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

While the majority of nonprofits individually have relatively small  operating budgets, as a whole, the nonprofit sector has a significant  presence in the U.S. economy, according to researchers of the nonprofit  sector. During the period 1998 through 2002, spending reported by tax-exempt  entities was roughly 11 to 12 percent of the nation’s gross domestic  product. The tax-exempt sector had over 9.6 million employees, about 9 percent  of the civilian workforce in 2002. Experts have identified several possible contributing reasons for this  increase:    a shift in recent decades away from government providing most  services directly;  the expansion of service-related industries in the U.S., of which many  nonprofits are a part;    deinstitutionalization during the 1960s and 1970s that eliminated large,  public care facilities in favor of smaller, community-based  organizations, often operated by nonprofit entities; and  the trend in devolution in certain policy areas such as welfare, which  contributed to a lessening role of the federal government and more  localized control in the hands of state, local, and nonprofit  organizations. Federal Government Increasingly Partnering with Nonprofit Organizations

Nonprofit organizations bring many strengths to their partnerships with  the federal government. Their research indicates that nonprofit organizations receive  significant funds from government sources and that over time these funds  have increased. For example:    Researchers have reported that the federal government provided about  $115 billion directly to nonprofits in fiscal year 2001, the majority of  which hospitals received through the Medicare program. Data from other researchers indicate that the federal government spent  an estimated $317 billion on nonprofit organizations in fiscal year  2004. Also, some federal funds move to nonprofits on the basis  of individuals’ decisions, that is, from federal programs to nonprofits  selected by the consumer, such as for health care. Emerging Policy Issues and Challenges Facing the Nonprofit Sector

The current federal oversight of nonprofits is focused on organizations’  tax-exempt status and on specific programs. However, there is less focus  on understanding the overall role of nonprofits as implementers of  national and federal initiatives, and how to best ensure that nonprofits  have the support they need. As we spoke with researchers and  practitioners, several issues emerged as needing attention in order to  ensure the strength of this important partner to the federal government. We  heard several common issues while taking this more comprehensive look  at nonprofit organizations’ interaction with the federal government (see  fig. Coordination and collaboration—One theme that surfaced in our  preliminary research was the importance and value of coordination and  collaboration between nonprofit organizations and government at all  levels. Capacity—Another area to which researchers suggest attention should be  paid is improving the capacity that smaller nonprofit organizations have to  address weaknesses in finances, administration, and human capital. Nonprofit sector data – As I mentioned earlier, there is a lack of  sufficient knowledge on a key federal government partner and its role. In addition, the funds to perform the  analysis generally come from the nonprofit sector, and are not consistently  available. Administrative and reporting requirements—Practitioners and  researchers alike addressed the difficulty that nonprofit organizations,  particularly smaller entities, have in responding to the administrative and  reporting requirements of their diverse funders. In addition, federal, state, and local governments rely on  nonprofit organizations as key partners in implementing programs and  providing services to the public. At the request of the Congress, we are beginning work to  examine these issues further.
Why GAO Did This Study

The nonprofit sector is an important means through which public services are delivered and national goals addressed. The federal government increasingly relies on networks, often involving nonprofits that address many issues--health care, education, and human services, for example. Because nonprofit organizations play a key role as partners with the federal government, there is a need to better understand the sector. This testimony (1) provides a picture of the nonprofit sector--its size, composition, and role in the economy; (2) discusses how and why the federal government partners with the sector; and (3) identifies issues related to the sector as a federal partner that need to be better understood. GAO's preliminary work on this topic focused on the intersection of nonprofit organizations and the federal government, including trends, the use of federal funding, and emerging issues. GAO interviewed key experts from relevant associations and academia, reviewed related research, and hosted roundtable discussions with key researchers and practitioners in the nonprofit area.

What GAO Found

U.S. nonprofit organizations have a significant role both in the economy as awhole and as providers of services. While the majority of nonprofit organizations have relatively small operating budgets, together their impact is large. For example, researchers estimate that the sector's spending in recent years was roughly 11 to 12 percent of the nation's gross domestic product and, in 2002, the sector had over 9.6 million employees, about 9 percent of the civilian workforce. Further, the sector has grown; the number of charitable organizations reporting almost tripled over the last two decades. The federal government increasingly partners with nonprofit organizations as they bring many strengths to these partnerships, such as flexibility to respond to needs and access to those needing services. These organizations receive significant funds from government sources to provide services. Researchers have attempted to quantify these funds. For example, one estimate is that the federal government spent about $317 billion on nonprofit organizations in fiscal year 2004. However, the lack of data makes measuring federal funds to nonprofit organizations difficult. Many funds come through indirect routes, such as through state and local government, adding to the difficulty of determining funding and measuring performance. Although IRS is generally responsible for overseeing the tax-exempt status of these organizations, there is less focus at the federal level on the comprehensive role of nonprofits in providing services using federal funds. Our preliminary look at how the federal government interacts with the nonprofit sector indicates that several policy issues have emerged, for example: (1) Coordination and collaboration--the increasing importance of collaboration between all levels of the government and nonprofit organizations. (2) Internal governance issues--the need to strengthen internal governance of nonprofit organizations. (3) Capacity--the need to improve smaller nonprofit organizations' capacity to address weaknesses in finances, administration, and human capital. (4) Nonprofit sector data--the need for improved data on the sector's size, financial status, and funds from federal sources. (5) Administrative and reporting requirements--the many requirements to be accountable, which while important and necessary, require information in different formats and with increasing complexity. (6) Fiscal challenges for nonprofits--the instability of some nonprofits' financial position. At the request of the Congress, we are beginning work to examine these issuesfurther.