Community Services
Block Grant
Administrative
Expenses
Prepared by
Erwin de Leon
Sarah Pettijohn
Carol J. De Vita
Urban Institute
February
F
Fe
brua
br
u ry
r 2012
Prepared by
Erwin de Leon
Sarah Pettijohn
Carol J. De Vita
Urban Institute
February 28, 2012
This publication was created by the Urban Institute in the performance of the U.S. Department of Health and Human
Services, Administration for Children and Families, Office of Community Services, Community Services Block
Grant contract number HHSP23320095654WC. Any opinion, findings, and conclusions, or recommendations
expressed in this material are those of the author(s) and do not necessarily reflect the views of the U.S. Department
of Health and Human Services, Administration for Children and Families, Office of Community Services, or of the
Urban Institute, its trustees, or its sponsors.
CONTENTS
Executive Summary...................................................................................................................................... iii
Accountability and Administrative Expenses ................................................................................................ 1
Definitions of Administrative Expenses ........................................................................................................ 2
Administrative Expenses as a Proxy for Efficiency ........................................................................................ 4
Efforts to Assess Nonprofits by Their Administrative Expenses ............................................................... 5
HHS Administrative Efficiency Measures for CSBG ................................................................................... 6
Strengths and Limitations of Financial Ratios ........................................................................................... 6
Implications for Organizational Capacity .................................................................................................. 8
State CSBG Administrative Expenses ............................................................................................................ 9
CSBG Eligible Entities’ Administrative Expenses ......................................................................................... 12
Types of Expenses Allocated to Administration ..................................................................................... 12
Staff time............................................................................................................................................. 12
Other types of administrative expenses ............................................................................................. 13
Use of CSBG Funds .................................................................................................................................. 14
Perspectives on Allocating Administrative Expenses.............................................................................. 16
Comparisons of CAAs and Other Nonprofits .............................................................................................. 17
Administrative Expenses of CAAs and Comparable Nonprofits.............................................................. 19
Findings ................................................................................................................................................... 20
Conclusions ................................................................................................................................................. 21
Technical Notes ........................................................................................................................................... 24
References .................................................................................................................................................. 25
Appendix A: CSBG Administrative Expenditures by State, FY 2008 ............................................................ 27
Appendix B: Methodology for the Phone Interviews ................................................................................. 29
Appendix C: Methodology for the Regression Analysis .............................................................................. 31
ii
EXECUTIVE SUMMARY
All funders—both government and private donors—want to know that their funds are being used
for the purposes intended and are being spent efficiently and effectively. This is especially true
when resources are constrained. To learn more about administrative expenses and financial
efficiency measures, the Office of Community Services, Administration for Children and
Families, Department of Health and Human Services (OCS/ACF/HHS) commissioned the Urban
Institute to review literature on measuring administrative expenses and analyze the
administrative expenses associated with the Community Services Block Grant (CSBG).
The study addressed five research questions:
1. How are administrative costs defined by Federal government entities, particularly for
CSBG?
2. What percentage of State CSBG funds is spent on administrative expenditures?
3. What types of guidance do States receive in reporting CSBG administrative costs?
4. How do the administrative expenditures of CSBG-eligible entities (specifically
Community Action Agencies, or CAAs) compare to those of similar nonprofit
organizations?
5. How have administrative expenditures been used to assess the performance of nonprofit
organizations, including the strengths and limitations of these approaches?
Key Findings
Many definitions and guidelines relate to administrative expenses
Administrative costs are generally defined as expenditures incurred by a nonprofit organization
to support its stated mission or purpose; they are associated with the organization’s overall
functions and management. These are often defined along three functional categories:
administrative, program, and fundraising.
There are multiple layers of guidance for reporting administrative expenses. For example, the
Financial Accounting Standards Board (FASB) establishes standards of financial accounting that
govern the preparation of financial reports by nongovernmental entities. In addition, individual
agencies issue guidelines specific to particular government programs or reporting forms. The
iii
Internal Revenue Service (IRS), for example, uses the same functional categories as FASB but
adds instructions for completing the Form 990—a financial reporting form that nonprofits file
annually with the IRS. Similarly, the Office of Management and Budget (OMB) issued Circular
A-122 in 1980, with subsequent updates, that set principles for determining costs of grants,
contracts, and other agreements with nonprofit organizations. The Office of Community Services
issued an Information Memorandum (IM 37) in 1999 to help CSBG grantees better understand
how to report their CSBG expenditures in programmatic reports required under the CSBG
legislation.
