581035

research-article2015
AASXXX10.1177/0095399715581035 Administration & SocietyMitchell

Article
Administration & Society
2017, Vol. 49(9) 1272­–1296
Fiscal Leanness and © The Author(s) 2015
DOI: 10.1177/0095399715581035
Fiscal Responsiveness: journals.sagepub.com/home/aas

Exploring the Normative

Limits of Strategic
Nonprofit Financial
Management

George E. Mitchell1

Abstract
The principles of normative nonprofit financial management instruct
organizations to minimize overhead and to remain fiscally lean. Although prior
scholarship has addressed many of the unintended negative consequences of
normative managerial practices, research has not yet explored the impact of
the norm of fiscal leanness on the ability of nonprofits to respond efficiently
to their economic environments. This research seeks to address this gap
and finds that fiscal leanness appears to inhibit fiscal responsiveness. Results
are derived from a panel of 501c3 public charities filing Forms 990 with the
Internal Revenue Service (IRS) for fiscal years 2004 to 2011.

Keywords
nonprofit financial management, strategic management, elasticity, charitable
contributions, asset accumulation

1ColinPowell School for Civic and Global Leadership, The City College of New York, New
York City, USA

Corresponding Author:
George E. Mitchell, Department of Political Science, The City College of New York, 4/135A
North Academic Center, 160 Convent Avenue, New York, NY 10031, USA.
Email: gmitchell@ccny.cuny.edu
Mitchell 1273

Within the United States, the number of reporting public charities grew 47%
between 1999 and 2009 to 362,926, while revenues grew 75% to US$1.4 tril-
lion (Roeger, Blackwood, & Pettijohn, 2011).1 The field of public administra-
tion recognizes a strong and growing role for nonprofit organizations in
service delivery and collaborative governance (Agranoff, 2005; Feldman,
2010; Meier, 2010; O’Leary & Slyke, 2010; O’Leary & Vij, 2012; Smith,
2010), and the last several decades have witnessed an increasing outsourcing
of public services to nonprofit organizations intended to improve service
quality and efficiency (Van Slyke, 2003).2 The increasing significance of the
nonprofit sector has enhanced scrutiny of nonprofit financial management
practices as a growing literature examines functional expense accounting (M.
A. Hager, Pollak, & Rooney, 2004; Wing & Hager, 2004a), the use of func-
tional expense ratios for nonprofit performance assessment (Bhattacharya &
Tinkelman, 2009; Cnaan, Jones, Dickin, & Salomon, 2011; Gordon, Knock,
& Neely, 2009; M. A. Hager & Flack, 2004; Lowell, Trelstad, & Meehan,
2005; Sloan, 2009; Steinberg & Morris, 2010; Szper, 2013; Szper & Prakash,
2011), and the quality of nonprofit financial disclosures (Abramson, 1995;
Froelich, 1997; Mitchell, 2014; Orend, O’Neill, & Mitchell, 1997; Trussel,
2003; Wing, Gordon, Hager, Pollak, & Rooney, 2006; Wing & Hager, 2004b).
As attention to nonprofit financial disclosures has increased, nonprofits
have come under increasing pressure to demonstrate their fiscal probity in
accordance with widely held norms of appropriate nonprofit financial behav-
ior. “Good” nonprofits minimize overhead and remain fiscally lean, consis-
tent with general social expectations and specific industry benchmarks.
Individual donors consult ratings and rankings of nonprofits based on norma-
tive financial standards, while many institutional funders require nonprofits
to meet specific standards as conditions for grant and contract eligibility. In
consequence, nonprofits have adapted their fiscal behavior to conform to
these social norms.
Although presumably intended to enhance organizational efficiency, nor-
mative financial management may exert a constraining effect on fiscal behav-
ior that reduces efficiency. As normative fiscal standards are static, but
nonprofits’ economic environments are dynamic, rigid adherence to norms of
appropriate financial behavior may impede an organization’s ability to
respond rationally and efficiently to its external environment.
Most nonprofits seek to continually expand to meet the growing needs of
society and to increase program coverage to serve more beneficiaries.
Organizational growth can be achieved by accumulating net assets over time,
and efficient organizational growth can be achieved by accumulating net
assets more rapidly when the cost of contributions is less expensive and more
slowly when the cost of contributions is more expensive. As the price of
1274 Administration & Society 49(9)

contributions fluctuates with macroeconomic contractions and expansions,

organizations with efficient growth strategies adjust the rate of asset accumu-
lation in response to their economic environments. Environmental respon-
siveness allows organizations to distribute the costs of growth over time in
favor of less costly periods. Thus, over time, these organizations can grow
faster and at lower cost relative to organizations that attempt to grow at a
constant rate.
Organizations enacting the norm of fiscal leanness, however, may lack the
flexibility to respond efficiently to changes in their economic environments.
These organizations may prefer to forgo more rapid and efficient growth to
instead maintain the appearance of fiscal probity in accordance with norma-
tive expectations that nonprofits minimize overhead and remain fiscally lean
“come what may.” During periods of economic expansion when the price of
charitable contributions is relatively low and fundraising and asset accumula-
tion are most efficient, sudden investments in fundraising that translate into
higher levels of net assets—rather than higher current program spending—
directly contradict the principles of normative financial management.
Organizations pursuing such efficient growth strategies are likely to be sanc-
tioned by donors, the media, and the general public all exhibiting concern
over increasing overhead rates and fiscal bloat.
Does the norm of fiscal leanness reduce the ability of nonprofits to effi-
ciently respond to their economic environments in the pursuit of organiza-
tional growth? This article addresses this important question and is organized
as follows. The following section introduces the “Theoretical and Empirical
Context” and defines key concepts. The section after that describes the “Data
and Method.” This is followed by the “Results and Discussion.” The penulti-
mate section considers “Exploring the Consequences of Normative Financial
Management” in light of this and prior research, and the final section,
“Conclusion and Implications,” offers a brief conclusion and a discussion of
implications.

