The relationship between government and the nonprofit sector is at a crucial transition stage in the US. Since the 1960s, funding of nonprofits has been on the rise, although the extent of this increase depends upon the type of nonprofit organization.  However, many pending proposals in Congress would significantly alter several major federal programs such as Medicaid, the Temporary Aid to Needy Families (TANF) program, and Section 8 housing voucher program, possibly reducing government funding of a wide array of nonprofit organizations over time.  Further, the ongoing debate on the Bush administration’s Faith Based and Community Initiative reflects differing views on the extent to which government should support nonprofit organizations as well as the appropriateness of direct government financial support of churches and faith-related agencies.  Proposals to devolve responsibility for important federal programs to the states would also fundamentally change the regulatory role of the federal government as it relates to nonprofit agencies receiving federal funds such as Medicaid, with potentially very important consequences for government’s relationship to nonprofit organizations. 

The high profile politics of government funding of nonprofits has tended to overshadow the ongoing transformation and diversification of the ways government financially supports nonprofits (Smith, 2002; Salamon, 2002). Government financing of public services has moved well beyond direct government services to include grants and contracts and increasingly, tax credits, tax-exempt bonds, tax deductions, vouchers, and fees for services. This diversification tends to mask the extent of public funding of nonprofits and, simultaneously, the increased centralization of government funding at the federal level in many areas such as health and social services. The variety of policy tools has also had important and far-reaching effects on the actual operations of nonprofit organizations including facilitating the development of various types of hybrid nonprofit organizations with features of the public and/or for-profit sector as well as much greater cross-sectoral initiatives involving multiple organizations including nonprofits, for-profit businesses, and different government agencies.

In short, the US policy toward nonprofits exhibit sometimes contradictory trends.  One the one hand, the growth of government financing of nonprofit and the competition for public and private funds generates ongoing pressure for more accountability and outcome evaluation. This has pushed government to greater levels of regulation both in terms of programmatic performance as well as administrative transparency.  Further regulation could be forthcoming.  Yet, the diversification of policy tools combined with the devolution of government programs has encouraged the growth of relational governance at the local level.  Thus, trends in the US mirror the two fundamental strands of the New Public Management (NPM):  the desire for improved performance and the goal of shifting away from large public bureaucracies toward more flexibility and decentralization in public service delivery (Hood, 1991; Behn, 2003; Smith, 2004). 

The Government-Nonprofit Relationship:  Growth and Diversification

Government financial support on nonprofit organizations has a long tradition in the United States dating to the colonial period (Salamon, 1987; Smith and Lipsky, 1993; Hall, 1987). Harvard University, the Massachusetts General Hospital and other leading educational and health institutions received public funding in their formative years.  Throughout the 19^th century and the early 20^th century, government funding of nonprofit service agencies continued, although it tended to be most extensive in the urban areas of the Northeast and Midwest.  Beginning in the 1960s, government financing of nonprofit organizations increased sharply fueled by extensive new federal spending on many new social and health programs and organizations including Medicare and Medicaid, community action agencies, community mental health centers, neighborhood health centers, and child protection agencies.  In the 1970s, government funding essentially created a national network of mostly nonprofit drug and alcohol treatment programs. Other innovative community agencies receiving federal funds were battered women shelters, rape crisis programs, and emergency shelters for runaway youth.  In the 1980s, the government’s principal response to AIDS, homelessness, and hunger was through contracting with nonprofit service agencies (Smith and Lipsky, 1993; Smith, 2002). 

Government funding of nonprofit agencies increased in the 1980s despite a renewed emphasis on policy devolution from the federal government to state and local government.  In  particular, President Reagan won passage in 1981 of the OmniBus Reconciliation Act (OBRA) which reduced somewhat the growth rate of federal spending and regulations on many federal social and health programs and devolved responsibility for the administration of these programs, at least in part, to the states (Gutowski and Koshel, 1984).  Some nonprofit agencies, especially outside of hospitals and higher educational institutions, experienced sharp reductions in government funding, at least initially. 

Even before the end of the second Reagan administration in 1988, though, government funding of many different types of nonprofit agencies recovered and in many cases increased substantially. Many states and localities substituted their own funds for lost federal money (See for example, Milroy, 1999), refinanced their contracts with nonprofit agencies, or reconfigured programs to maximize federal assistance in order to take advantage of federal programs with increasing budgets (GAO, 1984; Milroy, 1999).  This shift was particularly apparent in policy areas such as mental health, developmental disabilities, child welfare, home health, and counseling where state government increasingly tapped Medicaid to fund services previously funded through federal, state, and local categorical grant programs (GAO, 1995). 