Interviews with CAA financial officials indicate that guidelines regarding CSBG administrative
expenses are complex and sometimes conflict with other directives. For example, some expenses
can be seen as both administrative and programmatic, depending on the regulatory authority
issuing the guidance and the purpose of the report being completed. IM 37 provides
administrative and programmatic definitions that sometimes differ from those identified under
OMB Circular A-122. Grantees must reconcile these differences.
State spending on CSBG administrative expenditures is restricted
By law, States may spend no more than $55,000 or 5 percent of their CSBG grant on
administrative expenses (CSBG Act, Sec. 675C(b)(2)). The legislation also provides States the
authority to expend allocated funds within a 24-month time frame. Consequently, administrative
expenditures reported by a State over a one-year period may exceed the 5 percent threshold
because of the carryover of funds from the previous fiscal year.
In FY 2008, States’ CSBG administrative expenses ranged from 0.87 percent (South Dakota) to
6.61 percent (Alabama) of their total CSBG expenditures. Four States (South Dakota, Tennessee,
Missouri, and Indiana) reported CSBG administrative expenditures of less than 2 percent of their
total CSBG expenditures in FY 2008.
Eight States (Georgia, Massachusetts, New Mexico, Ohio, North Carolina, Arizona, New Jersey,
and Alabama) exceeded the 5 percent threshold in FY 2008 because of differences in the CSBG
reporting period and grant period.
iv
Training and guidance on using and reporting CSBG funds is available
The national CSBG Network provides training opportunities for State officials to learn how to
budget and allocate CSBG funds. The National Association for State Community Services
Programs (NASCSP) and other national associations conduct training through webinars; at
national meetings, orientations, and monitors’ training sessions; and by special request. Some of
these sessions have been conducted by large, highly respected accounting and consulting firms.
CAAs appear to be motivated to keep administrative expenses low
Unlike States, eligible entities (such as CAAs) do not have legislative restrictions on their use of
CSBG funds for administrative purposes. However, like all nonprofits, they are motivated to
keep overall administrative costs low and target resources toward their direct service programs
and their legislated mission to address the causes of poverty in local communities.
In FY 2009, OCS/HHS introduced an administrative efficiency measure for eligible entities that
receive CSBG funds and set as a target that 19 percent of a CAA’s (or other eligible entity’s)
total CSBG subaward could be spent on administrative expenditures in a year. Nationally,
eligible entities have been able to produce even more efficient results, reporting CSBG
administrative expenses, on average, just below 17 percent in FY 2009 and 16 percent in FY
2010. The efficiency measure applies only to CSBG funds, not administrative expenses for the
organization as a whole.
Based on an analysis of IRS Form 990 data, CAAs appear to be comparatively good stewards of
their financial resources. In FY 2008, CAAs spent, on average, somewhat less on agency-wide
administrative expenses (6.8 percent) than a comparable group of nonprofits (8.2 percent).
Factors to consider when developing Efficiency Measures
There is no generally accepted standard for designating an appropriate level of resources that
should be spent on administrative expenditures. In 2002, the U.S. General Accounting Office
(GAO) reported that nonprofits spent on average 13 percent of their budgets on general
management—namely, salaries, travel, professional fees, and other expenses not otherwise
designated to specific line items. About 85 percent of funds, on average, cover program
expenses, and about 3 percent is used for fundraising (percentages are rounded).
Efforts to create rating scales to assess the efficiency of nonprofit service providers typically are
based on the assumption that lower is better. Scholars note that such systems can lead to creative
v
and inconsistent accounting procedures that underreport administrative expenses and lead to
underinvestment in an organization’s infrastructure.
Focusing solely on financial ratios to assess an organization’s efficiency and effectiveness can
miss the big picture of an organization’s performance. In addition to financial stability, it is
important to consider the outcomes an organization achieves in order to demonstrate success in
meeting community needs.
To fulfill CSBG’s legislative mandate of addressing the causes of poverty locally, CAAs and
other eligible entities coordinate a wide range of health and human services programs and
collaborate with community partners. Such activities are often considered administrative rather
than programmatic because they are not necessarily associated with the direct delivery of service.
This distinction needs to be considered when creating benchmarks and targets for CSBG
administrative expenditures.
Recommendations
Both funders and nonprofit organizations want public needs to be met in the best possible way, at
the least cost and with little waste. This analysis suggests three areas in which further attention is
needed.
First, government agencies that issue guidelines need to clarify the distinction between
administrative and program expenses. Expert review of guidelines across issuing
authorities is needed to reduce or eliminate ambiguous and conflicting guidelines and
improve the quality of reporting. In particular, attention might be given to clarifying how
facility costs, grant writing/development activities, and information technology services
are classified.
