Nonprofits for Hire: The Welfare State in the Age of Contracting

Nonprofits for Hire

Nonprofits for Hire The Welfare State in the Age of Contracting

Steven Rathgeb Smith Michael Lipsky

HARVARD UNIVERSITY PRESS

Cambridge, Massachusetts London, England

Copyright © 1993 by the President and Fellows of Harvard College All rights reserved Printed in the United States of America Third printing, 1998 Library of Congress Cataloging-in-Publication Data Smith, Steven Rathgeb, 1951Nonprofits for hire: the welfare state in the age of contracting / Steven Rathgeb Smith and Michael Lipsky. p. em. Includes index. ISBN 0-674-62638-9 (cloth) ISBN 0-674-62639-7 (pbk.) 1. Social service-United States--Contracting out. I. Lipsky, Michael. II. Title. HV95.S585 1993 361.6--dc20 92-26625 CIP

For Penny and to the memory ofJulius and Helen Robinson McClain

Preface

Two generations ago the world of social services consisted of independent privately funded charities and a few government agencies providing direct services through large, impersonal institutions. Today, social service provision takes place through the unwinding of complex relations between legislative appropriations, government contracting, and implementation of public policies by means of nonprofit organizations dependent on public funds. This reconfiguration of social service provision is the subject of our book. We show how the service sector and its nonprofit providers have been traIlsformed under the subtle pressures of the contracting regime. We explain how contracting has contributed to the expansion of the service state and facilitated greater fairness and higher standards in some service areas. Nonprofit providers have changed as well, in their sources of revenue, governance, qualifications of service personnel, and the nature of clients and services. We also explore the dilemmas of managers who must now hustle for contracts, compete with other agencies for scarce resources, and bend their priorities to meet the new demands of their government counterparts. We conclude by showing how the nonprofit sector is beginning to mobilize to counter governmental dominance of the public agency/ private agency relationship, and challenging the strengths and weaknesses of claims that the expansion of contracting has led to greater privatization. In a final chapter we assess the implications of contracting for the welfare state in terms of issues of citizenship, the mobilization of political symbols, and the implications for community. In writing this book we have been guided in part by the hope that people whose work goes into the making of social policy will recognize in the problems we describe issues they face on a daily basis. What do trends in the welfare state have to do with ordinary people? We believe that the experiences and behaviors of the people who

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Preface

work in nonprofit organizations and other parts of the service system, taken together, add up to-in a sense, become-the nation's social policy. We also hope that people engaged in the nonprofit sector may discover answers to the inconsistencies they confront in their work, such as: why do governments say they want our services, but do not pay us enough to do the job effectively? Why do we fight with sister agencies when we basically stand for the same thing? Why have we drifted so far from the purposes to which we were dedicated when we started? Why, despite our best efforts, have we become so dependent on government funds? This book is written in deep appreciation of the men and women whose work consists of serving others through nonprofit agencies, usually for little recognition, either as volunteers or for only modest compensation. Separately, we are privileged to have worked with such people in aid of emotionally disturbed adolescents, developmentally disabled individuals, court-involved teenagers, and young people in need of responsive services. If this book offers any insight into the operations and dilemmas of nonprofit service providers, it is significantly due to instruction we have received over the years from fellow board members and staff of Beaverbrook STEP, Inc., Justice Resources Inc. ORI), and Roxbury Youthworks-Massachusetts agencies we have been privileged to serve. Faculty members of the Massachusetts Institute of Technology to whom we are indebted for guidance and critical response to our work include Suzanne Berger, Walter Dean Burnham, Josh Cohen, Ellen Immergut, Gary Marx, Martin Rein, Harvey Sapolsky, J. Mark David Schuster, Brian Smith, Charles Stewart III, and Rick Valelly. We are particularly grateful to Martha Wagner Weinberg, who brought us together, and Deborah A. Stone, coauthor of an early article (with Smith) on contracting, who have given us good counsel since this collaboration began. Many colleagues and other scholars have been very helpful at different stages in providing reactions to our work. For their thoughtful comments we are grateful to: Barbara Andersen, Charles T. Clotfelter, James W. Davis, Jr., Harold W. Demone, Jr., Arthur C. DeMauro, Cliff Falby, Randy Garten, Robert E. Goodin, Jean C. Greisheimer, Peter Dobkin Hall, Joel Handler, Helen Ingram, Ira C.

Preface

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Katznelson, Joseph Klesner, Ralph M. Kramer, Marc Landy, Laurence E. Lynn, Jr., Reid C. Leifset, Margaret Levi, Jack Meyer, John Morris, Robert Morris, F. Ellen Nettig, Paul E. Peterson, Michael Sosin, Clarence Stone, Melissa Middleton Stone, Richard Sussman, and Edward C. Weaver. We cannot do justice here to the many individuals who have shared information and opinions with us as we conducted research for this book. However, we would be remiss if we did not mention, for their contributions to our understanding of nonprofit organizations, social services, and the welfare state, Richard Hill, HubertJones, Marie A. Matava, Peter Nessen, Helen O'Malley, Jeff Seifert, Marc Thibodeau, Pat Troy, Luis Velez, and Susan Wayne. Steven Smith has accumulated many debts to colleagues while a member of the faculties of Washington University in St. Louis and Duke University. For valued advice and encouragement, he is grateful to David Cronin, David Gillespie, Shanti K Khinduka, Martha N. Ozawa, and Michael Sherraden in St. Louis, and in North Carolina, to Bill Ascher, Bob Behn, Charles T. Clotfelter, Phil Cook, Joel L. Fleishman, Bruce Kuniholm, Helen Ladd, and Duncan Yaggy. For financial support over the years we are indebted to the Ford Foundation, the Donner Foundation (for related work by Lipsky on food banks), the Urban Research Program of the Australian National University (Lipsky), and the Center for the Study of Philanthropy and Voluntarism at the Terry Sanford Institute of Public Policy at Duke University (Smith). The views expressed in the book are ours alone and do not reflect those of any of these institutions. Some of the material in this book has been published, in preliminary versions, in Political Science Quarterly, Social Service Review, the Journal ofHealth Politics, Policy and Law, Child Welfare, and as an article by Smith and Deborah A. Stone in Rernaking the Welfare State, ed. by Michael K Brown (Philadelphia: Temple University Press, 1988).

Contents

Part I: The Turn to Nonprofits 1. Contracting for Services in the Welfare State The Scope of Nonprofit Service Organizations 5 Issues for the Welfare State 11

2. Nonprofit Organizations and Community Nonprofits as Manifestations of Community

3

20 22

Community and the Theory of Nonprofit Organizations Toward a Political Explanation of Nonprofit Organizations 31 Three Types of Nonprofit Service Agencies 37

26

Part II: The Contracting Regime Introduction to Part II

43

46 3. The Political Economy of Nonprofit Revenues Historical Background 47 Impact at the Service Delivery Level 57 The Reagan Era and a Changing Federal Role 62 4. Guardians of Community and Issues of Governance Boards ofDirectors 73 Executive Directors 79 Boards, Executives, and Community 88 5. Service Providers for the Welfare State 98 Professionalization 100 Deprofessionalization and Government Funding 108 Volunteers and Organizational Capacity 111 The New Street-Level Bureaucrats 115

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6. Services and Clients under Contracting

120

Imperatives of Public and Nonprofit Service Organizations 121 Significance ofDifferences between Government and 127 Nonprofits Changes in Practices under Contracting

131

7. Dilemmas of Management in Nonprofit Organizations 147 Understanding the Nonprofit Organization Cash Flow 151 The Dance of Contract Renewal 157 The Question of·Coal Succession 163

148

Part III: Implications for the Welfare State 171 8. The New Politics of the Contracting Regime Individual Agencies in the Political Process 173 The Rise of Associations of Nonprofit Providers 177 The Corporatist Politics of the Contracting Regime 179 The Nonprofit Sector under Attack 182 9. Privatization in Human Services: A Critique lWty Does Government Contract with Nonprofit Agencies? 191 Performance Assessment 199 The Irony of Privatization through Contracting

188

203

10. Government, Nonprofit Agencies, and the Welfare State 206 Issues of Citizenship 207 Contracting as Symbolic Politics 211 Toward a Balanced Approach to Communal Provision Tables Notes Index

233 245 285

215

The task of public agencies is not to achieve a problem-free society and to do so with technical efficiency. Our problems are not simple enough, our consensus not strong enough, and our understanding not grand enough to warrant such an approach to the ills of society. At the same time, our interdependence is so great, our sense of common destiny so fragile, and our hold on the intangible qualities of social life so weak that we can hardly afford to enthrone the market and run the risk of loosening even further the bonds of community. There surely must be an alternative approach. -Clarence Stone, ''Whither the Welfare State? Professionalization, Bureaucracy and the Market Alternative," Ethics 93 (April 1983): 595.