Theoretical and Empirical Context

Nonprofit management is at once normative and strategic, and the two
approaches are not necessarily contradictory. Mitchell and Schmitz (2014),
for example, observed that nonprofits can be understood as constrained opti-
mizers that maximize program impact subject to exogenous constraints. In
this formulation, termed principled instrumentalism, nonprofits strategically
pursue program impact, but the manner in which they do so is conditioned by
social norms and economic conditions over which they have little or no con-
trol. Thus although management practices may necessarily involve logics of
Mitchell 1275

appropriateness and consequences (March & Olsen, 1998), sectoral norms

can condition and constrain the ability of organizations to strategically maxi-
mize long-term program impact.
As public scrutiny of nonprofits has intensified, certain norms have
become institutionalized within the nonprofit sector instructing managers to
abide by specific managerial practices widely believed to be appropriate to
nonprofit organizations. These include, but are not limited to (a) overhead
minimization, or more specifically the minimization of the fundraising and
administrative expense ratios and the maximization of the program expense
ratio (Mitchell, 2013), and (b) fiscal leanness, or more specifically, the mini-
mization of the ratio of net assets to total expenses.
These norms of appropriate financial management are institutionalized
within the sector. For example, Charity Navigator (2013), an information
intermediary that awards nonprofits ratings ranging from zero to four stars,
requires organizations to limit their administrative expense ratios to between
3% and 15.5% or less and the fundraising expense ratio to between 10% and
20% or less to earn their highest ratings. Similarly, CharityWatch (2013), an
information intermediary that awards letter grades to nonprofits ranging from
A to F, penalizes organizations with 3 or more years of available assets.3
Many foundations, government agencies, and other institutional funders
adopt similar criteria for determining grant and contract eligibility. Indeed, as
“nonprofits are under pressure to spend rather than save . . . to ensure their
program expense ratios are at a sufficiently high level to avoid negative pub-
licity,” it is perhaps no surprise that mean operating reserves are negative
among U.S. nonprofits (T. Calabrese, 2013).
Although research on the impact of information intermediation on donor
behavior is mixed (Chen, 2009; Cnaan et al., 2011; Gordon et al., 2009;
Sloan, 2009; Szper, 2013; Szper & Prakash, 2011), nonprofits have clearly
responded to pressures from information intermediaries, media organiza-
tions, and other stakeholders by adapting to social expectations (Szper, 2013;
Trussel, 2003). About 75% of 501(c)3 nonprofits maintain fundraising
expense ratios below 10% of total functional expenses and 80% have net
assets equivalent to 3 years or less of total expenses.4
Normative expectations from different stakeholders can be diverse and
inconsistent, but the most widely accepted tenets of normative nonprofit
financial management emphasize overhead minimization and fiscal leanness.
Critics of these practices have shown how they can inhibit organizational
effectiveness and efficiency through a variety of mechanisms (Brooks, 2005;
T. Calabrese, 2013; M. A. Hager & Flack, 2004; Tinkelman & Donabedian,
2007; Wing & Hager, 2004a; Young & Steinberg, 1995), but one mechanism
that has not yet been adequately explored is the effect of fiscal leanness on a
1276 Administration & Society 49(9)

Table 1.  Price of Contributions and GDP.

Annual % change Elasticity of the price

Mean price of in the mean price Annual % change of contributions to
contributionsa of contributions in GDPb GDP
2006 US$0.22 −6.50 2.70 −2.41
2007 US$0.22 1.72 1.80 0.96
2008 US$0.26 16.36 −0.30 −54.53
2009 US$0.37 42.50 −2.80 −15.18
2010 US$0.31 −17.00 2.50 −6.80
aObservations are trimmed such that US$0.00 < price of contributions < US$7.59.
bData are obtained from the Bureau of Economic Statistics.

nonprofit’s ability to respond strategically and efficiently to changes in its

economic environment.
One of the most important features of a nonprofit’s economic environment
is the price it must pay to obtain charitable contributions. Empirically, this price
is an exogenous parameter implied by the average fundraising expense required
to obtain a dollar of contributions. This price reflects the various mixes of fund-
ing sources upon which organizations rely and is computed as follows:

Fundraising expenses
Price of contributions = .
Contributions, gifts, and grants

This price is extremely sensitive to macroeconomic conditions. During the

Great Recession, U.S. GDP decreased by 0.3% in 2008 and 2.8% in 2009.5
Correspondingly, the mean price of charitable contributions increased 16.36%
in 2008 and 42.5% in 2009.6
This relationship can also be expressed in terms of elasticities, which pro-
vide measures of the responsiveness of one variable to another. Specifically,
an elasticity measures the percentage change in one variable, such as the price
of charitable contributions, relative to the percentage change in another vari-
able, such as GDP. A value equal to zero indicates no response or perfect
inelasticity, a value between zero and negative one indicates a disproportion-
ately small or relatively inelastic response, a value equal to negative one indi-
cates a proportionate response or unit elasticity, and a value less than negative
one indicates a disproportionately large response or relative elasticity.7 Table 1
reports the elasticities of the price of contributions to GDP for 2006 to 2010. The
response is generally very elastic. In 2008, for example, a 1% decline in GDP
was associated with a disproportionately large increase in the mean price of
contributions of 42.50%. Overall, changes in the price of contributions track
Mitchell 1277

very closely with changes in GDP, exhibiting a nearly perfect negative

correlation.8
The price of contributions fluctuates as economic conditions change, and
efficient asset accumulation favors periods when the price of contributions is
relatively low and disfavors periods when the price is relatively high. The
concept of elasticity can also be used to assess how asset accumulation
responds to changes in the price of contributions. An elasticity that is signifi-
cantly less than negative one would indicate an elastic response, an elasticity
insignificantly different from negative one would indicate a proportional
response or unit elasticity, and a response between negative one and zero
would indicate an inelastic response. Moreover, the impact of fiscal leanness
on fiscal response can be evaluated by comparing the elasticity of fiscally lean
organizations with that of less fiscally lean organizations. If fiscal leanness
impairs an organization’s ability to respond to its economic environment, then
fiscally lean organizations would exhibit a significantly smaller elasticity (in
absolute value) in comparison with less fiscally lean organizations.
Prior nonprofit scholarship has examined elasticities in a variety of con-
texts, including the elasticity of charitable contributions (Khanna, Posnett, &
Sandler, 1995; Marudas & Jacobs, 2007; Okten & Weisbrod, 2000; Tinkelman,
2004; Weisbrod & Dominguez, 1986) and net charitable contributions (Jacobs
& Marudas, 2006) to fundraising expenditures. Empirically, the elasticity of
contributions to fundraising expenditures typically ranges between zero and
positive one (although some values are observed outside of this range), indi-
cating that increases in fundraising expenditures are usually associated with
slightly smaller increases in charitable contributions (Tinkelman, 2004).
Additional scholarship has examined the price, income, and wealth elasticities
of giving (Brooks, 2004). Steinberg (1990) found the average price elasticity of
giving to be about −1.2 and the average income elasticity of giving to be about
0.65. Brooks (2002) found the wealth elasticity of giving to be about 0.30.9
However, although much is known about the impact of fundraising on
charitable contributions, as well as the impact of price, income, and wealth on
donor giving, comparatively little is known about the effect of the price of
charitable contributions on nonprofit growth or asset accumulation, or
whether fiscal leanness plays a significant role in modulating fiscal respon-
siveness. This gap leaves an important aspect of nonprofit financial manage-
ment unexplored. The remainder of this article examines these relationships
to better understand the consequences of the norm of fiscal leanness.

Data and Method

Data are obtained from the National Center for Charitable Statistics (NCCS).
The NCCS data files contain information for 501c3 public charities filing
1278 Administration & Society 49(9)

Internal Revenue Service (IRS) Forms 990 from 2006 to 2010 with records
spanning fiscal years 2004 to 2011. IRS Form 990 data are known to over-
represent larger organizations and to contain inaccuracies and inconstancies
that warrant caution (Wing & Hager, 2004b). For example, in prior research,
scholars have observed widespread underreporting of fundraising expenses,
particularly among smaller organizations (Froelich & Knoepfle, 1996; M.
Hager, Rooney, & Pollak, 2002; Thornton, 2006; Tinkelman, 2004; Tuckman
& Chang, 1998; Wing et al., 2006; Wing & Hager, 2004b). Scholars have
noted that board members and volunteers may provide fundraising services
for free, and that nonprofits may fail to account for the cost of the time that
executive directors and staff devote to fundraising activities (M. Hager et al.,
2002; Lindahl & Conley, 2002). Nonprofits also face strong incentives to
minimize reported fundraising expenses to appear more “efficient” to infor-
mation intermediaries that rate and rank nonprofits on the basis of financial
ratios derived from Form 990 data (M. A. Hager & Flack, 2004; Lowell et al.,
2005). Recent scholarship attributes an overall decrease in the values of non-
profits’ fundraising expense ratios to the emergence of these intermediaries
and the phenomenon of nonprofit “reactivity” or “playing to the test” (Szper,
2013). Indeed, scholars have long noted the potential for systemic accounting
manipulation in Form 990 disclosures (Easterling, 2000; Trussel, 2003; Wing
et al., 2006) and have confirmed the widespread understatement of fundrais-
ing expenses empirically (Krishnan, Yetman, & Yetman, 2006).
In addition, the IRS began to phase in new Form 990 filing requirements
over a 3-year period beginning in fiscal year 2007 and taking effect for most
organizations by fiscal year 2009. The new rules require fewer nonprofits to
report fundraising expenses and thus contribute to an overall decline in data
availability.10 Moreover, due to data extraction errors, the raw data the IRS
provided to the NCCS do not contain information about fundraising expenses
after 2008. Only a few hundred data are available for subsequent years as a
result of NCCS data validation routines. Table 2 compares the number of
nonmissing observations of fundraising expenses to the number of observa-
tions for which fundraising expenses are positive, by fiscal year.
Previous research based on IRS Form 990 data has observed the pervasive
phenomenon of zero cost fundraising (Tinkelman, 2004). A simple compari-
son of means confirms that larger organizations are more likely to report
positive fundraising expenses relative to smaller organizations. Total reve-
nues average US$9,849,078 for organizations with positive fundraising
expenses but only US$3,824,162 for organizations with zero fundraising
expenses.
To mitigate errors introduced by data quality problems, records without
employer identification numbers (EINs), records with duplicate EINs, and
Mitchell 1279

Table 2.  Examination of Fundraising Expenses.