In addition, federal funding to address urgent public problems such as low income housing, immigrant assistance, and community development also rose, often substantially during the late 1980s and 1990s.  For example, the first Bush administration initiated a sharp rise in federal spending on drug and alcohol treatment and prevention programs and child welfare services.  New funding was available for new or expanded child care, pre-school such as Headstart and foster care (Executive Office of the President, 2005, 260-261; House Ways and Means Committee, 1996, 695, 935). Nonprofit low-income housing agencies proliferated throughout the country, spurred in part by the federal Low Income Housing Tax Credit (LIHTC) program enacted in 1986.   

More recently, the devolution of federal policy entered a new stage with the implementation of welfare reform, signed into law in 1996 by President Clinton.  This legislation replaced the Aid For Dependent Children (AFDC) program enacted in 1935 as a shared federal/state program with wide variations in payment levels to individuals and eligibility standards nationwide. In place of AFDC, Temporary Assistance for Needy Families (TANF) was established, initially with higher levels of funding than under AFDC but with a reduced number of recipients.  TANF includes new state block grant programs and greater discretion for   states to  design  income assistance programs, although new strict federal regulations governing the expenditure of federal TANF money by the states exist, including specific performance targets for states to meet on the number of people on the welfare rolls, rates of teenage pregnancy, and work participation by welfare recipients.  The welfare reform legislation also included a so-called Charitable Choice amendment to encourage states to fund faith-based  agencies providing social services. 

The impact of TANF on nonprofit organizations was complex.  Almost immediately, many of the clients of nonprofit social welfare agencies lost their income maintenance support. However, these same clients, to greatly varying degrees across the country, were eligible for additional services (funded in part with new federal grants) to help them seek permanent employment.   Overall, the size and character of welfare rolls and the expenditure of funds on welfare related programs changed dramatically.   A comparison of 1996 AFDC data and 2001 TANF data underscores this transformation:  the number of families on welfare dropped 53 percent; the number of teen parents on welfare dropped by 50 percent; and the share of AFDC/TANF dollars spent on direct cash assistance declined from 73 percent to 44 percent (House Ways and Means, 2004, pp. 7-3, 7-4).   

In short, federal funding for income maintenance support for individuals declined sharply but at the same time, federal support for services delivered by nonprofits (and to a much lesser extent for-profits) rose significantly.[1]  Overall, the federal share of total human service spending increased in the wake of welfare reform.  Indeed, the federal share of total spending on income-tested service benefits, including welfare, climbed substantially. State spending on services dropped from $8.1 billion in 1995 to $4.6 billion in 2002 while federal spending rose $7.1 billion to $17.5 billion (in 2002 dollars) (House Ways and Means, 2004, p. K-6).  A large percentage of this additional service funding was spent in support of nonprofit programs, including day care, welfare to work, job training, and counseling.    

The federal share of social welfare services funding has also risen due to sharp escalation in federal expenditures for Medicaid, the shared federal-state health care program. The number of Medicaid recipients has risen from 20 million in 1975 to almost 50 million in 2004 (House Ways and Means, 2004, p. 15-44; Behn and Keating, 2004, p. 843).   Total spending on Medicaid surged by over one-third between fiscal years 2000 and 2003, from just over $200 billion to over $275 billion (See Holahan and Ghosh, 2005). This rapid increase is due in part to substantial  growth in enrollment especially among the aged and disabled poor who receive long-term care and personal care benefits from Medicaid (Holahan and Ghosh, 2005; Kaiser Commission, 2005a; Kaiser Commission, 2005b)

Medicaid, for instance, is critical to funding services to the developmentally disabled, especially community based programs.   In 1980, most public funding for services for the developmentally disabled came from  state dollars; but due to the Home and Community Based Services (HCBS) waiver program of Medicaid, state funding represented only 46 percent of community spending in 2002 (Rizzolo, Hemp, Braddock and Pomeranz-Essley, 2004, p. 8).  Total public spending rose from about $8 billion in 1977 to $27 billion in 2002 (in 2002 dollars) (Rizzolo, et al., 2004, p. 44).  Medicaid also funds a broad group of programs provided by nonprofit agencies including child welfare, home care, hospices, counseling, residential foster care, drug and alcohol treatment, and services for the mentally ill (although the extent of coverage varies depending upon the state). [2] 

In arts and cultural policy, the reverse pattern is evident:  a sharp decline in federal funding and a steady rise in state and local funding for the arts during the 1990s.  Between 1992 and 2001, the budget of the National Endowment of the Arts dropped from $175 million to $102 million.  But spending by state and local arts agencies rose from approximately $800 million to $1.4 billion (Mulcahy, 2002).