Part I THE TURN TO

N ONPROFITS

1 - Contracting for Services in the Welfare State

Nonprofit service organizations play critical roles in the lives of citizens today. Present in virtually every community, they reflect the d.iversity of American life. They appear as social clubs, foundations, federated charities, church service organizations such as the Salvation Army, and child welfare agencies. From pre-natal clinics to home health care for the frail elderly, they provide services cradle-to-grave. As new social problems are recognized, new agencies are created to meet the need. Agencies for runaway youth, shelters for battered women and the homeless, food banks, hospices for AIDS patientsto name the agencies is to chart the development of the social welfare agenda of the past few decades. In addition to their service functions, nonprofit organizations play political roles as well. As far back as the 1830s, Alexis de Tocqueville, the pent oaring analyst of American society, recognized the powerful contrib lns of voluntary associations to the country's political and intellectual life. 1 Voluntary associations still enable citizens to express their collective interests and solve community problems. Today, in addition, they playa new political role in representing the welfare state to its citizens, providing a buffer between state policy and service delivery. The attraction of voluntary associations to citizens remains undiminished by the dominance of public programs in providing for the bulk of people's needs. Indeed, the inherent difficulties of operating a welfare state that inevitably falls short of expectations and generates conflicts in administration may make the voluntary sector look particularly good by comparison. Nonprofit organizations, moreover, appear to have a legitimacy based on their altruistic origins and an organizational vitality free from the coercion of government laws. So it was that George Bush in the 1988 presidential campaign-and

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THE TURN TO NONPROFITS

later during his first months in office--called upon voluntary organizations ("a thousand points of light") to playa critical role in solving the country's social problems. This phrase invokes a pretty picture-of stars twinkling in the sky, small and independent of one another, coming from nowhere, going nowhere, each illuminating the firmament ever so slightly. But in the late twentieth century this is a deceptive image. Equally deceptive is the concept of the voluntary agency fueled entirely by a neighborhelping-neighbor altruism, because it masks the increasing dependence of nonprofit service organizations on government funding. Rather than relying mostly on private charity and volunteers, most nonprofit service organizations depend on government support for over half of their revenues: for many, government support comprises their entire budget. In contrast to the traditional image of government and nonprofits as two independent sectors, the new relationship amounts to one of mutual dependence. Mutual dependence blurs the lines between public and private. The agencies now often depend on government financing. A 1988 survey of the Child Welfare League of America concluded that government support accounted for, on average, 59 percent of its member agency revenues. 2 A 1991 survey of over 350 nonprofit social service agencies in Massachusetts found that 52 percent of agency income was from state contracts, and an additional 17 percent from nonstate-contract government funding such as Medicaid. 3 A 1991 survey of 276 nonprofit social service, educational, and cultural agencies in the Raleigh-Durham-Chapel Hill, North Carolina, region found that 45 percent of total funding was from government, if hospitals and universities were excluded. Fully one-quarter of all nonprofits in the region received over one-half of their revenue from government. 4 A 1989 survey of nonprofits in the New York metropolitan region found that government funding contributed almost half of total revenue. 5 On the other side of the coin, government relies on nonprofits to provide social services. In fiscal year 1989, 14 Massachusetts state agencies spent over $800 million, about 8.5 percent of the state budget, to purchase from over 1,150 contractors such services as alcoholism rehabilitation, family crisis intervention, instruction in English-as-a-second language, and daycare. Overall, the state recognizes over 200 distinct types of social services in its purchase-of-

Contracting for Services

5

service system. 6 In New York City, several municipal agencies do not deliver direct services at all but wholly depend on purchase-of-service agreements with nonprofit agencies. These include the Youth Bureau, the Department of Employment, the Community Development Agency, the Department of Mental Health, Mental Retardation, and Alcoholism Services, and the Agency for Child Development (daycare and Head Start). The total amount of money disbursed in contracts in fiscal year 1985 was over one billion dollars. 7 The mutual dependence of government and nonprofit organizations raises significant questions for the welfare state. If the state no longer directly delivers services but authorizes private parties to conduct its business, where shall we locate the boundaries of the state? Massive contracting for services should also have significant implications for the limits of government and the autonomy of nongovernmental community affairs. For, unlike the starry image President Bush put before the public, more dependence on nonprofit organizations means not less but more government involvement in the affairs of voluntary and community agencies. This involvement is likely to continue and even increase. Ongoing fiscal constraints will continue to attract policymakers to the contracting option. At the same time, new social policy initiatives are likely to attract planners to the contracting approach, as they recently have done in the areas of child abuse prevention, daycare, employment and training, alternatives to prison, and other social service innovations. Government and nonprofit agencies have been cooperating to produce services for a long time, but the relationship is in flux, primarily because the norm of looking to nonprofits to provide human services, and the substantial dependence of government on the sector, are relatively new. 8 Appreciation of these trends emerges from a review of the size and scope of contracting for services with nonprofit organizations at present, and of the relationship between government and nonprofits over time.

The Scope of Nonprofit Service Organizations The significance of the mutual dependence of government and nonprofit organizations depends upon recognizing the substantial role played by the nonprofit sector in service delivery. It is relatively

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THE TURN TO NONPROFITS

easy to note the extensive reach of nonprofit organizations on an impressionistic level, for evidence of the existence of nonprofit agencies, from alcoholism rehabilitation to zoological societies, is all around us. It is harder to establish precisely the aggregate scope of contracting with nonprofit service organizations. One problem is that one cannot equate the scope of nonprofit agencies' activities and those activities for which government purchases services. If government purchases a certain proportion of an agency's services, is its influence limited to that proportion, or is it more useful to think of government's influence as extending to the agency's whole workload? This question arises particularly when agencies have multiple sources of income. For example, a drugrehabilitation center which contracts with government for half its "beds" is, in one sense, only half under contract with government. Yet it must fully (not half) comply with governmental contractual requirements in service delivery. A second difficulty is that many available statistics apply to the entire nonprofit sector, which includes museums, hospitals, and even universities. We can be confident that the service sector fully shared in the fourfold growth in the amount of gross national product originating in the nonprofit sector from 1960 to 1975 ($10 billion to $45.4 billion). But we cannot say precisely what portion of this economic activity went to human service organizations. Given the relative poverty of service organizations compared to other nonprofit institutions, the sector probably gained a smaller proportion of the increase in total assets, which rose from $975 billion to $2.74 trillion over this period. 9 Nonetheless, some statistics are available that do give an indication of the startling transformation of social service delivery in the last 30 years. For example, government purchase of service contracting with nonprofit service agencies in Massachusetts rose from $25 million in 1971 to $850 million in 1988. 10 A good measure of the economic and social significance of an activity is the number of people employed in it. Overall figures from some cities and states indicate the impressive scope of the nonprofit service sector. In Massachusetts, private social service agencies receiving government funds employed over 66,000 people in 1991. 11 This is estimated to be a far greater number than were employed in state human service agencies. 12 In New York City, employment in

Contracting for Services

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nonprofit human service agencies increased 106 percent between 1975 and 1985, fueled largely by increases in government funding. I3 A 1986 study of the nonprofit sector in St. Louis indicated that there were over 2,500 nonprofit service organizations in the metropolitan area. Eighty-five thousand people, or seven percent of the local work force, were employed in these agencies. I4 A 1985 nationwide survey of 316 community action agencies (which are funded primarily by government) revealed that the total annual payroll of these agencies was over $365 million. The total number of agency employees was 45,058, an average of 123 per agency.I5 Most of these community action agencies did not exist prior to 1965. And, as an indication of the predominant role of nonprofit agencies in social services, 87 percent of all employment (an estimated 143,000 persons) in the social services field in New York State worked in nonprofit agencies in 1987. 16 Nonprofit service organizations playa vital role in the life of local communities and neighborhoods that transcends simple economic interest. The time and money people freely give to service organizations may be thought of as a cost to the donors, but it is also a benefit in providing an outlet for altruistic impulses. The survey of St. Louis area residents revealed that almost half of the region's 900,000 adults volunteered at least once during the year in area organizations. I7 Nationwide, in 1987 an estimated 80 million Americans volunteered 14.8 billion hours in various voluntary organizations. IS The array of services is extensive-from hospitals to homeless shelters to rape crisis centers. Family Service America, an association representing 290 family service agencies nationwide, estimates that in numbers volunteers almost equal employees. Ten thousand individuals volunteered in their agencies during 1988, only slightly less than the 11,000 professionals they employed. I9 The federal Department of Health and Human Services estimates that over 615,000 people volunteered in Head Start programs during 1988, a program operated primarily by nonprofit service agencies. 2o In some service organizations such as emergency food programs, shelters for battered women, and rape crisis centers, volunteers provide the bulk of the actual service to individuals and their families. Often these volunteers give money to these nonprofit organizations as well. Many large nonprofit service organizations also use volunteers in an auxiliary or supplemental capacity in critical areas of

