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What Are the Determinants of Nonprofit Net Assets?. Thad Calabrese Doctoral Candidate, New York University Baruch College - CUNY, School of Public Affairs [email protected]. Presentation Outline. Explanation of Net Assets Policy Relevance Existing Literature/Theories - PowerPoint PPT Presentation
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1
What Are the Determinants of Nonprofit Net Assets?
Thad CalabreseDoctoral Candidate, New York UniversityBaruch College - CUNY,
School of Public [email protected]
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Presentation Outline
Explanation of Net Assets
Policy Relevance
Existing Literature/Theories
Net Assets and Uncertainty
Empirical Section - Data, Models, Variables
Results and Conclusions
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What Are Net Assets? Annual surpluses that an organization
accumulates:
Revenue - Expenses = Surplus/(Deficit)
Accumulates on balance sheet:
Assets - Liabilities = Net Assets
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More on Net Assets
In for-profit sector, net assets called “Owner’s Equity” - measure of wealth.
Restrictions by donors may make nonprofits unable to access these surpluses.
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Motivation
Almost no literature empirically addresses this question.
Nonprofit literature seemed in opposition to experiences with charities.
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Policy Relevance Understanding Nonprofit Net Assets
1. Current benefits for donors/nonprofits (tax expenditures); unclear future benefits;
2. Wealth concentration within sector; but is it entirely by organizational choice?
3. Effect on implementation of government policies.
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Current Literature: Theories of Nonprofit Organizations
Public Goods Theory
- Private suppliers of public goods
- Fill demand for additional public goods for those with preferences above the median voter.
Theory silent on financial operations of organizations.
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Current Literature, con’t Contracts Failure Theory
- nonprofits more likely to match quality/types of complex services sought.
- nondistribution constraint increases trustworthiness of nonprofits.
Theory assumes net assets spent on additional output.
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Behavioral Theories of Nonprofits
1) Maximizing Behavior
- usually output (compared to profit in
corporate finance)
- most assume breakeven operations are goal
(if mentioned at all)
- Tuckman and Chang (1992) are sole
exception
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Behavioral Theories of Nonprofits (con’t)
2) Supply Response
- Nonprofits respond to increases in demand for services
- Incomplete capital financial markets limit nonprofits (net assets as a source of funds)
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Behavioral Theories of Nonprofits (con’t)
3) Subsidizing Behavior
- Nonprofits provide services that cannot be supported on their own
- Breakeven operations assumed
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Behavioral Theories of Nonprofits (con’t)
4) Net Assets as Goal
- Especially as hedge against revenue uncertainty (slack resource)
- Potential agency problems
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Net Assets and the Current Literature
1) Ignores possibility of donor restrictions;
2) Assumes breakeven operations (no net
assets);
3) Ignores financial operations completely;
4) Exceptions to 2 and 3 are:- Chang and Tuckman (1990): descriptive- Tuckman and Chang (1992): cross-sectional- Fisman and Hubbard (2002, 2003): cross-sectional
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A Simple Theory of Net Assets & Uncertainty
Two-period model:
U (Q1 , Q2), where U1 > 0 and U2 >0
The first period budget constraint (no prior NA balance) is:
Y1 = v1Q1 + NA1 = v1Q1 + NA1
The second period budget constraint is:
Y2 + r1NA1 = v2Q2 + NA2
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A Simple Theory (con’t)
Under certainty, each variable in each budget constraint is known/knowable: no reason for precautionary savings
But this assumption is unrealistic, and each variable in the model is affected by uncertainty; net assets become desirable
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A Simple Theory (con’t)
Under certainty, each variable in each budget constraint is known/knowable: no reason for precautionary savings
But this assumption is unrealistic, and each variable in the model is affected by uncertainty; net assets become desirable
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A Simple Theory (con’t)
Net Assets are valued for:
1) Maximizing preferences in light of uncertainty;
2) Hedging against uncertainty of expansion of
services;
3) Hedging against uncertainty of subsidization
of clients;
4) Hedging against revenue uncertainty.
