With the rise of contracting out, the contracting relationship between government agencies and nonprofit organizations has become a vital aspect of both public service delivery and nonprofit funding.  The public sector has seen a shift towards privatization since the 1980s and a corresponding blurring of the boundaries between the public and nonprofit sectors with the rise of “third party government” (Salamon 1981) or the “hollowing” of the state (Milward and Provan 2000).  Privatization is often undertaken in hopes of reducing costs through competition among providers and by producing government services while reducing the size the government (Savas 1987), but the competition is not always present (Johnston and Romzek 1999) and there are many consequences of contracting out government services for both government agencies and nonprofit organizations (Kettl 2002; Milward and Provan 2000; Salamon 1981).  Yet, government contract spending has risen 141 percent in a decade from fiscal year 2001 to 2011 (Center for Effective Government 2013) and government collaborates with nonprofit organizations through a number of means and across levels of government—federal, state, and local.

In addition to government agencies increasingly relying upon nonprofit organizations to deliver public services, nonprofit organizations have become more dependent on government funds (Smith and Lipsky 1993); sometimes even adapting their missions to meet the service needs of government contracts (Saidel 1991; Van Slyke 2007).  Resource dependency issues have only been exacerbated by the recent recession and recovery as governments faced severe budget constraints and nonprofits providers were left to provide the same level of services, often with fewer resources.  The contracting relationship between government agencies and nonprofit providers is vital in ensuring effective privatization without placing undue burden on the government agency or the nonprofit provider.

In 2011, about a third of revenue for 501(c)(3) nonprofit organizations came from formal government contracts and grants (Pettijohn 2013).  With the growing use of nonprofit providers and the dependence of the nonprofit sector on government funds, how do government-nonprofit funding relations compare across levels of government?  Are nonprofit organizations more resource dependent when partnering with certain levels of government and how does it influence nonprofit organizations’ response to budget shortfalls?

This paper will use data from the Urban Institute’s 2013 National Survey of Nonprofit Government Contracting and Grants, which is a national survey of 2,764 501(c)(3) nonprofit organizations that had government contracts and grants.  Drawing upon this unique dataset, this paper examines how government-nonprofit contracting relationship varies by level of government.   This paper explores the influence of having a federal, state or local government funder as a nonprofit organization’s dominant funding source on resource dependency and the ability of a nonprofit to handle fiscal stress, the level of burden placed on the nonprofit for reporting requirements, and the key issues nonprofit organizations face in the funding relationship.  This paper has implications for public and nonprofit managers alike in developing and maintaining effective contract relationships between government agencies and nonprofit organizations.