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THE TURN TO NONPROFITS

organizational operations such as fundraising, public relations, and community outreach. Volunteers are also of critical importance to the governance of nonprofit organizations through their participation on boards of directors. Cyril O. Houle, an authority on nonprofit boards, estimated that 1,252,732 boards exist nationwide. Typically, nonprofit service organizations have between 10 and 40 board members. These figures would extrapolate to a minimum of 12 million individuals volunteering as board members across the country (discounted for multiple board memberships for some people), a great many of whom serve as board members of nonprofit service organizations. 21 Donations of money to nonprofit organizations are substantial and represent a key indicator of the relationship between nonprofits and citizens. In 1987, an estimated $89 billion was donated to nonprofit agencies nationwide, with $11.3 billion going to nonprofit social and legal services. 22 In 1985, in the greater St. Louis area, $628 million was donated, including $519 million by individuals. This sum is the equivalent of $261 for every man, woman, and child. 23 In 1985, 353 community action agencies received over $103 million in donated, in-kind contributions. Cash contributions totaled almost $14 million. 24 In 1981, 13 percent (or approximately $11.3 billion) of philanthropic donations were given to health and social welfare institutions. 25 Among large nonprofit service agencies, it is not uncommon for agencies to receive over a million dollars of contributions every year. The New England Home for Little Wanderers, a longstanding child and family service agency based in Boston, raised $1.13 million in individual and corporate contributions and $1.42 million in bequests and gifts in fiscal year 1988. 26 Yet government funding still plays a large role in the budgets of nonprofit service organizations receiving sizable charitable contributions. The New England Home received $5.1 million (or 63 percent of its operating revenues) from government for services in 1988. 27 A 1988 United Way of America survey revealed that mental health agencies affiliated with local United Way chapters received 64 percent of their income from government; the dependence on government of drug and substance abuse agencies was almost as great (62 percent) .28 Even sectarian service organizations receive substantial amounts of government funding. Catholic Charities U.S.A estimates

Contracting for Services

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that 44 percent of affiliate agency revenues in fiscal year 1988 were from government. 29 These examples underscore that voluntary action through donations of time and money is significantly intermingled with government funds and dependent upon government policy for its ultimate efficacy and impact. Nonprofit service organizations of course also serve millions of people. At every stage of the life cycle needy or dependent people turn to programs of nonprofit service agencies sponsored by government contracts. Head Start programs served an estimated 452,314 children in fiscal year 1989, an increase of almost 80,000 children from fiscal year 1980. Since the founding of Head Start in 1965, over 10 million children have been served. 3o There were 16,000 children in foster care in New York City in 1985. Family Service America estimates that its member agencies served more than 3.2 million people in 1988. 31 Again in New York, the Department of Aging served 25,257 meals a day in 1985 through nonprofit agencies funded by government. 32 Two noteworthy developments enrich our current understanding of the government-nonprofit relationship. First, government contracting with nonprofits has expanded to meet a wider variety of needs. For example, prior to the 1960s, public mental health programs were provided almost exclusively through large public institutions. By 1985, a dramatic shift had occurred. State mental health agencies owned or funded 21,948 separate facilities and programs. Private, predominantly nonprofit agencies funded by government represented 20,909 of this total figure. 33 Also, government contracting of nonprofit agencies rose sharply in services previously limited to a relatively small number of agencies dependent on private funds, including daycare, homeless shelters, child protection, counseling, home health, legal aid, family planning, respite care, and community living. Second, the character of the relationship has changed. Historically, government purchased services from charitable organizations and attached few strings beyond those common to many other service purchasers. Today governments contract for whole programs, and even create providers where they otherwise do not exist. There is more contracting today than ever before, and the terms of contracting are more demanding. If in the past government went to the private sector for limited services, today its purchasing power is such

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THE TURN TO NONPROFITS

that it is often in a position to shape the sorts of services offered by private providers. The nature of the funding process and the special nature of contracting organizations create special conditions of vulnerability for nonprofit agencies. First, when governments recognized such emergent social problems in the last 10 years as homelessness,34 hunger,35 and AIDS36 they dealt with them by funding nonprofits. The emergency nature of these issues has made organizations dedicated to working on these social problems dependent on government as one of the few "places" where large sources of support are available. Second, the "blockiness" of contracts makes the potential loss of contract funds particularly hard to take. If an agency experiences a ten percent decline in income from the United Way or private contributions (or for that matter if a contract is funded at last year's level while costs are increasing by ten percent), the agency can adjust incrementally to the shortfall. But the loss of an entire contract may throw the same agency for a loop. Not only will it lose a program segment, but valuable staff may be lost, and portions of contract overhead that paid part of the rent, bookkeeping, and the director's salary will no longer be available. The fact that agencies do not normally expect to lose contracts only slightly reduces their sense of vulnerability over the possibility of contract loss. The federal cutbacks of the Reagan years caused some agencies to shift from being primarily federal to being largely state contractors. Typical is the Franklin Community Action Corporation (FCAC), based in Greenfield, Massachusetts, which spent $2.5 million in 1981, largely from federal sources. Expenditures rose to $3.5 million in 1982, but dropped to $2.7 million in 1984 as the federal cuts were passed through to the agency. (The entire budget is funded from public sources.) But expenditures later rose to $5.1 million in 1988, as the agency obtained state contracts for services. While it might appear that agencies were simply shifting from one governmental payor to another, the move to state and local contracts is more portentous than that. This is because federal grants of the 1970s were often made for demonstration projects with few strings attached, and for programs the agencies championed. In contrast, state contracts are usually negotiated for very specific programs that allow nonprofit agencies little leeway. Third, the sharp expansion of nonprofit service organizations in

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the last 25 years has led to keen competItIon between nonprofit agencies for foundation grants and individual charitable contributions. Consequently, individual agencies find it very difficult to raise major amounts of private charitable contributions. As a result, many nonprofit service organizations, particularly organizations without established ties to United Way chapters and foundations, find that they have little alternative but to pursue additional government funds, either through new contract awards or through renegotiating their existing contracts for a higher rate.

Issues for the Welfare State American social policy is in the midst of a dramatic restructuring of the way public social services are provided. Although government funding of nonprofit service organizations dates to the colonial period, only in the last 25 years did this government-nonprofit strategy emerge as a widespread and favored tool of public service delivery. But entrusting the most vulnerable citizens and the most delicate service tasks to private agencies is not simply a matter of choice between "making" or "buying" services. This might be the case when one considers cOlltracting for pencils, computer services, or strategic weapons. But when it comes to purchasing the care and control of drug addicts, the safety and nurturing of children, the relief of hunger and the regulation of family life (through child protective activities) from private agencies, other values than efficiency are at stake. We contend that the impact of this transformation on the future of the American welfare state has not received adequate attention.

State Power to Private Providers One critical issue is the legitimacy of giving over state power to private providers. Government control and manipulation of vulnerable populations proceeds properly only when sanctioned by deliberate democratic processes and safeguards. Contracting gives away responsibility for important authoritative decisions about vulnerable people. Program monitoring and auditing are often rudimentary and inadequate for assuring program compliance and maintenance of standards. The policy system interposes courts as institutions that

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THE TURN TO NONPROFITS

alone can make the most important decisions-to deprive people of liberty, or take children from their homes. But in a thousand ways service workers act at the margin to make fateful decisions about people; or their reports constitute the primary evidence on which judges rely. Most of the time, in the end, it is the professional commitments of dedicated human services workers that protect society from the likelihood of severe problems of accountability due to contracting. But it is still crucial to examine closely the implications of the transfer of state powers to private agents. When children die in foster care, are public officials equally accountable if the social workers in charge are government employees or private providers under contract? How has the society transferred the police and rescue functions of the state to private agents? To put it more positively, how can the state secure the interests of citizens in being very careful with police pO\\Ters, while pursuing its utilization of private agencies for public purposes?