The overall rise in government funding of nonprofit organizations spurred substantial growth in the number of nonprofit organizations nationwide. For instance, the National Center for Charitable Statistics (NCCS) reports that the number of 501 (c) 3  public charities  rose  from 535,888 in 1996 to 822,817  in 2004 (NCCSa, 2005).  And the number of nonprofit social welfare agencies has more than tripled since 1980 (Smith, 2002).  Arts and cultural organizations have experienced a similar rise in numbers.  For instance, the number of nonprofit dance companies nationwide more than doubled between 1995 and 2005 (from 724 to 1576).  Similarly, the number of nonprofit theater companies increased from 3302 in 1995 to 5719 in 2005 (NCCSb, 2005).

The Diversification of Government Financing

The growth of nonprofit organizations reflects many factors including the influence of the New Public Management on public policy and management.  As part of this shift in policy, the diversification of government financial support for nonprofit organizations is a key explanatory factor.  This shift also has facilitated a movement away from direct grants and contracts to a variety of other financing vehicles. 

Direct Grants and Contracts

Before the 1960s, government funding of nonprofit agencies was relatively limited and tended to be restricted to certain services such as child welfare or high profile institutions such as the Metropolitan Museum of Art in New York City. Typically, public subsidies to nonprofit agencies were provided with relatively minimal accountability requirements; nonprofit agencies were assumed to use the money wisely and efficiently, partly because many nonprofits were part of a web of relationships that included the local chapter of the United Way that offered legitimacy and some measure of accountability to government.  Also, state and local governments ----the primary source of government funding---tended to maintain little capacity to monitor nonprofit grantees. 

Initially, when federal funding for nonprofits increased sharply in the 1960s and 70s, many of the new federal and state grants lacked stringent guidelines and regulations.  Over time, though, federal, state and local agencies discovered that they now were in charge of a very large service system, albeit one delivered by nonprofit agencies.  In order to “rationalize” this system (Brown, 1983) and ensure the government agencies were maintaining accountability for the expenditure of public funds, the regulations governing government contracts became increasingly stringent, even to the point of government sometimes specifying the names of the clients to be served by the agency (Smith and Lipsky, 1993; Gronbjerg, 1993).  Today, many government programs explicitly tie reimbursement for services to specified outcome measures through so-called performance contracting arrangements (Behn, 2003). 

Also noteworthy is the shift to managed care instead of direct contracts.  In the early years of widespread contracting, most contracts entailed a direct relationship between government and the nonprofit agency.  For example, the federal government would directly contract with a local community mental health center to provide mental health services to the local population.  Likewise, a state Department of Social Services would directly contract with a local nonprofit child welfare agency. This government-nonprofit agency relationship tended to be the norm until the late 1980s when a wave of managed care rolled through state and local government. 

The advent of managed care made the relationship between government and affected nonprofit agencies more complicated and indirect. For instance, in states such as New Jersey, Kansas, and Massachusetts, the state agency responsible for child welfare services replaced, at least in part, its direct contracts for foster care and related services with private, nonprofit agencies with  contracts with  third-party intermediaries who are paid on a capitated basis to manage the foster care services for the state.  This third party agency then subcontracts with private agencies for the provision of services (Mahoney, 2000; Wulcyn, 2000; Courtney, 2000).  Managed care is also quite prevalent in mental health services and various health care programs including state Medicaid programs.

Managed care in the context of government contracting for social and health services presents complicated policy tradeoffs.  The new managed care firm may allow greater opportunity to focus on client and program outcomes and introduce efficiencies into the delivery of contract services.  Yet, managed care can introduce great uncertainty on clients and revenues for nonprofit contract agencies since agencies are now dependent upon the managed care firms for client referrals instead of government.  Further, managed care contracts typically have built-in incentives to reduce service utilization, unlike many of the previous contracts with government.  

Further, by blurring the lines of accountability between the state and private agencies, managed care contracts can create confusion regarding the appropriate agency responsible for ensuring the provision of quality service and the judicious use of public funds.  As a result, the risk of service delivery outcomes is shifted from the state agency (and to an extent the nonprofit agency) to the third party managed care organization.  But usually these managed care organizations are not very open to outside scrutiny, especially by clients and consumers (Also see Smith, 1993).   For example, managed care firms are typically for-profit or nonprofit organizations that are not subject to the same rules on disclosure, open meeting laws, and service appeals that are characteristic of government agencies.   

