RESEARCH

“ENDOWMENT BUILDING AND USE BY NONPROFITS: AN INTEGRATION OF THEORY AND PRACTICE.” NONPROFIT MANAGEMENT & LEADERSHIP 34(2), 317-343. TODD L. ELY, JUNIPER KATZ, AND THAD D. CALABRESE, 2023

This paper explores issues concerning endowment building, endowment management, and the general perceptions of endowment through the views of leaders of nonprofits that built an endowment. We find that endowment is generally considered meaningful to nonprofit leaders when it provides at least 5% of an organization's annual budget. The initiative for building endowment largely comes from boards of directors, executive directors, or some combination of both. However, external actors—especially foundations—play critical roles. The source of funds for endowments mostly come from major gifts including bequests, even though these gifts often were not solicited. Endowments serve a range of functions for organizations and do seem to alter organizational behavior and outcomes as suggested by the existing literature. Endowment aids organizational sustainability by supporting some reasonable level of annual operating costs. Many nonprofits use the flexibility and freeing up of resources provided by endowment funds for innovation, program enhancement, capacity building, and risk taking. For better or worse, endowments become a key part of a virtuous cycle of legitimacy where the nonprofits' accomplishments, relationships, and reputation attract resources to support activities in perpetuity, thus creating a more capable, stable, and accomplished organization to which additional support is more easily drawn.

“NONPROFIT ACCOUNTING CHOICE.” THAD D CALABRESE, AND ANUBHAV GUPTA. 2023.
RESEARCH HANDBOOK ON NONPROFIT ACCOUNTING. DANIEL TINKELMAN AND LINDA PARSONS, EDS.

Accounting rules vary in terms of the discretion afforded to organizations - while some rules prescribe a specific treatment, others allow managers to choose one among many alternatives. Where there are alternatives, nonprofit managers must make choices. Managers in nonprofit organizations may use accounting choice to convey a misleadingly positive or negative image of the organization’s financial health. The scope of accounting choice includes the basis of accounting used in reporting financial information, the allocation of joint costs between program and overhead expenses, estimates and assumptions used in specific financial accounts and accruals, strategically altering actual spending decisions, accounting for business combinations, inventory valuation, and depreciation, among others. This chapter details the motivations underlying these choices, discusses the current literature on the topic including the key takeaways, and offers future directions for researchers interested in further exploring the topic of accounting choice in nonprofit organizations.

“THE HIDDEN COSTS OF TRUSTWORTHINESS.” NONPROFIT AND VOLUNTARY SECTOR QUARTERLY 52(2), 304-326. MITCHELL, GEORGE AND THAD D. CALABRESE. 2023.

The theory of the nonprofit institutional form developed by Henry Hansmann emphasizes the importance of organizational trustworthiness in a sector defined by hard-to-measure outputs. This body of theory effectually rationalizes a normative approach to nonprofit financial management focused on maintaining organizational trustworthiness through fiscal probity signaling. Such signals include measurable indicators of overhead minimization, fiscal leanness, revenue diversification, and debt avoidance, among others. Appropriate signaling behavior may increase organizational trustworthiness as intended, but the effects on mission impact are not well understood. Thus, this article assesses how adherence to common fiscal probity norms affects mission impact, using total spending as a proxy. Based on a panel of donative public charities spanning 1982 to 2019, analysis suggests that norm-adhering nonprofits sacrifice about half of their mission impact over a 10-year period compared with norm-busting nonprofits. This forgone mission impact is the hidden cost of trustworthiness.

“RESEARCH IMPLICATIONS OF ELECTRONIC FILING OF NONPROFIT INFORMATION: LESSONS FROM THE UNITED STATES’ INTERNAL REVENUE SERVICE FORM 990 SERIES.” VOLUNTAS: INTERNATIONAL JOURNAL OF VOLUNTARY AND NONPROFIT ORGANIZATIONS 34(1): 20-28. TODD L. ELY, THAD D. CALABRESE, AND JIHYE JUNG. 2021.