Nonmissing Observations
observations for which
of fundraising fundraising expenses are
expenses positive

  n n %
2004 10,749 1,460 13.58
2005 51,183 13,160 25.71
2006 254,167 77,104 30.34
2007 287,151 86,127 29.99
2008 288,569 45,263 15.69
2009 291,873 399 0.14
2010 284,216 407 0.14
2011 43,787 23 0.05

Note. Observations with negative values are omitted.

records for which the price of contributions falls outside of a plausible range
have been removed from analysis, consistent with prior research making use
of IRS Form 990 data (Tinkelman, 2004). The price of contributions is
trimmed with a lower bound of zero and an upper bound at the 99th percentile
such that 0 < price of contributions < 7.59, which removes zero cost fund-
raisers from the sample. This is consistent with previous research in which
nonpositive values are trimmed and maximum values are set to arbitrary con-
stants to eliminate the effects of implausible and extreme values (Thornton,
2006; Tinkelman, 2004).11
Table 3 shows the impact of data cleaning on the sample size. Table 4
presents the resulting summary statistics for relevant variables for the full
panel. All financial values are measured in constant 2010 dollars.
Fixed effects regression models simultaneously control for all time-invari-
ant differences between organizations, eliminating the possibility of bias due
to omitted time-invariant variables (Kohler & Kreuter, 2012), including the
use of inconsistent accounting methods across organizations and differences
in sector and general size, among numerous other factors (T. Calabrese, 2013;
M. A. Hager & Flack, 2004; M. Hager & Greenlee, 2004; Wing & Hager,
2004b). Fixed effects models, therefore, generally require far fewer control
variables as it is not necessary or appropriate to include covariates for time-
invariant characteristics. However, fixed effects models do not control for
time-variant differences between organizations, such as may be due to
changes in IRS reporting requirements that differentially affect organizations
1280 Administration & Society 49(9)

Table 3.  Data Cleaning.

n
Total number of records 1,766,258
Less removal of records without EINsa 1,766,254
Less removal of records with duplicate EINs 1,511,699
Less removal of records for which US$0.00 > price of 215,261
contributions > US$7.59
aEIN refers to the employer identification number, a unique identifier.

Table 4.  Summary Statistics.

M SD Median n
Fundraising expenses US$218,464 US$1,941,642 US$21,735 215,261
Contributions, gifts, US$3,069,344 US$30,618,654 US$298,765 215,261
and grants
Price of contributions US$0.20 US$0.52 US$0.08 215,261
Total revenues US$10,121,251 US$106,455,881 US$574,088 215,261
Total expenses US$9,076,986 US$94,559,397 US$512,352 215,261
Net assets at the US$14,960,963 US$275,043,413 US$402,361 215,261
beginning of the year
Net assets at the end US$15,949,757 US$284,707,160 US$451,398 215,261
of the year
Annual change in net US$988,794 US$49,978,101 US$20,272 215,261
assets
Years of net assets 4.67 181.86 0.80 215,236

Note. Observations with negative values are omitted.

over time. Therefore, fiscal year is included in the models as a series of dum-
mies with 2004 as the reference year. Robust standard errors are reported to
avoid biased significance tests.
Economic shocks may exert influence on nonprofit asset accumulation
though additional mechanisms other than the price of contributions. During
recessions, nonprofits may face higher demand for services that are met with
increased program and administrative expenditures, which may crowd out
asset accumulation. To examine this possibility, program and administrative
expenditures are included in the models as a control variable.12 An alternative
model specification uses the program and administrative expenditure ratio as a
robustness check. Another likely effect of an economic downturn on a non-
profit’s finances is a reduction in revenues from income generating activities
Mitchell 1281

such as program service fees and investment income. Reduced income from
these sources may also inhibit the ability of a nonprofit to accumulate assets
independently of the price of contributions. Earned revenue is therefore
included in the models as an additional control variable.13 An alternative model
specification uses the annual change in earned revenue as a robustness check.
The first set of models examined in the next section estimate the effect of
the price of charitable contributions on the annual change in net assets. The
change in net assets is measured as the difference in net assets between the
end of the fiscal year (EOY) and the beginning of the fiscal year (BOY)14:
Change in net assets
= ( Total assets EOY − Total liabilities EOY )
− ( Total assets BOY − Total liabilities BOY )
=Net assets EOY − Net assets BOY.
The second set of models estimates the elasticity of asset accumulation to
the price of contributions using the standard log–log method, with the sample
restricted to only organizations experiencing positive asset growth. Each set
of models includes three variations to examine the sensitivity of the main
effect to model specification.