In sum, contracting between government and nonprofit agencies has increased at the state and local level, but the structure of the contracting relationship has undergone important shifts.  To varying degrees, contracts are much more performance oriented with many contracts tying agency reimbursement to meeting specific performance measures.  And, the competition for resources means that the value of the contract to nonprofit agencies often fails to keep pace with rising costs or increased client demand for service.   The increased emphasis on accountability and performance means that contracts are much more specific and project focused, leaving less opportunity for nonprofits to adequately fund administrative infrastructure. (Insufficient financial support for organizational infrastructure is also a broader problem that involves private funders as well.) (Hager, et al., 2004)

Fees for Service

Despite the increase in contracts and various accountability requirements, the government-nonprofit relationship is increasingly complicated because of the shift away from a  reliance on direct contracts to a greater use of fees for service.   Fees have always been a part of the nonprofit revenue mix. Universities, for instance, have historically been very dependent upon tuition revenue.  Museums have relied primarily upon admission fees and special event ticket sales.  And, many longstanding child welfare agencies received per diem payments from government and private individuals starting with their formative years in the 19^th century through the post-World War II period; only the advent of federal funding in the 1960s substantially decreased the reliance of these agencies on fee income.   

In the contemporary period, fees is an umbrella term for diverse revenue collected from individuals and organizations including:  rent payments from residents in community housing programs; reimbursement from public and private health insurance programs; direct payments from clients; income from technical assistance services; tuition; the sale of goods such as meals from a café; and special event ticket sales.  

For social and health organizations, the very consequential shift in the last 20 years has been the increase in fee income that is directly or indirectly from government funds.  The extent of this shift is difficult to discern even with the examination of agency program and financial records. For instance, the identification of fee income in an audit or the IRS Form 990 tax return does not tell us much about the original source of the funds. Rent payments from the disabled could be from a person’s Supplemental Security Income (SSI) rather than private savings or income from employment.  Health insurance reimbursement could be from Medicaid or private insurance.  On Form 990 tax returns, fees are a separate line from direct government grants and contracts, with the implication that fees are private rather than public revenue.  But often, fee income for many nonprofit social and health agencies is actually government funds paid to individuals through Medicaid, vouchers, income maintenance payments, and per diem payments. Many fees are indirectly subsidized by government. For instance, day care fees are often subsidized by government through the Child Care Tax Credit. 

Overall, then, fee income for many types of nonprofit organizations especially in the social and health fields remains largely government funds, either directly or indirectly, despite efforts to move into earned income activities such as for-profit ventures. As a result, the increase in fee income has tended to mask the continued importance of government funding and the diversification of the means of government support for these agencies.

Other nonprofits including arts and cultural organizations and educational institutions continue to be quite dependent upon fees in the form of ticket or tuition payments from individuals (although the latter are often subsidized by government).  But as will be noted in subsequent pages, government financing can be quite important for these organizations as well. 

Tax Deductions and Credits

Another form of revenue diversification has been the growing role of tax deductions and tax credits as a direct and indirect funding source for nonprofits. More specifically, individual and corporate tax deductions for cash and in-kind contributions to nonprofit organizations are essentially an indirect subsidy to nonprofit organizations because they reduce the cost of donations to qualifying organizations (Clotfelter, 1985).  To be sure, while the cash donations have been particularly important since the creation of the federal income tax in the early 20^th century, in-kind donations have become much more important as the value of non-cash donations such as real property, patents, historical facades, and automobiles has risen. For example, many nonprofit service organizations have instituted car donation programs:  individuals donate their used cars to a nonprofit agency which then resells the autos to third party firms who then sell the car with a portion of the purchase price shared with the agency. Gifts of property are crucial to the development of many important conservation and cultural projects by nonprofit organizations.  

In short, nonprofit organizations depend upon the tax deductibility of real property and other assets to generate gifts which then can serve as a possible revenue source or the basis for a longer term partnership between individuals, for-profit businesses and the nonprofit agency. 

The growing value and contribution of non-cash donations is evident in the concern within Congress on the “loss” to the federal treasury of non-cash donations and the potential abuse of the tax code by individuals who donate goods and property.  For instance, Congress enacted legislation in 2004 that limited the value of automobile donations because of widespread concern that so little of the value of the deduction was actually realized by the recipient charity. Proposals are pending in Congress would further restrict the value of tax deductions that individuals and corporations could take for non-cash donations.

In addition to tax deductions, tax credits are growing in importance as a strategy for government to address important social problems. For instance, the Low Income Housing Tax Credit (LIHTC) was enacted in 1986 as part of the omnibus tax reform legislation.  In fiscal year 2004, Congress authorized $382 million to fund the LIHTC (House Ways and Means, 2004, p. 13-58).  The LIHTC allows private investors to reduce their tax liability by purchasing tax credits to build low-income housing with the hope that the tax savings will be passed on to low-income renters in the form of lower rent payments.  This tax credit program is vital to the ability of nonprofit community development and housing organizations to build low-income and affordable housing.

