Nonprofit Sector: Increasing Numbers and Key Role in Delivering  
Federal Services (24-JUL-07, GAO-07-1084T).			 
                                                                 
The nonprofit sector is an important means through which public  
services are delivered and national goals addressed. The federal 
government increasingly relies on networks, often involving	 
nonprofits that address many issues--health care, education, and 
human services, for example. Because nonprofit organizations play
a key role as partners with the federal government, there is a	 
need to better understand the sector. This testimony (1) provides
a picture of the nonprofit sector--its size, composition, and	 
role in the economy; (2) discusses how and why the federal	 
government partners with the sector; and (3) identifies issues	 
related to the sector as a federal partner that need to be better
understood. GAO's preliminary work on this topic focused on the  
intersection of nonprofit organizations and the federal 	 
government, including trends, the use of federal funding, and	 
emerging issues. GAO interviewed key experts from relevant	 
associations and academia, reviewed related research, and hosted 
roundtable discussions with key researchers and practitioners in 
the nonprofit area.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1084T					        
    ACCNO:   A73209						        
  TITLE:     Nonprofit Sector: Increasing Numbers and Key Role in     
Delivering Federal Services					 
     DATE:   07/24/2007 
  SUBJECT:   Accountability					 
	     Charitable organizations				 
	     Federal funds					 
	     Federal/state relations				 
	     Nonprofit organizations				 
	     Policy evaluation					 
	     Tax exempt organizations				 
	     Tax exempt status					 

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GAO-07-1084T

   

     * [1]Role of Nonprofit Organizations in the Economy and as Provid
     * [2]Federal Government Increasingly Partnering with Nonprofit Or
     * [3]Emerging Policy Issues and Challenges Facing the Nonprofit S
     * [4]Concluding Observations
     * [5]Contacts and Acknowledgments
     * [6]GAO's Mission
     * [7]Obtaining Copies of GAO Reports and Testimony

          * [8]Order by Mail or Phone

     * [9]To Report Fraud, Waste, and Abuse in Federal Programs
     * [10]Congressional Relations
     * [11]Public Affairs

Testimony

Before the Subcommittee on Oversight, Committee on Ways and Means, House
of Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Tuesday, July 24, 2007

NONPROFIT SECTOR

Increasing Numbers and Key Role in Delivering Federal Services

Statement of Stanley J. Czerwinski
Director, Strategic Issues

GAO-07-1084T

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to participate in today's hearing to discuss
our preliminary work and observations on the role the nonprofit sector
plays in partnering with federal, state, and local governments to deliver
programs and services.^1 Although the sector is an important means through
which many key national goals are addressed, its role can be nearly
invisible to federal policy-setting decision makers when designing and
implementing programs. Broadly stated, the federal government increasingly
relies on large and complex networks of nonfederal actors to carry out
initiatives. In recent years, most oversight of the sector has focused on
its tax-exempt status. However, because the nonprofit sector plays a key
role in delivering services funded by the federal government, there is
also a need to better understand the sector as a partner on which the
federal government relies.

The nonprofit sector is defined primarily by its tax-exempt status, a
designation that occurs at both the federal and state levels of
government. In addition, nonprofit organizations share certain other
characteristics. First, they work to serve public purposes or the common
goals of their members. Further, they can benefit from voluntary labor and
are self-governing. In addition, they are not permitted to distribute
profits to their members but must instead use them to further the
organization's charitable purpose. Beyond these commonalities, they have a
diverse set of missions, and many of those missions are related to those
of federal agencies. As a result, it is important to better understand the
composition of the sector, its importance, and its strengths and
challenges.

An estimated 1.8 million organizations were recognized as
federal-tax-exempt organizations as of September 2006.^2 Of these, about
60 percent (see fig. 1) are public charities or foundations that benefit
the broad public interest, and are referred to as 501(c)(3) organizations.
Our focus today is largely on charities, as they represent the majority of
the sector. (See further clarification of key terms in app. I.)

^1The tax-exempt sector is often referred to as the nonprofit sector.

^2GAO, Tax Compliance: Thousands of Organizations Exempt from Federal
Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes,
[12]GAO-07-563 (Washington, D.C.: June 29, 2007), p. 5.