Results and Discussion

Table 5 displays the results of the first set of models. Model 1 is the primary
model, Model 2 provides the alternative control specification, and Model 3
provides the primary model only for the fiscal years 2006 to 2008, which
excludes the problematic years for missing data identified above. The effect
of the price of contributions on the annual change in net assets does not differ
significantly between the primary model and the two alternative models at
the 95% confidence level, suggesting that the main effect is robust to model
specification. On average, a 10-cent decrease in the cost to raise US$1 is
associated with an increase in net assets of about US$2,987.
As discussed above, fiscal leanness may impact an organization’s fiscal
response to its economic environment. Fiscal leanness is indicated by an
organization’s years of net assets or roughly the length of time an organiza-
tion could sustain its current program expenses by liquidating its net assets.
Formally, years of net assets is calculated as follows:

Net assets
Years of net assets = .
Total expenses
1282 Administration & Society 49(9)

Table 5.  Fixed Effects Regression Results for the Annual Change in Net Assets.

1 2 3
Price of contributions −29,870.27*** −30,030.26*** −29,171.29***
1,415.26 3,246.32 1,495.98
Fiscal year
2004  
2005 8,698.87  
8,643.99  
2006 10,485.47 215,841.40 —
8,482.11 155,799.30  
2007 13,999.91* 210,346.00 3,595.14***
8,477.93 155,845.20 797.47
2008 −13,499.79 178,523.70 −23,960.35***
8,535.15 155,851.70 1,151.72
2009 −32,866.12 145,458.10 —
65,235.93 169,799.20  
2010 86,725.38* 250,905.80 —
44,852.08 163,451.60  
2011 98,280.27 208,433.30 —
100,099.30 157,780.80  
Earned revenuesa 25.39*** — 23.70***
7.29 7.08
Program and administrative −9.24*** — −9.43***
expensesa 2.52 2.94
Change in earned revenues — −0.45 —
  0.34  
Program and administrative — 12.26 —
expense ratio   82.34  
Constant 54,670.31*** −131,599.50 67,328.53***
9,587.41 155,809.50 4,976.01
R2 .02 .03 .02
F 110.99*** — 207.33***
Observations 175,784 83,695 163,515
Groups 98,620 64,627 93,877

Note. Standard errors are in italics.

aStatistics are shown in thousands for convenience of display.

*p < .10. **p < .05. ***p < .01.

Nonprofits with fewer years of net assets are relatively lean, while those
with more years of net assets are less lean. As larger organizations tend to
have both higher net assets and higher expenses, while smaller organizations
Mitchell 1283

Table 6.  Years of Net Assets by Subsector.

M SD Median n
Public safety, disaster preparedness 15.60 561.08 2.82 3,288
Environment 9.53 115.84 1.16 6,337
Philanthropy, voluntarism 8.43 173.27 1.21 10,031
Health—General 7.90 202.57 0.98 15,069
Mutual/membership benefit 6.21 8.42 2.07 249
Education 6.19 313.21 1.05 34,723
Arts, culture, and humanities 5.66 225.72 0.90 29,004
Housing, shelter 4.37 28.10 1.44 7,412
Science and technology 3.93 18.92 1.20 890
Community improvement 3.61 52.56 0.71 7,668
Youth development 3.61 39.71 0.91 8,073
Recreation and sports 3.52 44.93 0.65 9,139
Health—Disease specific (research) 3.36 19.68 0.99 1,693
Religion related 2.69 24.07 0.52 10,508
Animal related 2.61 6.94 1.26 4,857
Food, agriculture, nutrition 2.58 37.93 0.56 2,351
Human services, multipurpose, and other 2.49 58.77 0.61 32,829
Social science 2.42 6.51 0.88 598
Health—Disease specific (general) 2.04 16.10 0.65 6,794
Public, society benefit 2.02 8.20 0.59 2,159
Mental health 1.66 38.66 0.46 5,953
International, foreign affairs 1.46 5.23 0.49 5,918
Crime, legal related 1.40 5.55 0.52 4,714
Employment, job related 1.34 11.18 0.44 2,305
Unknown, unclassified 1.30 3.31 0.36 90
Civil rights/advocacy 1.01 1.96 0.54 2,584

tend to have both lower net assets and lower expenses, the indicator of fiscal
leanness is statistically uncorrelated with organizational size, effectively rul-
ing out organizational size as an alternative explanation to fiscal leanness in
the tests that follow.15 Table 6 displays summary statistics for years of net
assets by National Taxonomy of Exempt Entities (NTEE) subsector. The
median for the sample is 0.78 years or 9.36 months.
Figure 1 compares the magnitude of the fiscal response for organizations
with years of net assets above and below the median. Fiscally lean nonprofits
exhibit a significantly decreased fiscal response to changes in the price of
charitable contributions compared with less lean nonprofits. Fiscally lean
organizations respond to a 10-cent decrease in the price of contributions with
1284 Administration & Society 49(9)

$50,000
$40,000
$30,000
$20,000
$10,000

Above the median Below the median

Figure 1.  The effect of the price of contributions on the change in net assets for
organizations above and below the median years of net assets.

an increase in net assets of only US$1,755. Less fiscally lean organizations

respond to the same shock with an increase in net assets of US$4,423, or
roughly two and a half times the fiscal response.16
Nonprofits must acquire resources to grow, and growing organizations
may be able to grow more rapidly by responding more flexibly to changes in
the price of contributions. Table 7 presents the results of several models esti-
mating the elasticity of net asset accumulation to the price of charitable con-
tributions for nonprofits that are exhibiting growth. Again, the results are
robust to model specification as the elasticities do not significantly differ
from primary model at the 95% confidence level. Overall, the relationship
between the price of contributions and asset accumulation is relatively inelas-
tic ( 0 > E > −1) . The elasticity of −0.23 indicates that a 10% decrease in the
price of contributions is associated with a disproportionately small increase
in net assets of only 2.3%.
The general inelasticity of asset accumulation to the price of contributions
may be the result of several factors, including a relatively fixed supply of
philanthropic capital. A limited supply may further constrain the ability of
nonprofits to accumulate assets more rapidly without collectively raising the
price of contributions.
Mitchell 1285

Table 7.  Fixed Effects Regression Results for the Log of Asset Accumulation.

