Association for Public Policy Analysis & Management

Governments have traditionally supported the growth and expansion of nonprofit organizations (NPOs) because these organizations are thought to use funding wisely and efficiently with a superior understanding of both local needs and mission-oriented perspectives. The conceptual framework of government and nonprofit partnerships is generally oriented around two different perspectives of government: whether the government focuses on the quality of its democracy, or its own efficacy. Focusing on its own efficacy, government entities prefer to delegate or contract out the provision and delivery of public services to the nonprofit sector. It improves the efficiency of government by minimizing transaction costs, instead of expanding the size of government internally due to the direct provision or delivery of services. Furthermore, focusing on the quality of their democracy, governments indirectly support the demands of underrepresented populations by passing financial support on to NPOs.

The objective of this paper is to discuss why and which nonprofit organizations receive funding through state government grants at the state level. To determine the state determinants of government grants awarded to the nonprofit sector, the paper analyzes state grants in terms of five factors identified in previous research: organizational finances, political characteristics, state economy, demographic characteristics, and state government finances. Employing the fixed-effects regression model with Driscoll and Kraay standard errors, this paper is based on multiple observations of 50 states over a period of 11 years, from 2000 to 2011. This methodology makes it possible to control cross-state correlation issues that are generally ignored by the fixed and random effects model.

The empirical results show that, in sum, state governments tend to allocate their grants toward the nonprofit sector when finances and economic conditions are stable enough but there is also a high demand for improving quality of life. Specifically, keeping in mind the perspective of state financial situations, NPOs receive more state government grants when they are located in states with higher property tax revenues and lower debt payments. Considering the perspective of state economic conditions, NPOs receive more state grants when economic conditions are generally better, in terms of lower poverty levels, but also when more people are unemployed. Addressing the perspective of state politics, NPOs receive more state grants when governors are not members of the major party and when citizens are less likely to participate in voting. From the perspective of state demographics and culture, NPOs receive more state government grants when states have larger and younger populations (under age 18), more new immigrants, when communities are less volunteer-oriented, comprised of less educated members, and when they are less populated. Taking into account the characteristics of NPOs, NPOs with higher fundraising revenues generally received fewer state-level grants.

These results help shed light on the study of nonprofit financial management by facilitating an analysis of the state factors that shape the allocation of state government grants awarded to NPOs. They also contribute to an empirical analysis of government and nonprofit partnerships at the state level by applying a fixed effect analysis across states.