Perception of nonprofit efficiency

A study released recently from Ellison Research (Phoenix, Arizona) show that most Americans believe non-profit organizations are not financially efficient enough in their work. Sixty-two percent believe the typical non-profit spends more than what is reasonable on overhead expenses such as fundraising and administration. Regarding a particular nonprofit that one knows or relates to, however, the perception tends to be better.

This interesting pattern echoes what I have heard about local government perceptions -- when asked about local governments in general, many people consider them over-sized, inefficient, and poorly managed. Yet the same people tends to have somewhat better perceptions if the questions are about a particular local government that they deal with.

Are we just more distrustful of things that we less know? Or should we blame or appraise the media that are fond of bad news?

Program service fees for nonprofits

Program service fees constitute an important revenue source for many nonprofits. Nonprofit fees are associated with services -- may or may not related to their key missions -- and are billed to either the individual receiving the service (e.g, the parent with a child in daycare) or to a third party such as a government agency that supports such service (e.g., for public health). In recent years service fees from governments have become a major revenue source for nonprofits, which reflect the "complementary" relationship between nonprofits and government in that nonprofits collaborate as partners with government -- or even act as the extension of government -- to deliver public goods.

Sometimes fees are generated from activities beyond nonprofits' tax exempt mission. The profits may be considered unrelated business income (UBI) and thus subject to federal tax (UBIT). For example, a university may runs a pizza parlor that sells pizza to students and non-students alike. The pizza parlor is not tax-exempt because it is unrelated to the university's education purpose, even though the profits can be used to support the university's operation. However, a bake sale held by a social-service nonprofit can be tax exempt because the activity is not regularly carried on. On the other hand, activities that are directly related to a nonprofit's tax-exempt mission can rarely make break-even or general a profit. Therefore, nonprofits also rely on grant-making, donation, and other fundraising activities to seek additional revenue sources.

Nonprofit organizations vary in their service-fee reliance. Some (entrepreneurial nonprofits) are able to receive most of their funds from charging fees for services. Others (called donative nonprofits) have to rely more on private gifts or donations.

Nonprofit financial disclosure requirements

• Disclosure requirements by IRS

Nonprofit organizations are formed by filing initial registration statements to related state authorities. However, in order to exempt federal income tax they need to obtain tax exempt status from the IRS and are subject to the requirements of annual tax filings.

Most public charities nonprofits, except religious organizations or those with less $25,000 in annual revenues, much file an annual IRS Form 990. Filing organizations with gross receipts of $100,000 or less and total assets less than $250,000 can file a simplified form, 990 EZ. If a nonprofit earns over $1,000 from activities that are unrelated to their tax-exempt mission, it must file a form IRS 990T and may need to pay an unrelated business income tax (UBIT). Private foundations are required to file Form 990-PF.

Nonprofits are required to making their IRS filings available to the public on a same-day basis and for only a reasonable copying charge, unless they make their 990s widely available on the Internet. This requirement has largely been fulfilled by the creation of Guidestar, where you can get access to scanned copies of 990s from most nonprofits.

• Disclosure requirements by state authorities

At the state level there is considerable variation in the level of oversight on nonprofit finances. Many states require audited financial statements (following GAAP) along with IRS 990 Forms for annual filing. Other states require only Form 990, either Form 990 or audited financial statements, or no requirements at all. In 1997, the National Association of State Charities Officials and the National Association of Attorneys General developed a Unified Registration Statement (URS) to standardize, simplify, and economize compliance under the related state laws. Today, 32 states and the District of Columbia are allowed to file the unique state forms or the URS. In comparison, Minnesota has a more comprehensive nonprofit disclosure system than many other states. It has also created a searchable web-database that permit users to obtain state filing information on Minnesota nonprofits [?].

• Disclosure requirements by other parties

In addition, federal grant-making agencies or institutional donors may require that nonprofits provide supplemental disclosures. For example, since 1990, nonprofits receiving substantial direct or indirect federal assistance are subject to even more stringent auditing requirements than GAAP, governed by an Office of Management and Budget Circular A-133.

A lecture outline for nonprofit financial management

This is a tentative outline for my PA 5920 Skill Workshop: Financial Management of Nonprofit Organizations. You can click on the links to get additional references for related topics. Comments and questions are welcome!

1. What are nonprofit organizations?
• What is in a name?
• Basics of nonprofit management
• Formation, structure, and tax exempt status
• National taxonomy of exempt entities (details)
  
• Key fiscal issues for nonprofits
• Nonprofit accountability
• Nonprofit and government
• Nonprofit in fiscal stress
  
2. Nonprofit finance and budgeting
   
• Revenue sources
• Service fees: from individuals or organizations
  
• Grant-writing: from governments or foundations
  
• Fund-raising: sources and issues
  
• Functional expenses
  
• Program expenses
• Administrative expenses
• Fund-raising expenses
  
• Borrowing
• Types of nonprofit borrowing
• Nonprofit borrowing guide
• Nonprofit budgeting
• Budgeting process
• Budgeting techniques
3. Nonprofit financial reports
• Requirements of financial reporting
  
• IRS 990: where to get it? how to read it?
• Requirements at the state level
• Some special issues (Urban Institute)
  
• Financial accounting for nonprofits
  
• Financial conditions for nonprofits
  
• Financial condition analysis
  
• Assessing financial vulnerability of nonprofits
  
• Some caveats

*: Click here to download the PowerPoint file of the lecture in PDF.

