Building Public Services Through the Nonprofit Sector: Exploring the Risks of Rapid, Government Funded Growth in Human Service Organizations

Abstract

As the public sector increasingly relies on grants to nonprofits to provide human services, both public and nonprofit partners are exploring the implications of this relationship in order to ensure the best possible outcomes. A key issue that has emerged in the public sector literature is the concept of “thin markets” where public sector entities become reliant on a limited pool of private providers. At the same time, the nonprofit literature explores how to make nonprofits financially viable and develop relationship with government without straying from their mission. We combine these two perspectives to understand how a large influx of government grant funding to human service nonprofits impacts organizations’ future financial sustainability, recognizing that the stability of the relationship between government and nonprofits is crucial to providing quality services. Using a 13 year panel dataset of IRS 990 data from over 50,000 human service nonprofits we find that nonprofits who experience rapid growth from government grants do not build financial reserves to serve as a cushion during economic downturns creating a situation where declines in funding forces immediate expense reductions. We recommend approaches to the grant process for both government and nonprofit organizations to encourage long-term sustainability ensuring continuity of services, especially during unforeseen economic downturns.