In the arts and cultural arena, historic preservation tax credits have helped many nonprofit organizations preserve architecturally significant buildings and facades (National Park Service, 2005).  These historic preservation tax credits are often combined with the LIHTC. And, the LIHTC and the historic preservation tax credits are sometimes combined with grants, direct contracts, and tax-exempt bonds (See Nolden, et al., 2003).

In addition, the child care credit can be claimed by individuals and couples on their tax returns.  This credit partially offsets the cost of child care and dependent care (such as home health services), making nonprofit (and for-profit) services more affordable. 

The growth in the use of tax credits (and deductions) reflects, in part, the broad interest within public management for more consumer choice in the way in which citizens receive and utilize public services and the popularity of more indirect and hidden expenditures at a time when pressure exists to reduce government expenditures.  Tax credits which are exercised by private individuals and corporations do not excessively create new government bureaucracies (Howard, 2002). Tax credits are alternatives to direct grants and contracts which usually entail more visible and direct government expenditures.  Some tax credits such as the child care tax credits are exercised by individuals and relatively easy to claim.  Deductions for charitable contributions are similar.  Other tax credits though are very complicated.   Indeed, the LIHTC and the historic preservation credits are similar to contracts in that they are subject to very detailed government regulations and eligibility requirements.  Compliance with the terms of the LIHTC for instance requires extensive paperwork and monitoring by government and the recipient nonprofit agency, just like contracts.  (However, in many cases, these tax credits are not monitored well for their programmatic outcomes.)   

From the perspective of the nonprofit agency, tax credits such as the child care tax credit boost demand for agency programs by subsidizing the cost of service.  The Work Opportunity Tax Credit (WOTC) encourages firms to hire disadvantaged clients on nonprofit agencies, providing in some cases a source of income for nonprofits (Hamersma, 2005).  But the policy and management dilemma raised by credits is that they are often a less efficient financing strategy than direct government support through grants and contracts.  For instance, the value of the LIHTC for a particular project is shared by many consultants and investors, so the total foregone revenue to the US Treasury is far more than the actual money derived from tax credits used to build low-income housing.  And, since tax credits such as the LIHTC or the WOTC are tied to specific projects or individuals, they lack a capacity to build the nonprofit organizational infrastructure and significantly contribute to program sustainability.

Tax-Exempt Bonds

Large nonprofit institutions such as hospitals and universities (as well as for-profits) have taken advantage of tax-exempt bonds for decades.  These bonds help nonprofit organizations finance the cost of capital improvements such as a new construction or renovation.  What is new is the growing use of tax-exempt bonds by smaller nonprofit organizations such as housing development organizations, child welfare agencies, and mental health centers.  This increase in tax-exempt bond financing reflects in part the steady rise in the number of nonprofit organizations, especially smaller community-based organizations.  Most of these smaller organizations are undercapitalized so as they develop as organizations, they face substantial challenges in adequately funding their capital costs (Miller, 2003).  This situation is exacerbated by the lack of financing for capital costs within government contracts.  As a result, nonprofit organizations have turned to policymakers at the federal, state and local levels to help them address these important capital costs.  For example, state housing finance agencies have helped support low-income housing development by issuing bonds.  Also, some states such as Massachusetts, Washington, and New Jersey have created state agencies for economic development or housing development that offer tax-exempt bond financing programs for qualifying 501 (c) (3) organizations.  For instance, MassDevelopment has provided tax-exempt bond financing to nonprofit human service organizations for building purchase and renovation.  Often bond financing is combined with various forms of below-market rate loans (See www.massdevelopment.com; for New Jersey, see www.njeda.com). In the state of Washington, the Washington Housing Finance Commission has issued tax-exempt bonds on behalf of a wide variety of social, health and educational nonprofits, including some relatively small community organizations (http://www.wshfc.org/bonds/ npfacilities.htm)  Tax-exempt bonds are an attractive financing option for nonprofits since they can obtain sizable financing for their capital needs; few foundation sources of extensive capital financing exist by comparison, although some big national foundations have begun to offer programs specifically targeted to capital needs (Ryan, 2001).  Targeted fundraising through capital campaigns can be a very labor intensive and expensive process that is especially difficult for smaller agencies to undertake.