Figure 1: Categories of Tax-Exempt Entities

Note: The 501(c)(3) organizations are the public charities and
foundations; (501)(c)(4) are social welfare organizations.

As you know, the Internal Revenue Service (IRS) serves as the agency that
generally oversees the nonprofit sector at the federal level. IRS focuses
on whether organizations meet tax-exempt requirements and comply with
federal laws, such as those governing the use of funds intended for a
charitable purpose. It approves organizations for federal tax-exempt
status and is the recipient of annual reporting of financial data on Forms
990, which are required from organizations with gross receipts over
$25,000.^3 In addition, a few other federal organizations, such as the
Federal Trade Commission and the Department of Justice, provide oversight
of nonprofit organizations in certain specialized areas. States also play
an important role in the oversight of nonprofits, as they have interests
and responsibilities in areas such as the legitimacy of charitable
fundraising and whether a charity is meeting the charitable purpose for
which it was created. In addition, the public plays a role in oversight
through its ability to review key information on individual organizations,
to the extent useful information is available.

^3Churches are not required to file for tax-exempt status, nor to report
annually.

My testimony today will point out some of the diversity and the range of
characteristics present within the sector, along with some of the issues
that arise as nonprofit organizations interact with the federal
government. I would like to (1) provide a picture of the nonprofit
sector--its size, composition, and role in the economy; (2) discuss how
and why the federal government partners so extensively with the sector;
and (3) identify issues that others have raised related to the sector as a
federal partner that need to better understood.

My statement is based largely on some preliminary work we recently
completed that focused broadly on the intersection of nonprofits and the
federal government. We focused on trends in the use of federal funding and
on identifying emerging issues in the nonprofit sector. We interviewed
representatives from several large nonprofit member associations, research
and advocacy organizations, academic researchers, foundation
representatives, and nonprofit practitioners. We hosted two roundtable
discussions with key researchers and practitioners in the nonprofit area.
We also reviewed literature on the sector from academic centers, research
institutes, foundations, and others to better understand sector trends and
issues, and to identify additional experts for interviews. Our work
included a review of our previous work related to nonprofits on a wide
variety of topics, such as tax policy, human service programs, and
executive compensation. Our work was performed in accordance with
generally accepted government audit standards.

Role of Nonprofit Organizations in the Economy and as Providers of Services Is
Significant

While the majority of nonprofits individually have relatively small
operating budgets, as a whole, the nonprofit sector has a significant
presence in the U.S. economy, according to researchers of the nonprofit
sector. For example,

           o In 2004, nonprofit organizations that submitted Forms 990 to IRS
           held an estimated $3 trillion in total assets and received $1.4
           trillion in revenues.^4

           o During the period 1998 through 2002, spending reported by
           tax-exempt entities was roughly 11 to 12 percent of the nation's
           gross domestic product.^5 
           o The tax-exempt sector had over 9.6 million employees, about 9
           percent of the civilian workforce in 2002.^6 
           o Wages and salaries paid to nonprofit sector employees comprised
           8.3 percent of those paid in the U.S. in 2004.^7

^4The Urban Institute, "The Nonprofit Sector in Brief," The Nonprofit
Sector in Brief: Facts and Figures from the Nonprofit Almanac 2007 (Urban
Institute, 2006),
[13]www.urban.org/UploadedPDF/311373_nonprofit_sector.pdf (downloaded Oct.
30, 2006).

In addition to representing a significant portion of the U.S. economy, the
sector is growing. Data indicate that from May 2000 to May 2006, the
number of registered public charities has grown over 30 percent from about
646,000 to about 851,000, although organizations that have gone out of
existence may be included in those numbers.^8 Other data also suggest
growth in the sector. As shown in figure 2, the number of 501(c)(3)
organizations completing the Form 990 has almost tripled over the last two
decades (from 1986 to 2006) from about 148,000 to about 427,000.

^5GAO, Tax-Exempt Sector: Governance, Transparency, and Oversight Are
Critical for Maintaining Public Trust, [14]GAO-05-561T (Washington, D.C.:
Apr. 20, 2005), p. 9.

^6 [15]GAO-05-561T , p. 10.