Increased electronic filing, or e-filing, of nonprofit data in the United States and abroad quickens public availability, eliminates dependence on third-party proprietary datasets, and broadens access to information offering insight into previously neglected topics. On the other hand, increasingly open data require researchers to independently ensure data quality, understand limitations, and consider how data availability shapes research questions. As electronic filing becomes mandatory in the United States and more widespread elsewhere, this research considers how expanded e-filer data impact nonprofit research approaches and opportunities while assessing the generalizability and limits of existing e-filed data in the United States. While the data suggest increasing compliance with e-filing, analyses show that older nonprofits with greater capacity and sophisticated financial characteristics are historically more likely to e-file. Further, particular subsectors are more likely to e-file than others. Therefore, using existing e-filed IRS Form 990s for panel data analysis presents some generalizability concerns, although this will improve over time. Moving forward, e-filing and machine-readable access requirements bode well for both quantitative and qualitative nonprofit research, while the United States’ experience provides helpful lessons for other research settings.

“HOW U.S. PRIVATE FOUNDATIONS CHANGE PAYOUTS BASED ON FINANCIAL SHOCKS: REVEALED PUBLICNESS OR REVEALED PRIVATENESS? JOURNAL OF PUBLIC ADMINISTRATION RESEARCH AND THEORY 32(1), 166-182. THAD D. CALABRESE AND TODD L. ELY. 2021

This article asks what distribution behavior of private foundations in the United States reveals about their motivations and strategy. Do private foundations intentionally distribute additional money to grantees to help them manage through business cycles and maintain services during economic downturns? Such behavior would be consistent with revealed publicness with respect to distributions. Do they retrench during difficult economic times to protect their endowments? Or do they simply distribute money independent from the larger economy? The current study considers these conflicting expectations, and empirically tests whether private foundation distributions vary with endowment returns and the larger economy as suggested by competing theories. Using administrative data filed with the Internal Revenue Service, fixed effects regression models indicate that private foundations change distributions in a manner consistent with retrenchment or independently from the larger economy, depending on the sample used. The results do not support the notion that private foundations act with prosocial-countercyclical motivations about distributions—in which more money is distributed during economic downturns—despite their receiving significant public subsidies.

“BIASED ACTUARIAL ASSUMPTIONS AND SFAS 132R: THE NOT-FOR-PROFIT RESPONSE.” JOURNAL OF GOVERNMENTAL AND NONPROFIT ACCOUNTING 10(1), 110-133. ANUBHAV GUPTA AND THAD D. CALABRESE. 2021.

In 2003, the FASB issued an accounting standard (132R) requiring defined-benefit pension plan sponsors to disclose in the notes the asset allocations of their sponsored pension plans. A motivation for this requirement was to help users evaluate a plan's expected rate of return (ERR) assumption which is supposed to be determined by the allocation of plan assets to risky investments. All else being equal, the higher the assumption, the lower the pension expense and the higher the reported profits of plan sponsors. We hypothesize that not-for-profits used the ERR to inflate their earnings by reducing pension expenses. Using a dataset of audited financial statements and a difference-in-differences design, we find that not-for-profits significantly decreased their ERRs post-SFAS 132R. The results suggest that opportunistic actuarial assumptions by not-for-profits were reduced following the implementation of SFAS 132R.

“DOES PARTICIPATORY BUDGETING ALTER PUBLIC SPENDING? EVIDENCE FROM NEW YORK CITY.” ADMINISTRATION & SOCIETY 52(9), 1382-1409. THAD D. CALABRESE, DANIEL WILLIAMS, AND ANUBHAV GUPTA. 2020.

Participatory budgeting is described as a direct-democracy approach to resource allocation decision making. Theories assume it changes how public resources are spent by moving decisions from elected officials to citizens. The literature does not consider how earmarking—in which legislators direct parts of public budgets directly—might affect the impact of such policy devices. New York City’s participatory budgeting process which uses earmarks is analyzed to determine spending changes. Officials involved fund more projects at lower average amounts than those not involved but do not change the areas of funding, all of which is expected in systems of budgetary earmarks controlled by legislators.

“INSTRUMENTAL PHILANTHROPY, NONPROFIT THEORY, AND INFORMATION COSTS.” NONPROFIT POLICY FORUM 11(2). GEORGE MITCHELL AND THAD D. CALABRESE. 2020.

Instrumental philanthropy has gained attention and popularity in recent decades as an approach to maximizing the impact of giving. This article evaluates the suitability of the nonprofit institutional form, specifically the US public charity, as a vehicle for instrumental philanthropy. The analysis identifies an incongruity between the informational requirements of instrumental philanthropy and the form and theory of the nonprofit. An alternative theory of licensure is proposed to illustrate the difficulty of the information problem. Analysis suggests that the viability of instrumental philanthropy hinges upon information costs. Several public policy options are considered as means of better supporting instrumental philanthropy, presuming that allocative efficiency in the production of public benefits is a desirable public policy objective.