The Health of the Voluntary Sector A second critical issue is the health and well-being of the voluntary sector. When public funds play so vital a role in private agency budgets, it is disingenuous to think that the nonprofit sector would not be in danger of losing its separate identity. Does it matter whether the private sector maintains unique qualities and configurations? The answer is yes, for the following reasons. (1) Nonprofit organizations represent different values from those held by government. They are free to take action without giving thought to the needs of the entire society or being under constraints of taxpayer preferences. They need not standardize their products. They can do things government cannot do. They can elicit voluntary contributions and inspire citizen action in ways that are very difficult for government to emulate. Indeed, if government does seek to inspire citizen action, it tends to call upon the rhetoric of voluntarism, as in the experience of the Peace Corps and VISTA (the domestic Peace Corps). We should inquire whether the interpenetration of government and nonprofit agencies limits the capacity of society to respond effectively to a variety of social problems by restricting the autonomy of private agencies, even if their capacity for action is enhanced by increases in resources from contracting.

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(2) Nonprofit organizations are now highly dependent on government; consequently, economic downturns at the state or federal levels may result in cutbacks and the subsequent demise of nonprofit agencies as they fail to replace large parts of their program profiles. During the Great Depression many nonprofits experienced severe difficulties because of the loss of income and increased demand. 37 We should inquire whether the increased dependence of nonprofits on contracting poses similar concerns. (3) Democratic governance requires that government adequately hold accountable all agencies that implement public policy, whether they are government bureaus, businesses, or nonprofit contractors. Some analysts are particularly critical of social services contracting because contracts have proliferated without corresponding public mechanisms to hold contractors accountable. 38 We should seek to develop guidelines for program monitoring that protect nonprofit agencies from excessive governmental intrusion, while securing the legitimate needs of government to insure that programs are carried out. (4) Nonprofit agencies have taken over functions previously undertaken directly by public workers, and have assumed program responsibilities in new areas where government workers have never performed. The staffs of nonprofit agencies are the new "street-level bureaucrats": that is, workers who exercise discretion while interacting with citizens in the course of their jobs, whose decisions in assessing, prescribing, and in some case treating citizens' needs are highly consequential, and who act under the cloak of public authority.39 They "deliver" public policy to citizens, and their private coping behaviors, invented to make often impossible jobs manageable, may be said to "add up" to be, in effect, whatever policy is actually put into the field. The implications are even richer, however, than the assumption that the workers in nonprofit agencies effectively make policy. It also follows that workers in the private sector now represent public policy to the people. The policy regarding shelters is represented to the homeless through shelter monitors, counselors, and outreach workers. Child protection policies of the state are represented to distraught parents by workers in private agencies. These are the people who take the heat of client abuse, experience most directly the agony of not being able to serve their clients adequately, and deny client

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THE TURN TO NONPROFITS

claims when they have to. They also socialize clients to have expectations appropriate to the level of resources, and teach them the role of client, implicitly with the dual purpose of helping clients be effective in securing benefits while smoothing out relationships between clients and agencies. In short, private workers now play roles of social control with respect to public rights and claims of citizenship. There is more. These are private workers who are representing the state to citizens, but under the sponsorship of nonprofit agencies whose connections to government and to the average citizen may be very tenuous. At best, citizens would have a difficult time knowing when a matter was agency policy, and when it was government policy. Thus workers in nonprofit agencies buffer public policy to citizens and obscure the realities of public policies, because policies are mediated by nonprofit agencies.

Visions of the Polity At the heart of any difference of opinion over the desirability of growth of contracting are conflicting visions of proper and effective social provision. One view harks back to Tocqueville and the selfsufficiency of the frontier community. Social welfare needs are achieved through voluntary action, and voluntary action in turn generates the civic life that creates the community. In Voluntary Action, a book written in 1949, Lord Beveridge argued that through voluntary action "human society may become a friendly society-an Mfiliated Order of branches, some large and many small, each with its own life in freedom, each linked to all the rest by common purpose and by bonds to serve that purpose."40 Donations of time as well as money connect citizens with one another and build a community of individuals apart from the bureaucratic state. An alternative vision of the welfare state sees the development of public services and large-scale income redistribution through the tax system as the hallmark of a society where everyone is considered to be a social equal and deserving of collective efforts. The British sociologist T. H. Marshall noted that public social services, in their ideal version, represent "the entire citizen body organized in a great mutual aid society. All contribute, and all are entitled to receive benefits. There is no longer any distinction between the privileged

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and the unprivileged."41 Such a society has no need for voluntary action. In this vein, Gifford Pinchot, founder of the U.S. Forest Service, social reformer, and Governor of Pennsylvania, commented in 1932 that "the time is not far off, apparently, when private charity, though essential at times and in places, will be almost obsolete ... Surely that is natural and normal in a nation dedicated, as a nation, to the life, liberty, and happiness for all of its people."42 To Pinchot, Marshall, and many other scholars and policymakers of the mid-twentieth century, the ability of everyone fully to participate in society necessarily entailed "the socialization of the distribution" of social welfare, to borrow a phrase from Michael Walzer. 43 To these writers, private charity was inconsistent, unreliable, and parochial; thus, the state needed to assume the responsibility for the distribution of services through a state bureaucracy of professional workers who would distribute social welfare services as an entitlement rather than a gift. Through this socialization of distribution every person could be a full citizen both of his or her local community and the national community, because each citizen would be entitled to an array of basic services. In Western E'urope and Canada this socialization of distribution meant the extension of state provision and the frequent takeover of nonprofit service agencies by the state. In some cases governments preserved the existing network of primarily sectarian nonprofit service agencies, but replaced private charity with government funds. This arrangement is characteristic of the Netherlands and Germany. These governments take advantage of the capacity of nonprofit agencies to provide decentralized services through local community organizations; they then fund these agencies at a level sufficient for them to offer services on the universal basis characteristic of state bureaucracies. The shift to state funding and provision was regarded by many scholars and policymakers as the highest form of welfare state development. Alva Myrdal wrote in the 1930s: Social reform policies may be conceived of as passing through three stages: a paternalistic conservative era, when curing the worst ills is enough; a liberal era, when safeguarding against inequalities through pooling the risks is enough; and a social democratic era, when preventing the ills is attempted. The first was the period of curative social policy through private charity and public poor relief;

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THE TURN TO NONPROFITS

the second was the period of social insurance broad in scope but yet merely symptomatic; and the third may be called the period of protective and cooperative social policy.44 The United States, with its prominent role for nonprofit agencies and means-tested and targeted public programs, was considered to be regressive. Harold L. Wilensky and Charles N. Lebeaux in their landmark 1965 book on social policy, Industrial Society and Social Welfare, observed that America was a "reluctant welfare state." To them, the welfare state represented "government-protected minimum standards of income, nutrition, health, housing, and education for every citizen, assured to him as a political rights, not as charity."45 America was a reluctant welfare state because it had done much less than other industrialized countries in developing government-protected minimum standards. Until the 1960s, America had relied heavily upon a decentralized system of social protection that emphasized state and local responsibility and voluntarism to address social problems. The federal government's role, except during times of crisis or in selected circumstances such as veteran's pensions, remained limited. The roots of this laggard status lay in cultural values, religious and ethnic diversity, and political decentralization. The writers contended, however, that industrialization would gradually overcome these impediments and lead to a convergence of the United States and other industrialized countries. 46 In short, the welfare states of Europe were regarded as the configurations toward which America would eventually move. As one observer stated, "In the early 1960s, it would have been very difficult to find any long-term forecast not based on the assumption that the growth of the welfare state was just as long lasting-and for that matter just as desirable-a process as economic growth itself. "47 Full citizenship depended on the continued growth of the welfare state. But even as these pronouncements and assessments of the welfare state were being issued, dissatisfactions developed in the United States and abroad. In the 1960s and 1970s, profound disappointment characterized the evaluations of the welfare state and government service delivery. State bureaucracies often denied "citizenship" to recipients of welfare state services by demeaning service and regulations, not responding to community and client concerns, and mak-