^7National Center for Charitable Statistics, "NCCS Quick Facts" (Urban
Institute, May 2006),
[16]http://nccsdataweb.urban.org/NCCS/files/quickFacts.htm (downloaded
Dec. 15, 2006).

^8National Center for Charitable Statistics (using the IRS Business Master
File, May 2006), http://nccsdataweb.urban.org/NCCS/Public/index.php
(downloaded Dec. 18, 2006)

Figure 2: Growth in the Number of Reporting 501(c)(3) Organizations--1986
through 2006

Note: Public charities and private foundations are both 501(c)(3)
entities. Organizations that have annual gross receipts not normally in
excess of $25,000, churches, and certain other exempt organizations are
not required to file the annual information return.

Experts have identified several possible contributing reasons for this
increase:

           o a shift in recent decades away from government providing most
           services directly;
           o the expansion of service-related industries in the U.S., of
           which many nonprofits are a part;
           o deinstitutionalization during the 1960s and 1970s that
           eliminated large, public care facilities in favor of smaller,
           community-based organizations, often operated by nonprofit
           entities; and
           o the trend in devolution in certain policy areas such as welfare,
           which contributed to a lessening role of the federal government
           and more localized control in the hands of state, local, and
           nonprofit organizations.

Nonprofit organizations are found in a wide variety of policy areas such
as health care, education, and human services, and include many prominent
and highly visible community institutions, such as hospitals, museums, job
training centers, and churches. (See a list of categories in app. 2.)
These organizations also represent a diverse range of sizes. According to
the Independent Sector, 73 percent had annual budgets of less than
$500,000 in 2004 and only 4 percent had budgets exceeding $10 million.^9

Much of the data on the sector come from the IRS Form 990, but those data
have limitations. For example, returned Forms 990 are sometimes incomplete
or inaccurate and are not consistently followed up on, and some nonprofit
organizations required to submit Forms 990 do not do so. In addition, for
certain types of funding, the Form 990 does not distinguish between
government and private sources of support. It also does not break out the
sources of government grants by federal, state, or local level. We have
pointed out in the past the importance of requiring information in a more
timely and user-friendly way on IRS Forms 990.^10

Federal Government Increasingly Partnering with Nonprofit Organizations

Nonprofit organizations bring many strengths to their partnerships with
the federal government. Their breadth and diversity allow the sector to
address the specific needs of communities and of individuals. Researchers
commenting on the advantages of nonprofits point out the provision of
benefits in the public interest, often with greater flexibility and access
than can be achieved by the public sector. Nonprofits often bring an
indepth understanding of a particular geographic area or special
population and have access to underserved populations.

Nonprofit organizations play a large and increasing role in delivering
services traditionally provided by the government, according to
researchers. Their research indicates that nonprofit organizations receive
significant funds from government sources and that over time these funds
have increased. As we previously noted, data are limited but researchers
have attempted to analyze data from various sources and identify trends in
federal funding to nonprofits. Their work offers a glimpse into the
magnitude of federal funds going to nonprofits, but does not provide a
comprehensive analysis of the various funding streams. For example:

^9The Independent Sector describes itself as a nonprofit, nonpartisan
coalition of about 600 national public charities, foundations, and
corporate philanthropy programs, collectively representing tens of
thousands of charitable groups in every state.

^10 [17]GAO-05-561T .

           o Researchers have reported that the federal government provided
           about $115 billion directly to nonprofits in fiscal year 2001, the
           majority of which hospitals received through the Medicare program.
           Indirect federal funds through state and local governments to
           nonprofits were an estimated $84 billion, totaling about $199
           billion, or about 15 percent of federal payments and grants.^11 
           o Data from other researchers indicate that the federal government
           spent an estimated $317 billion on nonprofit organizations in
           fiscal year 2004.^12 
           o Researchers estimate that federal support to nonprofit
           organizations increased more than 230 percent from fiscal year
           1980 to fiscal year 2004 in adjusted dollars.^13

Federal funds reach nonprofit organizations through many paths (see fig.
3). Some flow directly from federal agencies to nonprofit organizations,
such as research grants to universities. Some funds flow to states as
grants, whose funds may flow to nonprofit organizations, or may flow to
local governments that compensate nonprofit organizations for services
with those funds. Also, some federal funds move to nonprofits on the basis
of individuals' decisions, that is, from federal programs to nonprofits
selected by the consumer, such as for health care. In addition to direct
and indirect federal funds, nonprofit organizations benefit from being
tax-exempt and also from other tax policies, such as donors' ability to
deduct contributions on their taxes.

