Association for Public Policy Analysis & Management

Marwell and Calabrese (2015) find empirical support that government does not provide the necessary funds for nonprofits to secure a particular social right, in this case child welfare. Their case study finds that the public goods and services guaranteed by the government but provided by private actors (nonprofits) are effectively subsidized by these organizations.   This produces a “deficit model” of collaborative governance in which nonprofits use up investments and reserves, issue more financial debt, and reduce other spending in order to provide these inadequately funded mandates. This predicament not only erodes the health and capacity of the nonprofit organizations, but also puts the delivery of this and other services at risk through the encouragement of inadequate and inefficient funding.  Here, we extend the analysis of the original Marwell and Calabrese (2015) paper by considering another mechanism in the deficit model of collaborative governance – employee and retiree pension benefits.

Pensions are a prime target for organizations to reduce costs without also reducing current services. Deferring pension contributions effectively reduces the input costs of service provision, and investment returns may possibly compensate for these funding shortfalls. The practice of governments raiding local pension funds became so pervasive that many states specifically forbade the practice (Schneider & Damanpour, 2002).  Further, while periodic deferrals may not significantly affect the funded status of pension systems, consistent and habitual deferrals do. Also, unlike the investments, reserves, debt, and support services that have traditionally been observable on organizations’ financial statements, the financial position of pension plans were until recently only disclosed in the notes. Accounting literature finds that financial statement users place more value on information disclosed directly on the financial statements than only in the notes. This change in nonprofit pension reporting is only one of several regulatory changes that have recently signaled their importance to financial management within the sector.

Here we argue that the deficit model of collaborative governance is not only subsidized by the private nonprofit organizations that secure the social rights of children in New York State, but also by private individuals – current workers and current beneficiaries. By underfunding pension benefits, making benefits less generous, or making other pension changes that reduce its value to individuals, these beneficiaries effectively fill part of the gap created by the inadequate reimbursement policies of government contracting. Using a unique and proprietary dataset, the objective of this paper is to determine the extent that a guaranteed social right is being subsidized by workers’ pension benefits; in effect, whether public services are being subsidized not only by draining the financial resources of nonprofit organizations, but also of the nonprofits’ employees and their families.

References:

Marwell, N. P., & Calabrese, T. (2015). A deficit model of collaborative governance: Government–nonprofit fiscal relations in the provision of child welfare services. Journal of Public Administration Research and Theory, 25(4), 1031-1058.

Schneider, M., & Damanpour, F. (2002). Public Choice Economics and Public Pension Plan Funding An Empirical Test. Administration & Society, 34(1), 57-86.