The Diversification of Organizational Forms

The diversification of policy tools has in turn led to the “hybridization” of organizational forms, both formal and informal (Skelcher, 2004).  Many of these new forms embody a more relational and collaborative approach to the government-nonprofit relationship.  This section focuses on these hybridization phenomenon and its implications for public and nonprofit management. 

In part, the transformation of organizational form reflects the increased competition for funds and the pressure by public and private funders on nonprofits to diversify their revenue base.  Or put another way, the NPM emphasis on performance and outcome evaluation has spurred nonprofits to pursue new sources of revenue which has in turn led to new types of organizational forms and relationships.  A few examples illustrate this point. 

Low Income Housing Organizations.  The expansion of tax credits through the LITHC (and to a lesser extent, historic preservation tax credits) has fueled the growth of low income housing and community development organizations throughout the country.  These organizations embody the sometimes contradictory management trends evident in the US and elsewhere.  Tax credits are actually awarded to eligible nonprofit and for-profit organizations by state governments.   The award process is increasingly competitive and rigorous, squeezing many of the smaller housing organizations who lack the financial and political capital to compete.  However, tax credits and the overall competition process forces nonprofits to develop ongoing partnerships with for-profit organizations including investment houses, banks, and for-profit businesses.  These organizations are also heavily invested in local partnerships with local and state government since new low-income housing projects involve some type of partnership with a social service agency to provide needed services to eligible renters (such as developmentally disabled housing). 

Tax credit financing has pushed (and forced) nonprofits to create a number of hybrid nonprofit-for-profit structures.  For instance, most nonprofit housing developers create for-profit, limited partnerships for their tax credit projects (so the private investors can receive their tax credits).  Sometimes, the limited partnership is effectively owned by the nonprofit; in other cases, the nonprofit may be a minority partner.  Some agencies have started their own for-profit subsidiaries.  For instance, Plymouth Housing in Seattle, a large nonprofit low-income housing agency, recently created a for-profit catering business to generate more income for the organization. 

Further, tax credit financing pushes an agency to be entrepreneurial and to keep building.  A child welfare agency with contracts with state government can often depend upon a certain number of children every year and a predictable stream of funding, barring any major budget or program quality problems.   But tax credits are unpredictable and uncertain, because tax credits are allocated on a project-by-project basis with no assurance that a low income housing agency will receive another tax credit package.  Especially in recent years, the competition for the federal tax credits that are allocated at the state level has been especially keen.  Thus, agencies specializing in tax credits are pressured to always be thinking of a new deal, since new funds come into the organization only through new tax credit deals.  This entrepreneurialism encourages additional partnership with for-profit organizations.

It is also worth noting that the complexity of tax-credit deals and their multiple revenue streams has tended to mask the extent to which the projects of low-income housing organizations have depended upon indirect government support and partnerships that are not tied directly to the tax credits including: 1) donations of land by local government to the housing organization at no cost or substantially below-market; and 2) the use of Section 8 housing vouchers to support the rent payments of the tenants.  In an important sense, then, low-income housing organizations are a good example of an emergent form of nonprofit organization that relies on a mix of direct contracts as well as various partnerships and collaborative initiatives. 

Fee-Based Organizations: The shift away from direct contracts and grants and to much greater reliance on fees, subsidized in part through government tax credits and deductions has also encouraged agencies to forge a variety of new partnerships that also involve much more dependence on a wide variety of networks and relationships.  A good example is an agency founded in the early 1970s in Seattle to create and improve affordable housing and physical facilities for low-income populations by providing architectural design and technical support to nonprofit agencies. Initially, the agency functioned as a “technical assistance” arm of the Seattle Department of Housing and Human Services but in the last 15 years, the mission and activities of the agency have become much broader.

Twenty years ago, the agency relied almost completely on funding from the federal Community Development Block Grant (CDBG).  This money was given to the state which then gave it to the city of Seattle which then contracted with the agency for technical assistance and design work with local nonprofits.  In short, most of its money was “pass-through” federal funding in the form of contracts between the agency and the city. 

But, CDBG funding (and many other block grants such as the Social Service Block Grant) have been in decline since the early years of the Reagan Administration (Posner, 2005).  In the mid-1990s, the agency experienced a funding crisis when the city notified the agency that it would terminate its funding entirely.  This was a particular problem for this agency since, like many agency dependent upon government contracts, its board and staff had done relatively little fundraising, so the agency did not have ready access to alternative sources of private donations. 

Pushed by this funding crisis to diversify, the agency bought a for-profit architectural firm, which became a for-profit subsidiary of the agency.  Ultimately, the city decided to continue to fund the agency but the level of CDBG funds has continued to decline steadily.  But the agency has been able to increase its revenue substantially by generating fee income from other nonprofit agencies (which usually originates directly or indirectly from public funding sources).  For example, a low-income housing organization might receive funding from the LIHTC program to build affordable housing.  The budget for the housing includes funding for design services that the housing agency directly pays to the agency.  