1 2 3
log (price of contributions) −0.23*** −0.22*** −0.23***
0.01 0.02 0.01
Fiscal year
2004  
   
2005 −0.17  
0.16  
2006 −0.10 0.44***  
0.16 0.04  
2007 −0.02 0.41*** 0.08***
0.16 0.06 0.01
2008 −0.12 0.30*** −0.02
0.16 0.07 0.02
2009 −0.33 0.47  
0.44 0.38  
2010 −0.01 0.37  
0.39 0.38  
2011 0.12 0.38*  
0.50 0.20  
Earned revenues 0.11*** 0.11***
0.04 0.04
Program and administrative expenses −0.03*** −0.03**
0.01 0.01
Change in earned revenuesa −0.01***  
  0.00  
Program and administrative expense ratiob 4.55***  
  0.47  
Constant 10.14*** 9.85*** 10.05***
0.17 0.10 0.04
R2 .03 .03 .03
F 98.54*** 172.44***
Observations 114,350 53,525 106,814
Groups 78,310 45,779 74,188

Note. Standard errors are in italics.

aStatistics are shown in millions for convenience of display.
bStatistics are shown in thousands for convenience of display.

*p < .10. **p < .05. ***p < .01.

1286 Administration & Society 49(9)

0.30
0.25
0.20
0.15
0.10

Above the median Below the median

Figure 2.  The elasticity of net asset accumulation to the price of contributions for
organizations above and below the median years of net assets.

Again, financially lean organizations are at a disadvantage and exercise

significantly less freedom in responding to price shocks. Fiscally lean orga-
nizations exhibit an elasticity of 0.13, less than half of the elasticity of less
fiscally lean organizations at 0.28.17 These results are displayed in Figure 2.
The tendency of fiscally leaner organizations to exhibit a more muted
response to changes in the price of contributions is consistent across the mod-
els for net asset change and the models for net asset accumulation.
Although this holds for the minority nonprofits that report positive fund-
raising costs, the majority of organizations report no fundraising expenses,
imposing an important limitation on the generalizability of the results.
Nonprofits with no fundraising expenses either receive contributions for free
or misreport their expenses in their public disclosures. Without more infor-
mation about these organizations, which also tend to be smaller in size and
may have a reduced capacity for financial reporting, it would be unwise to
speculate about their fiscal responses. Nevertheless, the pattern is consistent
for the substantial number of nonprofits with positive fundraising expenses.
Based on the available data for nonprofits with positive fundraising
expenses, less fiscally lean organizations exhibit significantly greater free-
dom to respond to price shocks compared with fiscally lean organizations.
Mitchell 1287

Strategically managed nonprofits respond rationally to their economic envi-

ronments by accelerating asset accumulation when the price of charitable
contributions falls and reducing asset accumulation when the price of contri-
butions rises. Over time, organizations that are less fiscally lean are able to
grow more quickly and efficiently than leaner nonprofits as they are able to
accumulate assets at a faster rate when asset accumulation is less expensive.
However, the widely held norm of fiscal leanness deters organizations from
accumulating net assets more rapidly when the price of contributions is rela-
tively low. Rapid asset accumulation during economic booms—when growth
is most efficient—increases the fundraising expense ratio, overhead ratio,
and years of available assets measure for the fiscal year, potentially leading
to negative publicity and even market censure. With this in view, it is perhaps
understandable that nonprofits are relatively insensitive to price shocks, trad-
ing efficient growth for the appearance of fiscal leanness. Unfortunately, by
constraining the ability of nonprofits to efficiently and rationally respond to
their economic environments, the norm of fiscal leanness forces organiza-
tions to accumulate assets at higher cost, wasting scarce resources.
The emphasis on nonprofit efficiency has brought attention to nonprofit
financial management practices, and the easy availability of financial data has
led some stakeholders to interpret asset accumulation from a normative rather
than a strategic perspective as evidence of miserliness or insufficient need
(Handy & Webb, 2003; S. R. Smith & Lipsky, 1993). Although the use of
financial metrics to evaluate and indirectly regulate nonprofit organizations
has been widely criticized (M. A. Hager & Flack, 2004; M. Hager & Greenlee,
2004; Lowell et al., 2005; Ogden et al., 2009; Steinberg & Morris, 2010; Wing
& Hager, 2004a), the intuitive appeal of these practices persists. Nonprofits
have responded by limiting asset accumulation to ensure favorable program
spending ratios (T. Calabrese, 2013) and reducing the proportion of their
expenses allocated to fundraising and administration. However, prior scholar-
ship has implicated these practices as major drivers of inefficiency among non-
profits that inhibit organizational effectiveness (Wing & Hager, 2004a),
restrict service output (Brooks, 2005), and increase financial vulnerability (T.
Calabrese, 2013). After all, a nonprofit may be perfectly lean with zero over-
head and zero years of net assets, but if its capacity is so diminished that its
programs have no impact, its effectiveness and efficiency are zero.