Contracting for Services

17

ing clients dependent on state professional services. 48 The growth of government funding of nonprofit agencies throughout advanced industrial countries in the last 30 years is a reaction against the problems of state services. In theory, government funding of nonprofit agencies is a mechanism for marrying two visions of the welfare state: promoting community interests, citizen participation in service delivery, and fellowship through voluntary action, while guaranteeing a minimum level of service regardless of income and social status. Indeed, this rationale served as a justification for the sharp rise in contracted services in the U.S. in the 1960s and 1970s. Community mental health centers, nearly all of which were (and are) nonprofit organizations, were designed in part to bring mental health care, long the province of the very sick and the rich, within the reach of every American. 49 In 1967, when Congress acted to promote contracting for services with nonprofit agencies, it did so in the belief that this was one way to make services widely available, regardless of income. Many programs--daycare, for example-would be delivered by nonprofits because"of their perceived flexibility, lower costs, and community focus. They would have graduated payment schedules to promote accessibility.5o After the subsequent growth of publicly subsidized purchased services, social policy analyst Neil Gilbert contended that America was moving towards a European model for its welfare state because social services were being offered on a more universal basis.51 In the 1980s the Reagan administration precipitated a broad retreat from the idea of universal social services. Instead of a developing union of the universalism of the public sector with the community base and vitality of the nonprofit sector, the two realms of social provision were placed in conflict with one another. The first budget cuts of the Reagan administration were partiallyjustified by the belief that the private sector would compensate for redtlced social spending. President Bush continued this policy with his appeal to a "thousand points of light." The sectors were also placed in conflict when government cutbacks set nonprofits competing against one another to try to maintain payment levels, and as the nonprofits tried to rally as a political force against the undertow of cutback funding. Government funding of nonprofit organizations draws support from across the political spectrum. Liberals join conservatives in backing this public-private collaboration because it is seen as a more

18

THE TURN TO NONPROFITS

effective and humane service strategy than reliance on public sector services alone. Until the reforms of the 1970s and 1980s, state hospitals and state custodial schools were repressive, isolated, and ineffective in service delivery. By contrast, community-based, nonprofit alternatives were small, staffed with committed individuals, and usually integrated into various aspects of community life. To conservatives, government contracting is part of the broad appeal of privatization that promises smaller government and more reliance on private initiative. To liberals, government contracting with nonprofit agencies can be a way to expand the boundaries of the welfare state, especially in areas where the responsibility for addressing social problems was previously borne by the affected individuals and their families. Good examples in this category are daycare, spouse abuse, respite care for families of the elderly and developmentally disabled, and assistance for victims of crime. In these cases, government funding of nonprofit agencies socializes the risk associated with these problems but maintains community delivery mechanisms. Since these social problems are sensitive and sometimes controversial issues that require intervention in the family and individual life, the use of nonprofit organizations is seen as consistent with protecting the privacy and freedom of families and individuals from government interference. Although there may be some consensus on the benefits of contracting for some services, the overall place of contracting in the political economy remains a source of substantial disagreement and confusion. Sociologist Nathan Glazer, for example, argues that the United States has become overly dependent on government for addressing community and individual problems; in his view nonprofit organizations are the key to reinvigorating community and individual responsibility, which will in turn produce salutary results for the American economy.52 Likewise, Peter L. Berger and Richard John Neuhaus argue that voluntary associations are important because they allow "empowerment through pluralism."53 Consequently, they tend to be very suspicious of government intrusion into the nonprofit sphere. By contrast, Robert Reich believes that the reliance of the United States on the "ideology of charity" has produced inadequate, fragmented social programs because citizens in need of relief are not regarded as entitled to social benefits. To Reich, the existing system

Contracting for Services

19

of voluntary and public relief hurts America's ability to compete in world markets, as workers are unlikely to be secure in their jobs because social protection is insufficient. 54 Where government funding of nonprofit agencies fits into a comprehensive view of the modern welfare state remains to be articulated. Reich and other scholars discuss charity and nonprofit agencies as if such organizations relied primarily on private contributions. Glazer refers to government funding of nonprofit agencies as if it were an aberration rather t.han a widely accepted and growing form of service delivery. Those who advocate a larger role for charity (or simply a smaller welfare state) are unprepared to present a blueprint for reduced entitlements. Whatever the perspective, these welfare state critics and supporters appear to neglect the.interpenetration of government and the voluntary sector. 55 Given the extensiveness of government funding of nonprofit agencies, the social, political, and organizational effects of this service strategy are extraordinarily important to the current debate on the future of the American welfare state.

2 - Nonprofit Organizations and Community

Every advanced industrial society has its particular signature, determined by how that nation balances government, community, and market responsibilities. In some countries radio and television outlets are owned by the government, in others the communications industry is privately owned. Some governments run the airlines and railroads, some do not. l Where private ownership prevails, countries also differ in the degree of influence the public sector has over private affairs through regulations, subsidies, and infrastructural development. Citizens of the industrialized countries receive income and social services not only from government but from the business and community sectors as well. In different measures, for example, elderly people may receive income support from private pensions, governmental supplements, or family and nonprofit institutions. 2 In the area of social services, alcoholics may receive counseling through their employers or public agencies, or from chapters of Alcoholics Anonymous, a self-financing voluntary association, or their church. It is the recognition of the important contributions of government, market, and community institutions to citizen well-being that leads many analysts to call attention to the declining relevance of the term ''welfare state," and to suggest alternatives such as "the mixed economy of welfare,"3 the "social division of welfare,"4 or "the welfare economy."5 In every country the particular mix of government, market, and community responsibility can and does change over time. Over the last several decades, social policy in the United States has evolved in ways that favor increased public responsibility in some areas (for example, educating handicapped children, preventing physical abuse and neglect among household members, and providing addi-

Nonprofit Organizations and Community

21

tional land for recreation). At the same time, the country has been reducing the degree of public responsibility for providing or regulating services in other areas, for example, in family planning counseling. Each sector emphasizes different values and operates according to different norms. Public welfare programs are characterized by inclusionary policies such as social security, food stamps, or social services, based upon formula to insure fairness. Because these are government policies, their extent will be determined ultimately by a legislative process, and they will be enforced by law-in the raising of revenues and in their distribution. Welfare provided by the market is usually restricted to employees and their dependents. If not mandated by law, the size of the benefits is determined by the role of benefits in recruiting and retaining workers. Welfare provision by business-say, pensions-is also likely to be more innovative and possibly cheaper than government provision because businesses are better able to search out new approaches and shop for least expensive alternatives. Welfare provision by community organizations may be particularistic in coverage (private organizations need not serve all who ask), but it also can be flexible and responsive to a degree not compatible with norms of governmental fairness or business evenhandedness. Whatever the sponsorship of welfare provision, programs may not seem very different to recipients. Money is money, after all. And with respect to services there is likely to be convergence of therapies and treatment practices regardless of sponsorship. Nonetheless, as this incomplete sketch of the differences between welfare provision in the three sectors should suggest, more than efficiency in provision is involved in program sponsorship. It is consequential whether governmental norms, market practices, or community associations govern social welfare provision in the broadest sense. It is also consequential if the balance in sectoral provision changes. If society sought to depend more on markets and less on government for health insurance, it would likely be seeking greater variety of options and possibilities of cost reductions through competition. But it would probably be trading off reduced standardization of coverage and greater reliance on employment status as a factor in the distribution of health coverage. This book analyzes the explosion in governmental contracting for

22

THE TURN TO NONPROFITS

services with nonprofit organizations, documented in the first chapter, and its impact on the character of the welfare state and American society. Our concerns are consistent with the view that any changes in the relations of the state and the economy (say, deregulation in transportation), the economy and community (business takeovers of proprietary hospitals), or the state and community (the focus of this effort), deserve attention because they are likely to be accompanied by changes in degrees of equity, responsiveness, flexibility, and liberty that one or another of these sectors promotes as dominant concerns.