“STARTING FROM SCRATCH: BUILDING OF MEANINGFUL ENDOWMENTS BY PUBLIC CHARITIES.” NONPROFIT MANAGEMENT & LEADERSHIP 31(1), 33-55. TODD L. ELY, JUNIPER KATZ, AND THAD D. CALABRESE. 2020.

relatively small number of organizations and subsectors. This study supports an operational definition of material endowment, equal to or greater than annual expenses, and investigates how common it is for a nonprofit to establish a meaningful endowment over time. Specifically, we address whether the sector's enthusiasm over the potential of endowment building is reflected in charitable organizations' experiences. Using financial data, we find that building a meaningful permanent endowment is a rare achievement among public charities over a period of two decades. Meaningful endowment creation, achieved by less than 2% of the sample, is more common for organizations with donor attachments, the need for subsidization of mission services, those with more fundraising costs, and those with more donative revenue portfolios.

“NONPROFIT FINANCE: A SYNTHETIC REVIEW.” VOLUNTARISTICS REVIEW 4(5), 1-89. THAD D. CALABRESE, 2019.

The field of finance is concerned with the management of money and how and where such funds are acquired and used. This article reviews the broad literature on finance related to nonprofit and voluntary organizations, identifies gaps in knowledge, and proposes potential avenues for future researchers. It examines in detail the sources of funds for nonprofit organizations, especially nonprofit agencies—including issues around revenue portfolios and interactions, the uses of these funds—with an emphasis on incentives faced by nonprofit organizations around financial disclosures, the benefits and problems of slack resources and profits, and issues of capital structure in nonprofit organizations.

“WHAT A DIFFERENCE A GRADE MAKES: EVIDENCE FROM NEW YORK CITY’S RESTAURANT GRADING POLICY.” PUBLIC ADMINISTRATION REVIEW 79(5): 651-665. ROTHBART, MICHAH W., AMY ELLEN SCHWARTZ, THAD D. CALABRESE, ZACHARY PAPPER, TODOR MIJANOVICH, RACHEL MELTZER, AND DIANA SILVER. 2019.

Can governments use grades to induce businesses to improve their compliance with regulations? Does public disclosure of compliance with food safety regulations matter for restaurants? Ultimately, this depends on whether grades matter for the bottom line. Based on 28 months of data on more than 15,000 restaurants in New York City, this article explores the impact of public restaurant grades on economic activity and public resources using rigorous panel data methods, including fixed-effects models with controls for underlying food safety compliance. Results show that A grades reduce the probability of restaurant closure and increase revenues while increasing sales taxes remitted and decreasing fines relative to B grades. Conversely, C grades increase the probability of restaurant closure and decrease revenues while decreasing sales taxes remitted relative to B grades. These findings suggest that policy makers can incorporate public information into regulations to more strongly incentivize compliance.

“PROVERBS OF NONPROFIT FINANCIAL MANAGEMENT.” THE AMERICAN REVIEW OF PUBLIC ADMINISTRATION 49(6): 649-661. GEORGE MITCHELL AND THAD D. CALABRESE. 2019.

Whereas the field of public administration has benefited from periods of critical reflection and reform aimed at reexamining the field’s traditional management paradigms, the related field of nonprofit management has generally lacked such an analogously explicit and sustained research program to reevaluate its own conventional wisdoms. Meanwhile, accumulated findings from the last several decades of nonprofit management research have problematized many traditional assumptions and practices in nonprofit management, specifically regarding the soundness of nomothetic management theory, the unintended negative consequences of certain management norms, and underlying assumptions about the nature and purpose of nonprofit management. This article critically reexamines four well-known “proverbs” of nonprofit financial management—minimize overhead, diversify revenues, be lean, and avoid debt—to demonstrate the need for a critical and reflective research program that takes stock and reconsiders the field’s foundational principles and assumptions. Implications are derived for scholars and practitioners, as well as for information intermediaries that evaluate nonprofits based on financial information.