^11Woods Bowman and Marion R. Fremont-Smith, "Nonprofits and State and
Local Governments," Nonprofits and Government, 2nd Edition, eds. E. Boris
and C. Steurle (Washington, D.C.: The Urban Institute Press, 2006), pp.
191-194.

^12Alan Abramson, Lester Salamon, and C. Eugene Steurle, "Federal Spending
and Tax Policies: Their Implications for the Nonprofit Sector," Nonprofits
and Government, 2nd Edition, eds. E. Boris and C. E. Steurle (Washington,
DC: The Urban Institute Press, 2006), p. 118.

^13Alan Abramson, Lester Salamon, and C. Eugene Steurle, "Federal Spending
and Tax Policies: Their Implications for the Nonprofit Sector."

Figure 3: Examples of Paths Federal Funds Take to Nonprofit Organizations

Emerging Policy Issues and Challenges Facing the Nonprofit Sector

The current federal oversight of nonprofits is focused on organizations'
tax-exempt status and on specific programs. However, there is less focus
on understanding the overall role of nonprofits as implementers of
national and federal initiatives, and how to best ensure that nonprofits
have the support they need. As we spoke with researchers and
practitioners, several issues emerged as needing attention in order to
ensure the strength of this important partner to the federal government.
We have looked at specific issues involving nonprofit organizations over
the years, but our past work was largely related to specific programs. We
heard several common issues while taking this more comprehensive look at
nonprofit organizations' interaction with the federal government (see fig.
4).

Figure 4: Emerging Policy Issues and Challenges Facing the Nonprofit
Sector

Coordination and collaboration--One theme that surfaced in our preliminary
research was the importance and value of coordination and collaboration
between nonprofit organizations and government at all levels. As we
pointed out in our work on 21st century challenges, the government relies
increasingly on new networks and partnerships to achieve critical results
and develop public policy, often including multiple federal agencies, non-
or quasi-government organizations, for-profit and nonprofit contractors,
and state and local governments.^14 A complex network of governmental and
nongovernmental entities shape the actual outcomes achieved, whether it be
through formal partnerships in grant programs or through independent
actions of each addressing common problems. For example, our research on
disaster relief efforts following September 11 and Hurricanes Rita and
Katrina highlighted the role of nonprofits in providing assistance and the
importance of communication and coordination of services with government
entities. We pointed out that the scope and complexity of the September 11
attacks presented challenges to charities in their attempts to provide
seamless social services for surviving family members and others in need
of aid.^15 With regards to the response to Hurricanes Katrina and Rita, we
noted that charities could improve coordination among charities and the
Federal Emergency Management Agency.^16

^14GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, [18]GAO-05-325SP (Washington, D.C.: February 2005).

^15GAO, September 11: More Effective Collaboration Could Enhance
Charitable Organizations' Contributions in Disasters, [19]GAO-03-259
(Washington, D.C.: Dec. 19, 2002), p. 3 .

We believe that many of the key practices that help enhance and sustain
collaboration among federal agencies can be helpful between government and
nonprofit organizations, such as when both parties collaborate to

           o define and articulate a common outcome;
           o establish mutually reinforcing or joint strategies;
           o identify and address needs by leveraging resources;
           o agree upon roles and responsibilities;
           o establish compatible policies, procedures, and other means to
           operate across boundaries;
           o develop mechanisms to monitor, evaluate, and report the results
           of collaborative efforts;
           o reinforce accountability for collaborative efforts through plans
           and reports; and
           o reinforce individual accountability for collaborative efforts
           through performance management systems.^17