Exploring the Consequences of Normative

Financial Management
The results presented above add to a growing body of literature questioning
the conventional wisdom of normative nonprofit financial management. The
1288 Administration & Society 49(9)

analysis contributes to this scholarship by challenging nonprofit managers

and other stakeholders to think more strategically about exercising greater
fiscal flexibility to adapt organizational growth strategies to changing eco-
nomic conditions.
The analysis reveals that more fiscally lean nonprofits are less able to
respond efficiently to shocks in their environments compared to less fiscally
lean organizations. Nonprofits with more fiscal slack enjoy more freedom to
adjust their fiscal behavior in response to changing economic conditions and
are consequently better able to benefit from economic expansions and to
endure economic recessions. Comparatively, lean nonprofits must forgo asset
accumulation when contributions are relatively inexpensive, only to accumu-
late assets too rapidly when contributions are relatively expensive.
Normative nonprofit financial management risks a number of additional
unintended consequences, many of which have already been discussed in
prior literature. For example, instead of minimizing the fundraising expense
ratio in accordance with sectoral norms, efficient service-maximizing non-
profits fundraise until the marginal return of a US$1 fundraising expenditure
is equal to US$1. However, noting that nonprofits face normative pressures
to limit fundraising expenditures, Brooks (2005) observed that nonprofits
stop fundraising well in advance this threshold, explaining that they

approach service maximization, but fundraise insufficiently to meet this goal.

This might occur due to the belief within an organization that high levels of
fundraising are not compatible with the nonprofit’s actual mission. Alternatively,
it might reflect implicit restrictions on fundraising imposed by donors who feel
such spending is “wasteful.” If this is the case, it is ironic that this leads
nonprofits to inefficiency in forgoing net revenues that could be used for core
services. (pp. 550-551)

In addition, normative financial management may have more indirect con-

sequences. For example, fiscal leanness may impede intertemporal revenue
stabilization. With stakeholders carefully monitoring nonprofit financial
ratios, managers are pressured to spend rather than accumulate surplus reve-
nues, regardless of whether those resources can be spent productively in the
current period or would be better saved for the future to smooth income dur-
ing economic contractions.
Normative financial management may also exacerbate the nonprofit star-
vation cycle as increasingly unrealistic and counterproductive expectations
among donors promote organizational incapacitation (Lecy & Searing, 2014).
Moreover, normative restrictions on asset accumulation may generally retard
organizational growth and prevent organizations from reaching the critical
Mitchell 1289

economies of scale required to efficiently address pressing social problems

(Lindenerg & Dobel, 1999).
Finally, fiscal unresponsiveness may promote financial procyclicality.
When nonprofits confront economic recessions, insufficient reserves may
force spending cuts and layoffs precisely when nonprofit services are needed
most. Conversely, during economic expansions, organizations must increase
spending to preserve normatively desirable program expense ratios, even
while service demand presumably declines. Nonprofits and the publics they
serve would be better off if nonprofit managers were freer to make rational
fiscal adjustments in response to changing economic conditions, but the sec-
toral norms that promote fiscal leanness and overhead minimization strongly
disincentivize economically efficient nonprofit financial management.

Conclusion and Implications

Strategic nonprofit financial management appears to be constrained by bind-
ing social norms that encourage leanness while unintentionally impeding the
ability of nonprofits to respond efficiently to fluctuating economic condi-
tions. Organizations that are less fiscally lean enjoy greater flexibility as they
have an enhanced ability to reallocate resources over time in response to
changes in the price of charitable contributions. In the long-run, organiza-
tions with more fiscal slack can accumulate assets more rapidly and inexpen-
sively than organizations that are more fiscally lean.
Although nonprofit managers, donors, and information intermediaries
may perceive virtue in organizational leanness, fiscal norms linked to static
financial ratios and benchmarks limit the ability of nonprofits to respond stra-
tegically to their economic environments. In consequence, “lean” nonprofit
financial management generates inefficiencies. Unfortunately, nonprofits
prudently attempting to stabilize their revenues or grow to scale through eco-
nomically efficient asset accumulation risk disapprobation for amassing
“excessive” wealth and generally for violating entrenched social norms about
appropriate financial management (T. D. Calabrese, 2012; Easterling, 2000).
Nonprofit mangers and leaders should discuss with their boards and other
stakeholders the merits of asset accumulation strategies that allow for greater
flexibility across time periods. Information intermediaries that assess non-
profits on the basis of financial disclosures should evaluate organizations
favorably for accumulating net assets more rapidly when the price of contri-
butions is relatively inexpensive.
Foundations, public officials responsible for grant-making and contract-
ing policies, and donors should reconsider mandatory financial ratio thresh-
olds that affect grant and contract eligibility for nonprofits. Although such
1290 Administration & Society 49(9)

policies may be intended to ensure frugality, directly or indirectly limiting the