“THE STRATEGIC USE OF PENSIONS BY NOT-FOR-PROFIT ORGANIZATIONS.” JOURNAL OF PENSION ECONOMICS AND FINANCE 18(3): 388-414. THAD D. CALABRESE AND ELIZABETH A. SEARING. 2019. “

Defined benefit pension plans are an important and unexplored aspect of not-for-profit compensation, covering between 15% and 21% of the estimated national not-for-profit workforce. Here we consider whether pension contributions and actuarial assumptions are mechanisms for achieving not-for-profit financial management objectives such as smoothing consumption, managing reported net earnings, and minimizing pension liabilities. The empirical results indicate a variety of these behaviors. Not-for-profit pension plan sponsors use accumulated net assets to smooth consumption. Further, not-for-profits manage reported profits downwards when they exceed expectations by increasing pension contributions, but both minimize contributions and liberalize actuarial assumptions when they underperform relative to their desired earnings targets.

“A REPLICATION OF ‘AGENCY PROBLEMS OF EXCESS ENDOWMENT HOLDINGS IN NOT-FOR-PROFIT FIRMS’ (JOURNAL OF ACCOUNTING AND ECONOMICS, 2006).” PUBLIC FINANCE REVIEW 47(4): 747-774. THAD D. CALABRESE AND ANUBHAV GUPTA. 2019. “

Core, Guay, and Verdi explore whether excessive levels of cash (“endowments”) are associated with nonprofits’ growth in program spending and fixed assets, agency problems, or donors’ monitoring efforts. We replicate their finding that excess endowments are unrelated to growth in program spending. However, unlike the original article, we find that persistent excess endowments are associated with growth in fixed assets. Further, when we alter the model specification to better align with theory, we find excess endowments increase program expense ratios and lead to higher growth in program service spending as well as capital investment. We are also able to replicate the original article’s finding that excess endowments are related to higher CEO and management compensation. However, when we again alter the model specification, we find excess endowments are associated with compensation declines. Overall, we find weaker evidence of a relationship between excess endowments and agency problems than the original article.

“WHAT ARE THE FINANCIAL IMPLICATIONS OF PUBLIC QUALITY DISCLOSURE? EVIDENCE FROM NEW YORK CITY’S RESTAURANT FOOD SAFETY GRADING POLICY.” PUBLIC FINANCE REVIEW 47(1): 170-201. RACHEL MELTZER, MICHAH W. ROTHBART, AMY ELLEN SCHWARTZ, THAD CALABRESE, DIANA SILVER, TOD MIJANOVICH, AND MERYL WEINSTEIN. 2019.

Grading schemes are an increasingly common method of quality disclosure for public services. Restaurant grading makes information about food safety practices more readily available and may reduce the prevalence of foodborne illnesses. However, it may also have meaningful financial repercussions. Using fine-grained administrative data that tracks food safety compliance and sales activity for the universe of graded restaurants in New York City and its bordering counties, we assess the aggregate financial effects from restaurant grading. Results indicate that the grading policy, after an initial period of adjustment, improves restaurants’ food safety compliance and reduces fines. While the average effect on revenues for graded restaurants across the municipality is null, the graded restaurants located geographically closer to an ungraded regime experience slower growth in revenues. There is also evidence of revenue convergence across graded and ungraded restaurants in the long term.

“DO OPERATING RESERVES STABILIZE SPENDING BY NONPROFIT ORGANIZATIONS?” NONPROFIT MANAGEMENT & LEADERSHIP 28(3): 295-311. THAD D. CALABRESE, 2018.

The public budgeting literature has a long and rich tradition that examines the role of budget stabilization funds as fiscal stabilizers for state and local governments during periods of declining revenues and deteriorating economic conditions. Similarly, nonprofit organizations may accumulate operating reserves that allow them to smooth out annual imbalances between revenues and expenses, especially when facing a fiscal shock. Agency theory, on the other hand, indicates that managers might use these reserves to enrich themselves at the expense of the organization. This article is a step toward addressing a gap in our knowledge by analyzing the implications of reserves on nonprofit spending in general and also on particular functions (program versus overhead spending). Using a long panel of data from 1995 to 2011 and controlling for sample selection bias, the empirical results suggest that operating reserves held by nonprofit organizations do reduce expense gaps during downturns, but the effect is small. The results also suggest that nonprofit managers value current spending more than reserving funds for the future. Further, operating reserves are not associated with agency problems as predicted by theory. The empirical results suggest that the current rule of thumb—that nonprofits ought to hold up to 6 months of operating reserves—is inadequate if these pools of savings are intended to maintain all spending at trend during poor fiscal times. If, however, reserves are intended to only offset trend deviations partially while alternative strategies are sought, then the current rule of thumb may be sufficient.