zihnioğlu, 2019).…”