What is in a name?

Nonprofit, not-for-profit, tax exempt, or charitable organizations... many times people use these phrases interchangeably for organizations that have "legal and ethical restrictions on the distribution of profits to owners or shareholders" (wiki), in contrast to commercial enterprises. However, these terms can mean different things to different people.

• Nonprofit or not-for-profit
  

According to Foundation Center, the simplest way to distinguish between the two terms is to think of the term "not-for-profit" as an activity, such as a reading a book. The term "nonprofit" refers to an organization that is not intended to make a profit, say for instance, an adult literacy group.

When the two terms were used interchangeably, people may still have different reasons to prefer one over the other. I like "not-for-profit" as it is more literally true in the sense that these organizations can actually have profits (therefore not "non"profit), just that they are not "for" the purpose of "profit." That said, I actually use "nonprofit" (or even NPO) more often simply because it is more abbreviate.

• Nonprofit or (federal) tax-exempt status
  

According to IRS, non-profit status is a state law concept. Although most federal tax-exempt organizations are non-profit organizations (in their states), organizing as a non-profit organization at the state level does not automatically grant the organization federal (income) tax-exempt status. To qualify as exempt from federal income taxes, an organization must meet requirements set forth in the Internal Revenue Code. See Types of Tax-Exempt Organizations or Publication 557 for more information.

• Nonprofit, charitable, and public charities
  

According to wiki, charitable organization (also known as a charity) is an organization with exclusive purposes of charity, that is, the giving of help to those in need. Charities are all non-profit organizations, however, not all non-profit organizations are charities. Nonetheless, the distinction may be drawn differently from common-sense understand of "charitable" activities or from the legal definition of charitable status. In common-sense, a nonprofit association can be formed for people of a same hobby, for instance, fishing. Its activities are certainly not-for-profit but clearly far from charitable.

In legal terms, however, IRS calls all organizations under 501(c)(3) as charitable organizations, which are then separated into two categories: "private foundation and "public charities." Private foundations are defined in the Internal Revenue Code under section 509(a) as 501(c)(3) organizations which do not qualify as public charities, because private foundations are subject to more limitations in revenue sources as well as expenditure types. For instance, private foundations receives most of its income from investments and endowments (rather than grants or service fees). This income is used to make grants to other organizations, rather than being disbursed directly for charitable activities.

Private cash for urban infrastructure

The New York Times (1/6, Uchitelle) reported New Haven, Conn., home of Yale University, as a vivid example of an urban problem nationwide -- the contrast between growing private construction spending, "supported handsomely by a growing number of very wealthy families," and declined government outlays on public infrastructure investment.

While some may be glad that private cash supplements public needs for urban renovation, the reach of philanthropic spending is limited. Most of private donation goes to endowments and foundations, which, when translates into development, adds to the nation’s stock of hospitals, libraries, museums, parks, university buildings, theaters and concert halls. Public infrastructure — highways, bridges, rail systems, water works, public schools, port facilities, sewers, airports, energy grids, tunnels, dams and levees — depends mostly on tax dollars, which has shrunk nationwide as a share of the national economy.

Local government CAFRs and nonprofit financial reports

In my PA5003 course I ask students to collect the comprehensive annual financial reports (CAFRs) of a local government for three consecutive years. It is a key expectation of this course for them to understand these financial reports: to know what kinds of financial information are included, how they are organized, how are the numbers related to each other, and how these numbers as a whole representing a complete picture of the organization’s financial condition.

There are a substantial number of students interested in nonprofit management. They may want to use financial reports of a nonprofit rather than a government, which is conditionally allowed but not encouraged. It is allowed, because curiosity and interests are the best teachers and I am glad to facilitate your inquiry. It is not encouraged, however, for two reasons:

1. Public and nonprofit organizations are closely related: they share the same missions for the delivery of common goods, they have the same calling of accountability, and they have tight budget connections in service delivery. It is critical for you to understand how governments function even if your future career goal is in the nonprofit sector;

2. The financial reporting system is complicated for governments, but even more complicated for nonprofits -- not because of technical difficulty, it is due to the lack of standard and uniformity. The nonprofit sector is outnumber and more diverse than local governments. States vary in their financial reporting requirements for nonprofits. Even for a same requirement like IRS 990, the quality of compliance is low. For all these reasons, it may be more difficult for you to learn or simply to finish assignments if you are using financial reports of NPOs.

Having said that, if you are still fixed for NPOs, here comes some criteria for screening:

1. The annual budget (total expenditure) of the NPO should be larger than 50k;
2. The NPO is registered in Minnesota which has higher requirements of nonprofit financial reporting than many other states;
3. The financial reports should be “audited financial statements” and include the following information:
a. types of assets, types of liabilities, and net assets;
b. types of revenue from different sources, and expenditures by functions areas