Internal governance issues--A second theme that surfaced in our
preliminary research was the need to strengthen governance of nonprofit
organizations, a point made by the sector itself as well as by others. At
the organization level, a sound governance structure can establish the set
of checks and balances that help steer an entity toward result-oriented
outcomes consistent with their purposes while also guarding against
abuses. Concerns about accountability and transparency of nonprofit
organizations have grown in recent years. In 2004 and 2005, the Senate
Finance Committee held hearings to look more closely at practices that are
illegal or not in keeping with standards typical of the charitable sector,
and released a discussion draft of possible solutions. In October 2004,
the Independent Sector convened a panel, whose report made several
recommendations to address concerns.^18 The panel continues to focus on
self-regulation as a way to address these concerns, although there are
mixed opinions on the potential success of self-regulation. In addition,
several efforts are under way within the sector to raise awareness of ways
to improve internal governance of nonprofits, including associations
focusing on providing training or consulting, and national certification
processes.^19

^16GAO, Hurricanes Katrina And Rita: Coordination between FEMA and the Red
Cross Should Be Improved for the 2006 Hurricane Season, [20]GAO-06-712
(Washington, D.C.: June 8, 2006), p. 1.

^17GAO, Results-Oriented Government: Practices That Can Help Enhance and
Sustain Collaboration among Federal Agencies, [21]GAO-06-15 (Washington,
D.C.: Oct. 21, 2005).

Capacity--Another area to which researchers suggest attention should be
paid is improving the capacity that smaller nonprofit organizations have
to address weaknesses in finances, administration, and human capital. Many
nonprofits struggling to accomplish their mission on limited budgets lack
the resources that could allow them to better manage their finances and
strengthen their infrastructure. In addition, particularly in smaller
nonprofit organizations, the strengths of board members may be in
addressing their organization's mission, and they may lack legal and
financial knowledge or the skills necessary to oversee a nonprofit entity.
One specific area identified as needing attention is the development of
human capital, as these organizations need to address a complex set of
issues, such as competition for service workers, leadership succession,
and staff turnover. One promising change is the increase in graduate
programs offering a concentration in nonprofit management from 17 in 1990
to 97 in 2001.^20 While there has not been a comprehensive effort by the
federal government to improve the capacity of nonprofit organizations,
several federal programs provide capacity-building grant funding and
technical assistance to nonprofits. Providing assistance to improve
capacity may be one area where the federal government could employ a more
strategic approach.

Nonprofit sector data - As I mentioned earlier, there is a lack of
sufficient knowledge on a key federal government partner and its role.
Researchers point out that without better data on the nonprofit sector as
a whole, appropriate and timely policy decisions regarding nonprofits
cannot be made. Some actions under way may improve information on
tax-exempt organizations. Beginning in 2008, small tax-exempt
organizations that previously were not required to file Form 990 returns,
with some exceptions (such as churches) will be required to file a shorter
notification form electronically.^21 In July 2007, IRS began mailing
educational letters to over 650,000 small tax-exempt organizations that
may be required to submit the notice. Further, IRS is seeking comments on
a redesigned Form 990, intended to provide a realistic picture of
organizations and their operations and to accurately reflect an
organization's operations and use of assets.^22 In addition to the Form
990, other sources of data have also been used to better understand the
sector, such as Bureau of Labor Statistics employment data, but continued
access to that data has been a problem. In addition, the funds to perform
the analysis generally come from the nonprofit sector, and are not
consistently available.

^18Panel on the Independent Sector (Convened by Independent Sector),
Strengthening Transparency, Governance, Accountability of Charitable
Organizations (Washington, D.C., June 2005).

^19For example, BoardSource, National Council of Nonprofit Associations,
and the Alliance for Nonprofit Management all focus to some extent on
strengthening internal governance of nonprofits. An example of a national
certification process is one established by the Standards for Excellence
Institute.

^20Alan J. Abramson, and Rachel McCarthy. "Infrastructure Organizations,"
from Lester M. Salamon, The State of Nonprofit America, 1st ed.
(Washington, D.C.: Brookings Institution Press, 2002), p. 337.