The shift to fee income is also consequential in terms of accountability, performance expectations and competition among agencies for funding.  CDBG funds were distributed with very loose accountability standards, offering the recipient agencies broad discretion in terms of clients and services.  But increasingly, CDBG funds are very targeted.  The fee income for the agency is based largely on the relationships, market position, and performance of the agency.  No formal contracts exist and the money tends to be project by project.  Nonetheless, the relationships tend to encourage repeat business, either directly or indirectly (since much of the public money is channeled through other organizations).  Indeed, this agency is representative of a new wave of nonprofits----from community development organizations to emergent job training programs to innovative programs for the homeless---that mix direct and indirect public funding complemented by occasional project specific grants from foundations and corporations. 

Another category of fee-based agencies exemplifying the move away from direct contracting with government are the varied job-training and workforce development programs which rely upon various types of partnerships for their revenue.  For instance, Farestart, a job-training program in Seattle, operates a restaurant that employs the homeless and disadvantaged and provides them with job training skills.  A substantial portion of their revenue is from the restaurant and related programs including a café which in turn rely upon on many different partnerships with local restaurants and chefs and municipal government. 

To be sure, some of the partnerships of Farestart have elements of a traditional contract such as a formal agreement and certain performance expectations.  But most of the partnerships are structured with the assumption that this relationship will be long-term and that the government and the for-profit sector need to invest in the agency to help ensure its long-term future and viability.  

Land Trusts.  Once a relatively rare type of nonprofit organization, land trusts have grown dramatically in number and assets in recent years, fueled by rising property values and the availability of tax credits and deductions for the gifts of land by individuals and corporations.  The typical land trust is a nonprofit entity with relatively few staff.  Its mission is environmental preservation especially open space and recreational land.  For instance, a company might sell a piece of land for conservation purposes to a land trust which would raise the money from public and private sources.  The company would sell the land to the land trust at less than its market price and then be able to deduct the resulting difference between the market price and the selling price from their corporate tax bill.  The land trust might then donate the land to a local municipality or hold the land as part of their own conservation land. 

Moreover, land trusts deals have now proliferated in areas far afield from conservation.  In Seattle, the Seattle Art Museum (SAM) in a major new project on the Seattle waterfront: the Olympic Sculpture Park (OSP), with a grand view of the Olympic Mountains and Puget Sound. 

OSP evolved from the joint efforts of SAM, private donors, a large oil company, Unocal, and the nonprofit Trust for Public Land (TPL).  Unocal had owned a site on the Seattle waterfront for its operations for several decades.  SAM staff viewed this site as the perfect location for a new sculpture park that would rival nationally recognized sculpture parks of other museums such as the sculpture garden at the Walker Art Center in Minneapolis.  The Unocal property was appraised for $24 million but Unocal was willing to sell the property to the TPL for $16 million (and take a tax deduction for the $8 million difference).  TPL, working with SAM, raised the $16 million for the purchase price from private donors. TPL then transferred title of the land to the Museum Development Authority, a public development authority (PDA) which owns the land on which the current SAM building resides. (A PDA is a quasi-public institution in Washington state that can issue bonds; it possesses more financing flexibility than a traditional nonprofit.)

The OSP project illustrates a number of important trends in public and nonprofit management.  First, OSP underscores the emergence of land trusts and the national Trust for Public Lands (TPL), in particular, as central players in various types of nonprofit-for-profit partnerships (and public-for-profit partnerships).  The ability of corporations and individuals to take a tax deduction for a gift of land at its appraised market value is a significant financial incentive (over and above the existing incentives for cash contributions) to give appreciated land for public purposes.  Also, corporations may save substantial sums in environmental remediation and associated transaction costs.  TPL and other similar organizations have the expertise and the professional capacity to manage these land deals and facilitate the raising of money for the purchase price.  

Second,, these projects are complicated, not unlike tax credit deals. They rely heavily on professional and social networks to connect donors, the Trust for Public Land, government agencies, and nonprofit institutions.  Further, the complexity of the project and the many players tends to mask the public role in the project, even though government agencies may be playing a substantial funding role, either directly or indirectly.  This lack of a visible government presence may be   unavoidable in these complicated public-private partnerships but it does likely mean that government may not receive credit from the citizens for helping support important public endeavors. Relatedly, the continuing obligations of government once a program is implemented or the new building constructed, especially if other sources of financing do not meet expectations, may also be obscured.  