Nonprofits as Manifestations of Community The term "community" often used very loosely, is for our purposes defined well by Robert Bellah and his colleagues. In Habits ofthe Heart they write that "a community is a group of people who are socially interdependent, who participate together in discussion and decisionmaking, and who share certain practices that both define the community and are nurtured by it."6 Nonprofit service organizations, in this definition, are tangible, significant manifestations of community. This central proposition is essential to understanding why changes in the relationship between nonprofit organizations and governments are consequential for public values. Three qualities of community are especially important in understandin'g the significance of community to nonprofit organizations and public policy. First, a community is self-identifying. People belong in communities if they think of themselves as members. Unlike individuals defined by congressional districts, tribes, professional societies, commodity futures markets, and other forms of social organization, community members are those who elect to consider themselves part of a larger collectivity. Sometimes community overlaps with other forms of organization, such as a neighborhood or ethnic fraternity. When this happens the impression is conveyed that the two are the same, but they are not. Sent to the right neighborhood, an observer might indeed find community. Sent to another, he or she would be disappointed. Many subsections of cities do not have active community lives. Even when they do, some people have nothing to do with their neighbors. 7 The newcomers who are charmed by their working class neighbors in Boston's North End are unlikely to participate in that

Nonprofit Organizations and Community

23

neighborhood's Italian community. And communities do not require residential propinquity. Inner-city churches are often the focal point of active communities whose parishioners are dispersed in the suburbs. A rape crisis center may draw upon women from throughout a geographic area rather than the immediate vicinity where the center is located. The second quality of communities is that they are fueled by voluntary action. People contribute time and money, extend their influence, and otherwise make community organizations work because they want to make a difference. 8 Such voluntary organizations may be particularly strong precisely because they are autonomous and not subject to market vagaries or changing governmental priorities. They also enjoy a special sort of legitimacy because their existence derives from free association rather than law or an ticipation of profit, and because they are thought to arise from the sort of passionate convictions that tend to be respected in politics disproportionately to the number of people who hold the beliefs. Third, communities are important because it is in their midst that our most deeply held values are expressed-literally so, since it is where we engage with other people in common enterprises of the highest salience. Religious communities, for example, facilitate worship by providing a safe and supportive haven. Moreover, communities give expression to those values through the development of informal and formal organizations. For example, religious communities make possible the realization of strongly felt "core" values by establishing schools, charity organizations, orphanages, youth groups, and the like. Communities are not only self-conscious collectivities of shared sentiment. They also take on activities that are consistent with those sentiments. They establish churches, radio stations, study groups, newspapers, community centers, block clubs, and other activities that allow them to inject their values into the society for the benefit of themselves, or others. Communities thus provide the context within which groups can organize to solve common problems. Communities of workers give rise to unions. Women's groups sponsor shelters and advocate for public policy dealing with spouse abuse. Neighbors brought together by environmental threats turn to organizations such as the Sierra Club. If "community" is to signify more than general feelings about

24

THE TURN TO NONPROFITS

common concerns, it must show itself in the activities people undertake to express those shared values. These activities include problemsolving service agencies that communities incorporate as nonprofit organizations: they are communities made manifest. Our emphasis then is different than that of commentators who comfortably use the word "community" in association with the nation-state or global issues. 9 Not every community organization incorporates itself as a nonprofit. The nonprofit designation is a legal category that requires an organization to file forms with the Internal Revenue Service and adhere to regulations on the distribution of earnings and political activity. This legal status also confers many tax benefits and privileges: charitable donations are tax deductible for the donor, and in most states nonprofits are exempt from local property and state sales taxes. In addition, nonprofits can take advantage of reduced postal rates and free "public service" advertising on radio and television. Io Legal status is also a way of joining two important aspects of community: the moral community, in which individuals share certain values and social concerns, and the legal community, which defines the rules of governance and participation for the organization. II This distinction is integral to our discussion because we view nonprofit service organizations not only as service-providing institutions but also as political organizations that play key roles in citizen representation and governance. Many community organizations may not need nonprofit legal status. The local soccer club or the block association may be able to transact business and achieve its purposes without the formal nonprofit designation. Nor are all nonprofits manifestations of community. In recent years some nonprofit organizations have been created by government. For example, the Durham (N.C.) Housing Authority created a new, nonprofit entity to develop low income housing; it was headed by the same board of directors as that of the Authority.I2 Others have been founded by just a few individuals with a novel idea about a way to address a problem. All these voluntary organizations embody some of the most prominent ways by which the rest of the world comes to know communities, and many have assumed nonprofit status. And it is through such organizational expressions that political elites are able to contact and interact with communities when they attempt to aid or contain

Nonprofit Organizations and Community

25

them. 13 In short, these organizations provide a key link between the citizenry and their government, and changes in their character may produce major shifts in the citizen-government relationship.14

Pathways to Participation The most straightforward way to demonstrate that nonprofit service organizations are manifestations of community is to recount the role of individuals in the organizations. These roles are discussed elsewhere in this book and so will be treated only briefly here. First, their boards of directors are drawn from community notables who support the organizations' objectives and are expected to provide leadership. Boards are constructed when organizations are established; later the composition of boards is altered incrementally depending upon the organization's goals and the perceived strengths of the rest of the board. Members are typically chosen for their potential contribution to advancing the organization's mission, including their expected financial contribution, their reputation, or their expertise. A hospital, museum, or orchestra may recruit to its board prominent individuals who will themselves contribute financially to the institution and induce generosity among their friends. A new job training center or youth development agency may recruit socially minded people in business whose ties to banks will help in establishing credit and getting the advice of lawyers and experts in the agency's policy field. An agency with government contracts may recruit individuals with influential political connections to help them retain their contracts and attract new ones. Throughout the nation thousands of people perform these roles in organizational governance. Some may be motivated in part by the social opportunities that accompany board membership. But they are also motivated by the desire to provide service. Board membership is a point of pride among professionals who are already a part of the service community, and among neophytes who are recruited to care about a particular service population. Second, nonprofit organizations make extensive use of volunteers. Hospitals depend upon volunteers to staff gift shops and cafeterias and to greet and direct patients and visitors. Shelters depend upon volunteers to serve meals and make guests feel welcome. Rape crisis centers depend upon volunteers to provide counseling and other

26

THE TURN TO NONPROFITS

support services. From door-to-door solicitations to taking calls during annual telephone drives, volunteers are central to mass solicitation efforts. Moreover, low pay lends a degree of voluntarism to paid work in nonprofit organizations. Third, many nonprofits raise significant parts of their annual budgets from individuals who believe they are supporting community institutions. People walk to raise money for hunger or AIDS relief programs. They contribute to Christmas funds for the homeless or the destitute. They give toys, food, or clothing to a local children's agency. In short, the cash and in-kind donations support the view that these nonprofit organizations are manifestations of community.

Community and the Theory of Nonprofit Organizations Political theorists recognize that social life tends to be held together by "mediating" institutions, including family structures and community organizations, that provide services outside the mandates and force of law implicit in government programs. I5 For such theorists, community organization is prior to government provision of service, coexists with public service provision, and plays a social role that cannot fully be taken over by government. In the absence of government-sponsored daycare programs, for example, families, friends, and neighbors invent childcare arrangements. Without nursing homes, the sick and frail are cared for at home. Without welfare programs, destitute people find succor through church programs for the poor. This theory of "mediating institutions" highlights the capacity of communities to solve their own problems and warns against the danger that government efforts to provide parallel services may undermine spontaneous community initiatives, 16 while public efforts to subsidize them may result in loss of vitality and character. I7 Moreover, these organizations are considered to be an important buffer for the individual against excessive government penetration of society. In this view-which harks back to Tocqueville-mediating institutions are essential to a democratic way of life. I8 This instructive perspective is properly cautionary about the dangers of government intrusion into community affairs, but it can be misguided in failing to understand the need for large-scale responses to widespread social need. It is one thing to recognize, consistent

Nonprofit Organizations and Community

27

with the theory of mediating institutions, that the rise of food banks and soup kitchens were spontaneous community responses to the needs of hungry people. It is another to suggest that food banks using private food donations might be able to feed the hungry and eliminate the need for food stamps. Two views of nonprofits that arise out of the economist's perspective also support our understanding of them as manifestations of community. One question economic theorists seek to answer is why certain goods that benefit large numbers of people are produced by society when their production cannot be explained by market-oriented behavior. To many economists, governments produce collective goods such as roads and lighthouses because these necessary goods cannot be produced by markets. No individual can afford to produce them, nor do people have incentives voluntarily to pay their share, since they can be "free riders" and enjoy these collective goods (if they exist) without contributing to their production or maintenance. Government is able to overcome this "market failure" because it acts through legitimate political processes to force the participation of everyone in contributing to the production of collective goods. In a democracy government is limited to producing only those collective goods which are either accessible to all, or, if targeted to benefit certain groups, enjoy the support of the majority.19 Other goods and services, such as orchestras and ethnic-specific burial societies, are not candidates for public policy because, while perhaps desired by many, they are not preferred by a critical mass. In such cases the "market failure" to produce collective goods is solved by private collective action. It would follow that the number of nonprofits would be directly related to ethnic and cultural heterogeneity. As economist Estelle James argues, the more diverse a society, the more difficult it is to reach consensus on the provision of collective goods. 20 (However, this view overlooks the possibility of pork-barrel policyrnaking: support for benefits to one narrow group is implicitly exchanged in legislatures for support for other projects benefiting other narrow groups.) This perspective on nonprofits is descriptively insightful. It supports our contention that communities desiring collective action establish organizations to meet their needs. It also structures analysis