Administrative and reporting requirements--Practitioners and researchers
alike addressed the difficulty that nonprofit organizations, particularly
smaller entities, have in responding to the administrative and reporting
requirements of their diverse funders. While funders need accountability,
the diverse requirements of different funders make reporting a
time-consuming and resource-intensive task. Experts report that both
government and foundations have increasing expectations that nonprofits
conduct performance measurement, but meeting the expectations, given the
size of grants and the evaluation capabilities of the staff, can be
difficult. One researcher said that practitioners report performance
evaluation as one of the biggest challenges they face, given their
capacity issues.

Fiscal challenges for nonprofits--Nonprofit organizations, particularly
smaller entities, often operate with limited budgets and have limited
capital. As one researcher noted, the logic of the business world is
"upended" with nonprofit organizations.^23 Researchers and practitioners
have pointed out that nonprofit organizations often have inadequate funds
to invest in management infrastructure and that government and private
foundations have not provided them adequate overhead funding to, for
example, pay salaries to attract employees with needed skills or upgrade
systems that would maximize efficiency. Funders--federal, state and local
governments, foundations, and private donors--are willing to pay varying
amounts toward overhead, resulting in nonprofit organizations needing to
sometimes turn to other sources to cover their overhead costs. We believe
this is an area in which more data are needed to fully understand the
implications of reimbursement for overhead charges.

^21The form is entitled "Form 990-N Electronic Notice (e-Postcard) for
Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ."

^22We have not evaluated the redesigned Form 990.

^23Miller, Clara. "The Looking-Glass World of Nonprofit Money: Managing in
For-Profits' Shadow Universe," The Nonprofit Quarterly, vol. 12, issue 1
(Spring 2005).

Concluding Observations

Virtually every American interacts with the nonprofit sector in his or her
daily life through a broad range of concerns and activities such as health
care, education, human services, job training, religion, and cultural
pursuits. In addition, federal, state, and local governments rely on
nonprofit organizations as key partners in implementing programs and
providing services to the public. Given the way the sector is woven into
t	he basic fabric of our society, it is essential we maintain and cultivate
its inherent strength and vitality and have accurate and reliable data on
the overall size and funding flows to the sector. Keys to a healthy
nonprofit sector include strengthening governance, enhancing capacity,
ensuring financial viability, and improving data quality without overly
burdening the sector with unnecessary or duplicative reporting and
administrative requirements. At the request of the Congress, we are
beginning work to examine these issues further.

Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions you or other Members of the Committee may have.

Contacts and Acknowledgments

For further information on this testimony, please contact Stanley
Czerwinski at (202) 512-6806. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this testimony. Individuals making key contributions to this testimony
include David Bobruff, Tom James, Heddi Nieuwsma, Carol Patey, and Tom
Short.

Appendix I: Key Terms Related to Nonprofit Status

           o Tax-exempt organization: An entity determined to be exempt from
           federal income taxes.
           o Nonprofit status: A state-law concept, in which approved
           entities may be eligible for exemption from sales, property, and
           state income taxes.
           o Section 501(c)(3) organization: An organization that has an
           exempt purpose such as serving the poor; advancing religious,
           educational, and scientific endeavors; protecting human rights;
           and addressing various other social problems.
           o IRS Form 990: An IRS information return that many tax-exempt
           entities, meeting certain requirements, must file annually.

Appendix II: Types of Programs and Services in the Nonprofit Sector

The IRS uses the National Taxonomy of Exempt Entities system to classify
tax-exempt organizations by industry subsector. When an organization is
initially approved as tax-exempt, it is classified into one of these 10
broad categories of tax-exempt entities:

           o Arts, culture, and humanities Museums, performing arts centers,
           media and communications, historical societies
           o Education Elementary and secondary schools, colleges and
           universities, libraries and educational services
           o Environment and animals Botanical gardens, natural resources
           conservation and protection
           o Health Hospitals, mental health services, medical research, home
           health care, substance abuse treatment
           o Human services Homeless shelters, youth development, job
           training, crime prevention, soup kitchens, recreation and sports
           o International, foreign affairs Human rights, international
           cultural exchange, international development, peace and security,
           foreign affairs
           o Public, societal benefit Foundations, civil rights, credits
           unions, economic development, public transportation, veterans'
           organizations
           o Religion-related Religion-related organizations, interfaith
           coalitions, religious media and communications
           o Mutual membership/benefit Insurance providers, pension and
           retirement funds, fraternal societies, cemeteries
           o Unknown, unclassified