Finally, the OSP deal underscores the importance of hybrid organizations to help attract the necessary financing for nonprofit organizations.  OSP is technically owned by the Museum PDA.  SAM also has created an affiliated Seattle Art Museum Foundation to help attract private donations.  In this sense, OSP and SAM fit with the broader trend evident in housing organizations and many other types of nonprofit organizations to create new organizational structures in order to gain greater financing and programmatic flexibility. 

Concluding Thoughts

In the last 25 years, government’s relationship to the nonprofit sector, especially in terms of a financing role, has undergone a profound transformation, although the changes in policy and practice are frequently intertwined in complex ways. Indeed, the wide-ranging and ongoing debate about privatization and devolution (See Hacker, 2002; Gilbert, 2004) has diverted attention from the realities of public policy and street-level practice as reflected in the programs of nonprofit agencies. 

At one level, “privatization” of a sort has certainly occurred.  Hundreds of thousands of nonprofit agencies have been established since the 1960s.   In some policy areas such as developmental disabilities and mental health, a substantial shift has occurred from large public institutions to smaller, nonprofit, community-based programs.  But most new nonprofits---whether in child welfare, dance, or low-income housing---- are providing services that were previously unavailable. Many of these organizations might have been at one time completely volunteer-led and financed, but eventually many of the organizations, especially in the social and health arena, received substantial public funding.  These organizations and their programs represent an expansion of the American welfare state.      

Another perspective on privatization is to consider it a shift away from direct public grants and contracts.  Nonprofit agencies such as community mental health centers that were funded through direct grants in the 1960s are now funded through a variety of different funding sources including fee for services through Medicaid and private insurance.  Housing development agencies depend in part on tax credit revenues as opposed to direct grants for low-income housing.         

The experience of most nonprofit agencies suggests that increases in fee income, at least among social service and health organizations, are not from  private funds from individuals or organizations but instead from public funds, especially through Medicaid but to a lesser extent other public programs such as Medicare, Section 8 housing voucher programs and per diem payments from government.  The growth of Medicaid as a funder of social programs for a broad spectrum of the population with very diverse needs ---from residential treatment for children to outpatient drug programs to home care for the developmentally disabled ----is in fact one of the largely overlooked stories of the growth of government and its funding of nonprofit organizations. 

Some fear that a shift to private nonprofit agencies has been accompanied by an abandonment of public goals and objectives in favor of private goals.  Whether true or not, most nonprofits receiving public funding, even in the form of fee for service revenue are very tied to public priorities and regulations.  Medicaid eligibility, for example, and the rules governing reimbursable services are quite extensive and elaborate.  Low income housing agencies such must use these credits to serve eligible clients to the extent required by the programs, lest the entire project lose its tax credit eligibility.  Many government contracts with nonprofit agencies are also controlled through various performance measures and targets.   Indeed, the continuing interest in the US (and elsewhere) in the new public management and its emphasis on accountability and performance measurement has encouraged governments at the state and local level (and private funding agencies) to tie ever more closely the programmatic outcomes of nonprofit contract agencies to public priorities. 

Yet, at the same time, the diversification of policy tools has produced an explosion in partnerships, coalitions, collaborations and hybrid organizations.  To varying extents, partnerships and many different types of hybrid organizations are not premised on competition and contracting.  Instead, they depend upon long-term relationships to take advantage of funding and programmatic opportunities.  Even some of the examples of competitive bidding such as the frequently intense competition among low-income housing organizations for tax credits require collaborations with other service agencies and a long-term positive relationship with local and state officials. 

Importantly, the rhetoric of privatization also tends to minimize the need for additional public resources and thus creates major difficulties for advocates of the programs provided by nonprofit organizations to successfully press their case for government support for their programs.  Further, the risks to nonprofit organizations of even incremental adjustments to key funding programs such as Medicaid or the LIHTC are largely neglected since the connection between Medicaid and the health of many nonprofit community agencies is not immediately apparent. 

Finally, the expectations on nonprofit performance have never been higher (See Light, 2004).   Government financing though tends to focus the attention of nonprofit staff and volunteers, government administrators and policymakers on performance measures related to the efficiency and effectiveness of organizational services.  Less tangible contributions of nonprofit organizations such as building community and social capital or encouraging citizen participation in local affairs tend to be overlooked or minimized.   Nonprofit organizations would be well-served by keeping these less tangible goals in mind in their governance and strategic planning.  These goals will help build broader community support and encourage higher levels of accountability, helping a nonprofit organization build long-term political and funding support from government as well as individuals and corporations. 

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