Contracts between nonprofit organizations and federal, state, or local governments are an important part of public service provision in the United States. During economic recessions, all types of nonprofit revenue, including government funding, can become volatile. This research exploits the American Recovery and Reinvestment Act (ARRA) as a quasi-experiment and examines the impact of this countercyclical government funding increase on nonprofit revenue volatility and other measures of financial health. The paper concludes by calculating and discussing the merits of maintaining steady government funding during economic downturns versus increasing funding to counteract losses from other sources.

This work complements ongoing work on ARRA’s effects. Chodorow-Reich et al. (2012) used an instrumental variable to identify the effect of ARRA’s Medicaid spending on employment. Cogan and Taylor (2010) found that ARRA reduced state borrowing and increased transfer payments to contract organizations such as nonprofits. The research also contributes to existing literature on the causes of nonprofit revenue volatility (Carroll and Stater, 2009) and the effects of government funding on other funding streams, known as crowding-out (for instance, Andreoni and Payne, 2011).

This work addresses several related questions about ARRA, revenue volatility, and other nonprofit financial outcomes. 1) Was government funding successful in closing absolute or per-client revenue shortfalls, and thus smoothing revenue volatility, during the recession? One of the purposes of ARRA was to provide countercyclical funding to bridge state and local budget gaps and thus avoid cuts to essential services, so any analysis of ARRA’s effects on nonprofits must begin with this fundamental question. 2) What would nonprofit revenue have been without ARRA? Government funds likely had an indirect effect on donations (encouraging or discouraging private giving). This effect must be quantified to understand the net revenue gains and counterfactuals. 3) Did ARRA have longer-term effects on nonprofit finances? It is possible that nonprofits are able to temporarily deal with revenue shortfalls with a variety of stopgap measures such as borrowing, depleting assets, or laying off administrative or fundraising staff, so ARRA’s impacts may be longer-term.

Causal identification of these questions is challenging because ARRA funding is correlated both with state-level measures of economic hardship (which can be observed and controlled for) and nonprofit quality (which cannot). To uncover a causal relationship, I regress individual nonprofit measures of revenue volatility (and the other dependent variables, in turn) on ARRA funding at the state-subsector level and include state-level controls for economic conditions. In choosing my instrumental variable, I follow Chodorow-Reich et al. (2012) and instrument for the level of ARRA funding directed to a state’s nonprofits by the aggregate grants received pre-recession.

A national, longitudinal data set is necessary to answer these questions. The National Center on Charitable Statistics has compiled a database of nonprofits’ annual Form 990 tax returns. I have combined this with ARRA 1512 reports, filed quarterly by ARRA awardees, and made available by the U.S. Recovery Accountability and Transparency Board. Additional data sources provide MSA-level populations of clients for various types of social service nonprofits as well as controls.