(450616)

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Highlights of [29]GAO-07-1084T , a testimony before the Subcommittee on
Oversight, Committee on Ways and Means, House of Representatives

July 24, 2007

NONPROFIT SECTOR

Increasing Numbers and Key Role in Delivering Federal Services

The nonprofit sector is an important means through which public services
are delivered and national goals addressed. The federal government
increasingly relies on networks, often involving nonprofits that address
many issues--health care, education, and human services, for example.
Because nonprofit organizations play a key role as partners with the
federal government, there is a need to better understand the sector.

This testimony (1) provides a picture of the nonprofit sector--its size,
composition, and role in the economy; (2) discusses how and why the
federal government partners with the sector; and (3) identifies issues
related to the sector as a federal partner that need to be better
understood.

GAO's preliminary work on this topic focused on the intersection of
nonprofit organizations and the federal government, including trends, the
use of federal funding, and emerging issues. GAO interviewed key experts
from relevant associations and academia, reviewed related research, and
hosted roundtable discussions with key researchers and practitioners in
the nonprofit area.

U.S. nonprofit organizations have a significant role both in the economy
as awhole and as providers of services. While the majority of nonprofit
organizations have relatively small operating budgets, together their
impact is large. For example, researchers estimate that the sector's
spending in recent years was roughly 11 to 12 percent of the nation's
gross domestic product and, in 2002, the sector had over 9.6 million
employees, about 9 percent of the civilian workforce. Further, the sector
has grown; the number of charitable organizations reporting almost tripled
over the last two decades.

The federal government increasingly partners with nonprofit organizations
as they bring many strengths to these partnerships, such as flexibility to
respond to needs and access to those needing services. These organizations
receive significant funds from government sources to provide services.
Researchers have attempted to quantify these funds. For example, one
estimate is that the federal government spent about $317 billion on
nonprofit organizations in fiscal year 2004. However, the lack of data
makes measuring federal funds to nonprofit organizations difficult. Many
funds come through indirect routes, such as through state and local
government, adding to the difficulty of determining funding and measuring
performance. Although IRS is generally responsible for overseeing the
tax-exempt status of these organizations, there is less focus at the
federal level on the comprehensive role of nonprofits in providing
services using federal funds.

Our preliminary look at how the federal government interacts with the
nonprofit sector indicates that several policy issues have emerged;
examples follow.

           o Coordination and collaboration--the increasing importance of
           collaboration between all levels of the government and nonprofit
           organizations.
           o Internal governance issues--the need to strengthen internal
           governance of nonprofit organizations.
           o Capacity--the need to improve smaller nonprofit organizations'
           capacity to address weaknesses in finances, administration, and
           human capital.
           o Nonprofit sector data--the need for improved data on the
           sector's size, financial status, and funds from federal sources.
           o Administrative and reporting requirements--the many requirements
           to be accountable, which while important and necessary, require
           information in different formats and with increasing complexity.
           o Fiscal challenges for nonprofits--the instability of some
           nonprofits' financial position.

At the request of the Congress, we are beginning work to examine these
issuesfurther.

References

Visible links
  12. http://www.gao.gov/cgi-bin/getrpt?GAO-07-563
  13. http://www.urban.org/UploadedPDF/311373_nonprofit_sector.pdf
  14. http://www.gao.gov/cgi-bin/getrpt?GAO-05-561T
  15. http://www.gao.gov/cgi-bin/getrpt?GAO-05-561T
  16. http://nccsdataweb.urban.org/NCCS/files/quickFacts.htm
  17. http://www.gao.gov/cgi-bin/getrpt?GAO-05-561T
  18. http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP
  19. http://www.gao.gov/cgi-bin/getrpt?GAO-03-259
  20. http://www.gao.gov/cgi-bin/getrpt?GAO-06-712
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-06-15
  22. http://www.gao.gov/
  23. http://www.gao.gov/
  24. http://www.gao.gov/fraudnet/fraudnet.htm
  25. mailto:[email protected]
  26. mailto:[email protected]
  27. mailto:[email protected]
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1084T
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1084T
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