Should we permit nonprofits to be the provider of last resort?

Published in the January 18, 2008 edition of Columbus Business First

Local governments are in the midst of budget hearings about the services which local taxes will fund.  Nonprofit groups providing a wide range of services are seeing the support they have traditionally received from local governments come under challenge. 

This is the latest chapter in a process that began two decades ago when the federal government began outsourcing public services to private organizations and shifting funding obligations onto state governments.  Known popularly as unfunded mandates, these obligations moved down to local governments over the past decade and now they are moving further down to the nonprofit sector. 

It is time to review what has happened and to ponder its consequences. 

This logical endpoint of outsourcing and unfunded mandates would have the nonprofit sector be a major provider of public services and potentially a major funder as well.  Ironically, the nonprofit sector is confronted with being cast as the provider of last resort for a wide range of services that economics tells us should be provided by the government. 

The core of the problem lies in the economic concepts of public goods and free riders.  Public goods are those goods and services whose benefit extends beyond the person paying for them.  Free riders are people who receive these indirect benefits but do not help to pay for them. 

A park benefits the visitor and indirectly the neighborhood.  Education indirectly benefits the employer, who gets skilled employees, and the public, which gets additional taxpayers and consumers who will contribute to the economy.  A vibrant downtown indirectly benefits the suburbanite who may rarely come downtown.  Homeless shelters and food pantries indirectly benefit the public by preserving neighborhoods and alleviating social unrest.  Free clinics and emergency rooms indirectly benefit the public by reducing the risk of spread of disease. 

The gradual shifting of obligations from the federal government down to the states, and ultimately down to the local governments, favors the free riders -- those states, municipalities, and individuals who don’t want to pay for the indirect benefits of these services.  Many of these services are now provided by nonprofit organizations.  Art, music, counseling, tutoring, sports, and after-school activities have shifted out of the public schools and into nonprofits.  Emergency housing, food, healthcare, and homecare are also increasingly provided by nonprofits. 

The next step is the expectation that the nonprofits will pick up the funding burden as well. 

While outsourcing to the nonprofit sector is a legitimate option for providing public services, shifting funding of more public services to the nonprofit sector is a worrisome trend for two reasons. 

The economic concern is that  the amount of these public goods and services will be insufficient and society will be less well off if free riders are allowed to benefit without paying.  The proper level of services is best provided through mandatory taxes on all who directly or indirectly benefit.  The more people who benefit, the higher the level of government that should be providing and taxing for the public good or service.  In contrast, the events of past decades have shifted the burden from all citizens to volunteer citizens, from taxpayers to the smaller set of nonprofit donors.

The business concern is that donors are nowadays less willing to provide operational funding and nonprofits are already so poorly capitalized that they have limited or no ability to sustain services.  Thus, as we see the clouds of economic recession on the horizon, those public services we most need in recession may have a poorer chance of being available. 

Nonprofits are committed to their missions and they will work hard to provide public services in the face of reduced governmental support.  But given the benefits we all directly and indirectly receive from the services they provide, is it in the public’s interest to rely more heavily on nonprofits’ success in getting donors to write the checks that we don’t want to ask taxpayers to write?

Allen J. Proctor was formerly chief financial officer of Harvard University and is the author of Linking Mission to Money(R) Finance for Nonprofit Board Members. Subscribe to his free newsletter at www.proctorconsulting.org.

Copyright 2008. Reprinted with permission, Business First of Columbus Inc.