The voices of Urban Institute's researchers and staff
May 15, 2014

The important government-nonprofit relationship doesn’t always work as well as it could

May 15, 2014

Why does government funding for nonprofit services produce a vibrant service sector in some places, but not in others? As our companion State Report to the 2013 National Survey of Nonprofit-Government Contracts and Grants shows, not all contracts and grants are created equal. States vary widely in the amount, type, and structure of funding that they provide to nonprofits to administer services on their behalf. Our partner on this project, the National Council of Nonprofits, released a companion report, Toward Common Sense Contracting: What Taxpayers Deserve, providing stories of the impact of these issues and proposed solutions to the problems.

Our report provides national and state-by-state snapshots of most types of nonprofit organizations that have contracts and grants with local, state, and federal governments. The individual state profiles are designed to document the extent of nonprofit-government contracting, processes, and problems. Additionally, states are ranked according to number of grants, types of issues, and actions taken by nonprofits to address the challenges they face, such as limitations on overhead expenses.

Nonprofit organizations in many states have been severely restricted in how government funds can be used to support various services and activities, which can affect service delivery. Funds from grants and contracts cover program expenses, such as food distributed or time spent working with beneficiaries, but often not the costs of actually running the program, like tracking participants’ progress or measuring program performance. Overhead expenses of electricity, rent, and employing administrative staff are sometimes excluded as well.

Organizations in most states are limited to spending about 8 to 10 percent of their contract or grant on administrative expenses. Last year’s National Survey of Nonprofit-Government Contracts and Grants found that 53 percent of nonprofit organizations reported limits on general overhead or administrative costs and 50 percent reported limits on program-specific overhead. Of those reporting a limit on administrative expenses, nearly one-quarter were not allowed to spend any contract or grant money on overhead or administration.

But limitations and restrictions on government dollars aren’t equal from state to state. Sixty-two percent of organizations in Hawaii reported limits on program overhead. Even in Massachusetts, the state with the fewest reported limits, nearly a third of organizations still faced restrictions.

Nonprofits in Idaho, Alabama, West Virginia, Tennessee, and South Dakota were particularly restricted. In these states, about a third of organizations that faced limits were not allowed to spend any of their contract or grant money on administrative or overhead costs.

The federal government is taking notice of the problems associated with limiting overhead expenses. In December 2013, the Office of Management and Budget issued new guidance to better support nonprofit organizations as they deliver services on behalf of government agencies. While the government must ensure accountability from nonprofits, limiting organizations’ ability to effectively run programs and make improvements presents challenges for nonprofits and the communities they serve.

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