ability of nonprofits to remain flexible reduces organizational efficiency.
Rather than tying nonprofit funding to financial benchmarks, donors might
instead consult measures of programmatic efficiency such as the cost per unit
of impact. To promote efficiency, donors need only to consider the total costs
at which a nonprofit achieves specific outcomes and need not be concerned
with how an organization distributes those costs across functional expense
categories (Mitchell, 2014). Funders can support this shift in emphasis by
providing dedicated resources for program evaluation.
In addition, scholars and analysts should exercise extreme caution when
analyzing and interpreting Form 990 data. Research confirms that misre-
porting and underreporting are pervasive and recent changes to the Form
990 coupled with persistent data extraction errors appear to have exacer-
bated data quality problems. The IRS and the NCCS should consider inves-
tigating these phenomena. In addition, the NCCS may consider regularly
producing smaller but higher quality data sets for researchers by drawing
representative samples from the Form 990 data files and individually vali-
dating each record, and when possible, cross-validating the records with
audited financial statements. Better quality data may be preferable to quan-
tity for many research needs.
Finally, future scholarship could contribute to this research program by
examining the financial management practices of nonprofit managers in
greater detail using mixed methods. Forms 990 contain very limited informa-
tion, and future research would do well to use qualitative methods such as
in-depth interviewing to better understand the mix of strategic and normative
considerations that influence financial decision making within nonprofit
organizations.

Acknowledgment
The author is grateful to Thad Calabrese and Daniel Tinkelman for their helpful com-
ments and suggestions.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research,
authorship, and/or publication of this article.

Funding
The author(s) disclosed receipt of the following financial support for the research,
authorship, and/or publication of this article: This research was supported by the
Public Service Management Program at the City College of New York.
Mitchell 1291

Notes
  1. The number of reporting public charities grew from 247,308 to 362,926 during
that period or 115,618/247,308 = 47%. Revenues grew from US$800 billion to
US$1,400 billion or US$600 billion/US$800 billion = 75%.
  2. However, scholarship has begun to question the assumption that public–non-
profit partnerships improve efficiency in service delivery (Andrews & Entwistle,
2010).
  3. According to their website, “Groups with ‘years of available assets’ of more than
5 years are the ‘least needy’ in CharityWatch’s view and receive an ‘F’ grade
regardless of other measurements.” See CharityWatch (2013). Charity Navigator
requires organizations to maintain at least 1 year’s worth of available assets to
earn their highest rating, implying a benchmark range between 1 and 3 years. See
Charity Navigator (2013).
 4. Statistics are obtained from the full panel of National Center for Charitable
Statistics (NCCS) core pubic charity data files for 2006 to 2010, inclusive of extra-
neous years. The percentage of organizations with fundraising expense ratios below
10% is calculated only for those organizations with positive fundraising expenses.
Net assetsat the beginning of thefiscal year
Years of net assets is calculated as   Total expenses
only for organizations with positive expenses.
  5. GDP growth statistics are obtained from the Bureau of Economic Statistics.
  6. Calculations are based on Internal Revenue Service (IRS) Form 990 data for
501c3 public charities provided by the NCCS for the years 2006 to 2010. The
cost to raise US$1 is corrected for underreporting bias (as described below) and
trimmed to 0 < price of contributions < 7.59.
  7. Conventionally, elasticities are reported in absolute value as they are typically
negative; however, for reasons of clarity, elasticities are reported in the text with
their correct sign.
  8. The correlation coefficient is −0.98.
  9. As a point of clarification, this research regards price from the donor’s perspective
charitablecontributions
as the cost of program service or .
charitablecontributions − fundraising expenses
For example, see Carman (2011) and Tinkelman (2004). This contrasts with the non-
profit’s perspective in which the relevant price is the cost of charitable contributions or
fundraising expenses
.
charitablecontributions For example, see Fogal (2010). These prices are such that, for
       example, if a US$1 charitable contribution costs US$0.20 from a nonprofit’s per-
spective, the price of program service from a donor’s point of view is US$1.25. The
fundraising expenditures US$0.20
nonprofit’s price of fundraising, = =US$0.20, while
charitable contributions US$1.00
 
the donor’s price of program service, ignoring administrative costs,
1292 Administration & Society 49(9)

charitable contributions US$1.00 US$1.00

= = =US$1.25.
charitable contributions − fundraising expenses US$1.00 − US$0.20 US$0.80

10. Organizations with US$200,000 in gross receipts or total assets of US$500,000

at the end of their fiscal years must file the new form 990.
11. Zero cost fundraisers fall outside of the scope of theory as they either fail to
observe or fail to report plausible price information.
12. Program and administrative expenditures are calculated as the difference
between total expenditures and fundraising expenses.
13. Earned revenues are calculated as the difference between total revenue and con-
tributions, gifts, and grants.
14. For a precise definition of operating reserves, see T. Calabrese (2013).
15. The correlation coefficient between years of net assets and organizational size as
measured by total assets is 0.00.
16. The difference is statistically significant at the 95% confidence level.
17. The difference is statistically significant at the 95% confidence level.

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Author Biography
George E. Mitchell is an assistant professor of political science and an affiliate of the
public service management program at the City College of New York specializing in
strategic non-governmental organization (NGO)/nonprofit management and leader-
ship, international relations, and research methodology. His research has been pub-
lished in Nonprofit and Voluntary Sector Quarterly, Voluntas, Review of International
Studies, American Review of Public Administration, Public Performance and
Management Review, and in various edited volumes. Before joining City College, he
worked in the post-conflict reconstruction sector in the Middle East and was a found-
ing Member of the Transnational NGO Initiative at the Maxwell School of Syracuse
University.