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Data
Comes from Guidestar-Digitized Database from
NCCS based on Form 990 data
Years: 1998 - 2003
Only data with restriction information
More representative of sector than SOI data
Final sample: 699,717 observations (50%)
covering 134,421 organizations (40%)
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Empirical Model
Net Assets = f (Q, E, C, R, O, t, S)
Vectors:Q = Output related O = Other controlsE = Expansion t = Year FEC = Subsidization of clients S = Subsector FER = Revenue
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Dependent Variables
Net Assets defined in three ways (all natural logs):
1) Total Net Assets (includes restrictions)2) Unrestricted Net Assets (without
restrictions)3) Unrestricted + Temporarily Restricted
Net Assets (earned through operations)
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Independent Variables: QLiterature suggests output affected by demographic and
population characteristics:
1) Change in average per capita income (BEA)
2) Change in proportion of youth population (Census)
3) Change in proportion of elderly population (Census)
4) Change in community homogeneity (Census)
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Independent Variables: E
1) Fixed assets (ln PPE)
2) Capital replacement (ln Depreciation)
3) Access to debt (Dummy 1 = LT Borrowing)
4) Organizational borrowing cost (ln Interest
Expense/Total Liabilities)
5) Interact Access to debt*Fixed assets
6) Interact Access to debt*Capital replacement
All derived from Form 990 data
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Independent Variables: C
Based on population need:
1) Change in state welfare recipients per capita (DHHS)
2) Change in state unemployment rates (BLS)
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Independent Variables: R
1) Government funding
2) Donations from individuals
3) Self-generated
4) Investment revenue
All derived from Form 990 data
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Independent Variables: O
1) Size (total revenues) - 990 data
2) Number of employees - 990 data
3) Attorney General oversight - OH AG
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A Few Descriptive Statistics
Average Total Net Assets: ~$430,000
Average Unrestricted: ~$310,000
Orgs with Access to Debt: ~26 percent
Average Size: Under $500,000 in revenue
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Regression Results, TNA – All Subsectors
Q Vector
pcichangelag -0.001**
lagdeltayouth -0.003***
lagdeltaelderly -0.002***
lagdelta_diversity 0.237***
Except for community heterogeneity variable, proxies for output have little effect (although significant).
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Regression Results, con’t
E Vector
accessdebt -0.156***
L.logint_rate -0.021***
L.logFixed_Assets 0.260***
L.logDepreciation -0.002
L.FAXDebt 0.002
L.DepXDebt -0.012***
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Regression Results, con’t
welfaredeltalag 0.040***
joblessdeltalag -0.012**
Small effects again, although significant.
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Regression Results, con’t
R Vector
L.logGF -0.033***
L.logDon_Fund 0.104***
L.logSelf_Fund -0.033***
L.logInvest_Fund 0.328***
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Regression Results, con’t
O Vector
L.logTR 0.381***
L.AGOversight -0.005***
L.logemp -0.022***
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Change in Variables When Excluding Restrictions
Variable (Vector) LogTNA LogUNA
Pcichangelag (Q) -0.001** -0.000
lagdelta_diversity (Q) 0.237*** -0.015
L.logDepreciation (E) -0.002 0.017***
L.FAXDebt (E) 0.002 0.010***
L.logDon_Fund (R) 0.104*** 0.053***
L.logSelf_Fund (R) -0.033*** -0.002
L.logInvest_Fund (R) 0.328*** 0.294***
L.AGOversight (O) -0.005*** -0.002
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Conclusions
1. Sector needs to communicate need for net assets;
2. Sector not over-retaining on average;
3. Increased state oversight likely to have minimal effect on net assets;
4. Progressive spenddown requirements may be warranted.
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Current Economic Climate
1. “Safe” government funds drying up;
2. Bank credit also drying up.
Results suggest that nonprofits might retain rather than spend in current climate (similar to households).