28

THE TURN TO NONPROFITS

in such a way as to offer an explanation for the intrusion of government into some previously untouched areas. As the popular conception of the role and scope of government has changed, activities once regarded as inappropriate for public collective action are now undertaken by the state. Relatively recent federal support for the arts and for social policy concerns such as special education and child abuse illustrate how conceptions of the proper scope of public action change over time. The notion of nonprofits arising out of market failure may parsimoniously map a part of the world, but it has weaknesses as a guide to the origins of nonprofits. In particular, the theory cannot anticipate that government will want to contract with nonprofits to provide public services. We thus must face. one of two paradoxes. Either activities deemed too specialized for government are in fact properly government responsibilities, or government seeks to provide activities through established organizations because it will not provide them. Starting from the notion that what needs to be explained are departures from free market exchange, economists have also suggested that nonprofits recommend themselves to potential donors and consumers of nonprofits' services because they are deemed trustworthy.21 Their point of departure is the proposition that markets are not able to yield socially optimal results when agreements cannot be entered into because one party cannot judge the quality of goods or services. In this view, a person looking for a nursing home has difficulty assessing the quality of the home and particularly its future service standards. A philanthropist seeking to relieve world hunger has related difficulties in assessing the trustworthiness of a relief agency. How does he or she know that a hundred-dollar donation for famine relief will actually go to feed hungry people? Nonprofit organizations are said to solve this problem of "contract failure" in one of two ways. Some maintain that if no one stands to gain financially by nonprofits' activities, at least in theory, donors (and, ironically, government) can trust (or trust more) that funds will be used for their stated purpose. 22 In another version, clients may be inclined to trust nonprofits to provide high levels of care or service, reliable advice, expert judgment untainted by commercial considerations, and so forth, if they know that the organizations they

Nonprofit Organizations and Community

29

go to for help or otherwise patronize are not motivated by the prospect of distributing profits to the organization's principals. 23 Never mind if the nonprofit nursing home goes bankrupt through mismanagement, or the charity decides to focus its attention on population control instead of hunger relief. At least the bankruptcy and the change in organizational focus did not occur because the nonprofits' directors were trying to maximize their own return on investment. At a general level this view correctly identifies an important strength of nonprofits, particularly in referencing the altruistic assumptions by which many such organizations are guided. It does not, of course, consider the problems of insuring service quality of nonprofits; it only removes one possible contributor to consumers' lack of confidence. Nor does it consider that many nonprofit organizations may actually depart from their stated mission in the actual delivery of services. 24 It also neglects other ways that nonprofits can be used for the aggrandizement of their principals. Fancy offices, inflated salaries, and sweetheart subcontracts can go a long way to making life easier for irresponsible administrators of nonprofit agencies. Client trust as an explanation for the rise of nonprofits also fails to explain why government might turn to the sector, since the political accountability of government might offer greater protection against abuse than private boards of directors. However, the presumed selflessness of nonprofits might actually offer something of an explanation of public interest in nonprofits in an era of skepticism over government capacity and, in some places, distrust of government intentions. A particular weakness of these economic theories is that they take a deductive form (that is, if a collective need exists which is felt by a minority of the political community, then ...). When we seek to apply the theories to actual developments, however, important inconsistencies immediately appear. It seems to make sense that one might trust a nursing home operated by a nonprofit provider more than one run as a business. But it is equally sensible to say that a nursing home run by a business could be more concerned about reputation than the community organization, and thus provide more reliable service. The fact is that we take care of our ill and elderly people in

30

THE TURN TO NONPROFITS

institutions established in all three sectors of society: government, market, and community (through nonprofits). The theory of nonprofits does not help us understand why one nursing home is nonprofit and another is not, or why society continues to support government residences for elderly veterans and other chronic needs populations. Society also maintains public, nonprofit and for-profit hospitals, rehabilitation facilities, and schools. 25 One theorist who has tried to address the problem of market failure theories is Lester M. Salamon. He argues that it is not government but the voluntary sector which first organizes to provide collective goods in response to market failure. Government then subsidizes the voluntary sector in cases of "voluntary failure," when the private sector is unable to provide adequate levels of.collective goods. 26 Salamon's theory is helpful in calling attention to widespread government funding of nonprofit service agencies and the important limitations on service faced by nonprofit agencies dependent solely on private funds. Yet this theory is also unable to explain the simultaneous existence of public, nonprofit and for-profit organizations in many service categories such as residential care for the aged, children, and the developmentally disabled. Historical reflections are also instinctively friendly to this perspective. Most nonprofit agencies addressing the needs of the poor relied upon private funds until the 1960s. Yet the voluntary failure theory would have predicted that government funding of nonprofit agencies would have been much more extensive and widespread throughout American history. Another interpretation is that government funding in response to voluntary failure did arise in the 1960s when public expectations of service adequacy changed. If this perspective is correct, it converts the voluntary failure theory into one that responds primarily to political stimuli and impulses. Finally, Salamon's views are indifferent to the fact that the sources of funding for nonprofit organizations affect the character of services. Aid to the poor provided by nonprofit agencies reliant upon private donations is often fundamentally different from the services to the poor provided by nonprofit agencies funded by government. Another anomaly that confronts the theorist of nonprofit organizations is the intrusion of one form into the space of another. It is fairly commonplace to observe that businesses are setting up on turf

Nonprofit Organiz.ations and Community

31

that has generally been regarded in the past as nonprofit territory. Hospital chains (businesses) are buying up nonprofit community counterparts. Entrepreneurs have entered the daycare business and community residence programs for persons with developmental disabilities. As privatization through contracting continues, businesses may be expected to hunt down the contract dollar. 27 It may be less evident but it is still the case that nonprofit organizations are sneaking into areas that have typically been business territory. The field of management consulting has attracted nonprofit participants, for example. Magazine publishing is also illustrative: both Ms. and Mother Jones were founded as nonprofit organizations, although they very well could have been founded as businesses like their commercial competitors. Other nonprofits, such as the National Geographic Society with National Geographic, and the American Mu.seum of Natural History with Natural History, publish magazines, but they did not start out primarily as publishers. If issues of trust or the possibility of collective action were fundamental, why do the same services, presumably confronted with similar market positions and possibilities of market failure, tolerate such a wide range of organizational forms? Equally interesting is the transformation of the same organization: the choices individual organizations have been making to change their forms. Ms. magazine was sold by its nonprofit owner to a private publisher. Quite a few nonprofits in the mental health field, hoping to get more ready access to capital, have turned into for-profit entities. 28 At the same time, some businesses have reorganized themselves as nonprofits, or have subsumed themselves as units of nonprofit grOllpS. Why would the same organization, providing the same service, change its organizational status if market or voluntary failure explained the origins of nonprofits?

Toward a Political Explanation of Nonprofit Organizations One of the fundamental difficulties of the market and voluntary failure theories of nonprofits is their neglect of the role of government and government policy. To market failure theorists, government policymakers simply implement the demand of the people for collective goods; they have no independent role to play in shaping the nonprofit sector. The theorists of voluntary failure, similarly,

32

THE TURN TO NONPROFITS

ignore the role of politics and the design of dominant political institutions as important factors in determining the nature of the voluntary sector. Yet the complex character of the nonprofit sector in the United States can only be understood as a result of individuals and groups taking actions on the basis of perceived costs and benefits-a process shaped by a variety of political and historical factors. 29 A dominant perspective in analyzing political (and other) behavior takes the view that actions can be explained by taking into account the costs and benefits to individuals. People will be moved to participate in individual or collective action only if the perceived benefits of doing so exceed the perceived costs. People establish and join organizations because the advantage or incentives outweigh the additional costs in personal time and resources required in organizational activity. 30 These personal and small group calculations of costs and benefits are profoundly affected by historical precedent, government policy, the structure of political institutions, and peer and community influences. In this vein political scientist Walter Dean Burnham contends that the decline in electoral participation in the United States may be explained by potential voters' calculations of costs and benefits, which are strongly influenced by government policy.31 An organization's decision to adopt the nonprofit form can be thought of in similar terms. The selection of nonprofit status is a decision made by organizational leaders following historical precedent, anticipatingthe expectations of relevant actors such as government officials and community leaders, and calculating the expected costs and benefits within the constraints and incentives determined by government policy. We will show how the calculation of costs and benefits influences the shape of the nonprofit sector by examining how a few hypothetical individuals (drawn from actual examples) recently tried to achieve their objectives. These are not isolated and autonomous cases; they are typical people who live in a political landscape influenced by their peers, government policy, and historical precedent. Case 1. Upon his appointment to a judgeship in an inner-eity district court, a reformer is determined to bring pre-employment training and counseling services to juvenile offenders so that he will

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have a constructive alternative to sending offenders to jail, setting them free, or simply maintaining them on probation. The judge persuades community leaders to establish a nonprofit youth service agency to raise public and private funds for programs for his constituency. The founders of the new agency are encouraged by the availability of government funding in the juvenile justice area. It never occurs to them to set up anything but a nonprofit-an organization able to enjoy the tax status of a nonprofit in the treatment of its receipts and philanthropic donations, and in a position to meet government contracting requirements. Case 2. A woman with a doctorate in education wants to continue to work in e(lucational research. She is approached to undertake some projects but does not want to bring them to a large consulting firm that would demand too much off the top for administrative overhead. At t.he same time the federal agency, which normally does business with other nonprofit organizations such as universities or the Ra~d Corporation, will not contract with individuals who have no organizational affiliation. The researcher does not anticipate making great profits from educational research. In any case, she is not interested in building a business that would require her to spend too much time making contacts and administering other people's work. She fornIs a nonprofit corporation that satisfies the contracting agencies. She can set her own salary level if she continues to solicit contracts successfully. She is protected from creditors if she fails. Case 3. A man gains recognition for the work his nonprofit corporation has done in placing welfare recipients in jobs. His agency succeeds by ingeniously combining portions of clients' welfare payments (the state gladly pays because welfare costs will go down if individuals become employed) with federal job training grants and payments from employers (whose wage costs remain low while trainees are partially supported by welfare grants). Others are beginning to copy his program. He concludes he might be able to cash in on his organizatio:n's system while performing a valuable service. The climate is right: employment of welfare recipients is a hot topic, while in many places labor scarcity makes his services very valuable to corporations desperate for workers. Inspired by corporate interest in his approach and aware of increased state and federal flexibility in the use of welfare funds, the entrepreneur leaves his nonprofit provider and starts up a business to sell his system.

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THE TURN TO NONPROFITS

Case 4. A nonprofit mental health service organization, consisting of five professionals, wants to move its operations to better quarters. Although it prospers, banks are unwilling to lend the agency money for relocation and expansion. Aware that capital for expansion is more available to prosperous businesses than to nonprofit organizations, the agency disbands and starts up again as a business able to go to the public for capital growth. Case 5. Two physicians start a for-profit residential child care agency for difficult-to-place children rejected by existing public and nonprofit agencies. However, persistent concerns about quality are raised about the program. A new director is appointed to upgrade service quality. As part of his effort to improve the program's reputation, he incorporates the agency as a nonprofit. He also believes that government officials will be more likely to contract with a nonprofit agency than with a for-profit. 32 Although groups and individuals make choices to fit their own interests, patterns in behavior still emerge. For the most part, calculations in choosing organizational status are consistent across service areas, so the decision to opt for nonprofit status may likewise be taken consistently. In some areas-for example, services for runaway youth-there is no conceivable profit to be made, so the issue is moot. In addition, public expectations of the governing structure of service delivery shape decisions in the direction of uniformity of type.

The choice of organizational form may be dictated by calculations of costs and benefits, but the calculations will always be made within specific contexts. Needless to say, they will vary from place to place, country to country, and over time. Four topics influence these calculations: advantages of the nonprofit form, historical precedent, anticipated reactions, and regime characteristics.

Advantages of the Nonprofit Form Nonprofit status can be seen as a legal option which presents a set of constraints and advantages chosen strategically by people who calculate that organizations formed under such conditions will prosper. 33 These constraints are determined in the world of politics and include the political structure of governance and prohibition against the distribution of profits and assets to individual directors. There are

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also restnctlons on the actIVItIes of the nonprofits, primarily on political lobbying and the extent to which they can engage in profitmaking ventures. The benefits include favorable tax treatment and other public subsidies, as well as the advantage that comes with the ability to assert that the organization is not established for financial gain. It is important that the constraints and advantages should be conceptualized not just from the perspective of private actors but also from the perspective of government officials. Nonprofit organizations funded by government provide many advantages to government, including the ability to reward favored constituents, to shift the financial and managerial risk of public services from public officials to private individuals and organizations, and to respond quickly to emergent social problems. 34 These advantages encourage government officials to devote public funds to nonprofit services, which then attracts individuals interested in creating nonprofit organizations to th.is service sector.

Historical Precedent To understand the importance of historical precedent it will be useful to review in brief the development of nonprofit organizations. First, nonprofit organizations predate the existence of modern markets. In the extreme case this makes talk of market failure sound absurd, as, for example, when we refer to the great pre-modern European universities. In the United States the history of nonprofits also appears to have political origin.s. According to historian Peter Dobkin Hall, in this country the oldest nonprofits were founded at an early stage of American development, in the beginning of the nineteenth century, when some Protestant evangelicals and federalist merchants sought ways to cultivate and direct the populist Jeffersonian developments of the period, as well as to create institutions that would feed the needs of new nlercantile interests as they defined them. The institutions were created at a time when these mercantile interests, having lost control in the political realm, sought to maintain their social visions through nonprofit corporations. This suggests that an explanation rooted in political circumstances rather than market failure would be in order.

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THE TURN TO NONPROFITS

The schools, colleges, missionary societies, libraries, orphanages, and hospitals founded in this period served the twin goal of advancing culture and piety for the enlightened and meeting the needs of the emerging industrial order under the aegis of the privileged classes. 35 Many nonprofit social welfare organizations were also founded by immigrant groups which wanted to maintain their cultural, ethnic and religious identity.36 These impulses carried over into the post-Civil War period with the founding of charitable as well as cultural institutions. 37 The important point is that the bulk of the country's traditional nonprofit organizations developed at a time when the corporation as a legal entitywasjust developing as a means of pursuing collective action. 38 Nonprofit organizations then proliferated, following models previously laid down. A Boston hospital, a Chicago settlement house, a New York charity organization were imitated, and the imitators imitated in turn as the "diffusion of innovation" proceeded.

Expectations of Others The history of the nonprofit sector and the experiences ofindividuals and organizations that interact with it establish certain expectations. People of vital importance to an organization's environment may come to expect that organizations of certain sorts will be nonprofit organizations; new organizations then conform to those expectations reflexively. For example, counseling services for children and families for many years were almost exclusively the domain of nonprofit and public service organizations; no models of for-profit service organizations existed in this area. Another example is battered women shelters. Nothing prevents a shelter from being operated under for-profit auspices; however, the expectations of the community and government are that these shelters should be nonprofit. These expectations may be incorporated into law. When the state of Massachusetts decided to close its training schools in the early 1970s, the state Department of Youth Services adopted a regulation that only nonprofit agencies were eligible to receive government contracts to care for the youth leaving the training schools. 39 This requirement is written into many public programs that depend on contracting.

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Regime Characteristics The structure of the American welfare state also appears to play a role in influencing the nonprofit form. 40 Costa Esping-Anderson characterizes the American welfare state as a liberal regime (in the European sense) in which "means-tested assistance, modest universal transfers, or modest social-insurance plans predominate. In this model, the progress of social reform is severely circumscribed by traditional, work-ethic norms." As a result, the state encourages the market, either passively-by guaranteeing only a minimum---or actively, by subsidizing private welfare schemes. 41 In liberal welfare state regimes, nonprofit service organizations emerge to fulfill three key functions: (1) they supplement government provision; (2) they can reinforce the prevailing government policy emphasizing work norms, self-sufficiency, and markets; and (3) they can serve as a vehicle for pushing expanded government provision. The relationship between nonprofits and the government and market sectors is of key importance to the determination of the shape of the nonprofit sector. This means that major changes in the relations will affect the quantity and role of the nonprofit sector in society. Recent political controversies surrounding nonprofit organizations are in