Second, training and technical assistance for States and eligible entities (CAAs),
particularly for smaller organizations, is needed to help financial officers prepare
reporting documents. Comparisons of financial ratios, such as percentage spent on
administrative expenses, are only valid if the data are comparable. Interviews with CAA
financial officers indicate that they do their best to comply with Federal directives but
that unclear and conflicting guidelines can be problematic.
vi
Third, because administrative costs, as a proportion of total expenses, decrease as a
nonprofit’s budget increases, funders might consider permitting a range of administrative
expense levels based on organization size, with smaller nonprofits allowed higher
percentages than larger ones. The literature is less clear about how the types of services
provided or the provider’s geographic location might affect administrative expenses.
These factors need further investigation before any policy recommendations can be made.
Information Sources
The report is based on the following sources of information:
legislative and administrative records,
CSBG Information System (IS) Survey data, provided by NASCSP,
telephone interviews with 23 CAA financial officers in eight States,
FY 2008 IRS Form 990 data, and
professional journal articles on efforts to create measures of administrative expenses as a
proxy for efficiency.
vii
ACCOUNTABILITY AND ADMINISTRATIVE EXPENSES
All levels of government contract with nonprofit organizations to provide needed services.
According to a 2009 study, 33,000 nonprofit human service organizations in the United States
managed nearly 200,000 government contracts—an average of six government contracts per
organization. For 60 percent of these organizations, government funds represented the single
largest source of revenue. Three-quarters of these nonprofits managed grants and contracts from
two or more government agencies. Larger nonprofits with budgets of more than $1 million were
more likely than smaller ones to contract with government (Boris et al. 2010).
In a time of tight budgets and resource constraints, all funders—government and private
donors—want to know that their funds are being spent for the purposes intended and that funds
are being spent efficiently and effectively. This idea is not a new one. Nearly 20 years ago, the
1993 Government Performance and Results Act (GPRA) directed government contractors to
articulate their project goals and objectives and to measure performance. However, empirically
measuring the outcomes and effectiveness of nonprofit human service organizations is difficult
because outcomes are not easily defined or easily quantified, and definitions of effectiveness
may vary among different stakeholders (Hatry et al. 2003).
This paper examines the administrative costs associated with the Community Services Block
Grant (CSBG). It begins by presenting four definitions of administrative expenses used by
government entities. It then reviews the scholarly literature regarding how administrative
expenditures have been used to assess the performance of nonprofits, including the strengths and
limitations of these approaches. It also describes the HHS efficiency measures and targets
currently in place for CSBG. The third section looks at CSBG administrative expenses from the
perspective of the State agencies (hereafter referred to as “States”), including the guidance States
receive regarding statutory and regulatory requirements. The next section focuses on
administrative expenditures from the perspective of Community Action Agencies (CAAs),
namely, the groups responsible for implementing CSBG locally. A comparison of administrative
expenditures of CAAs and a comparable set of nonprofit organizations is provided in section five
to place the CAA experience in a broader context. Finally, the report summarizes the key points
1
of this study and suggests directions that might be considered for measuring and interpreting
CSBG’s administrative expenditures.
DEFINITIONS OF ADMINISTRATIVE EXPENSES
Administrative expenses are generally defined as expenditures a nonprofit organization incurs to
support its stated mission or purpose. Most funders, government agencies, and financial and
nonprofit experts associate these costs with the overall function and management of the
organization. Sometimes these expenditures are also referred to as overhead expenses or
management and general expenses.
While the broad functional categories for reporting allowable activities and expenses are similar,
the precise reporting instructions and definitions often differ, based upon the regulatory authority
publishing the guidance. For example:
1. The Financial Accounting Standards Board (FASB), the designated private-sector
organization that establishes standards of financial accounting that govern the preparation
of financial reports by nongovernmental entities,1 requires nonprofits to account for their
costs along three functional dimensions: administrative, program, and fundraising
expenses (Pindus and Nightingale 1994; Pollak, Rooney, and Hager 2001; Parson 2003).
The FASB guidelines (1993) categorize nonprofit activities such as “oversight, business
management, general recordkeeping, budgeting, financing, and related administrative
activities, and all management and administration except for direct conduct of program
services or fund-raising activities” under management and general expenses.
2. The Internal Revenue Service (IRS) uses the same functional categories, and instructs
nonprofits filing Form 990 (the annual reporting statement)2 to use the management and
general expenses line to report expenses “that relate to the organization’s overall
operations and management, rather than fundraising activities or program services.” The
1
Financial Accounting Standards Board, “Facts about FASB,”
http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495.
2
The IRS requires registered nonprofits to file an annual Form 990 if their gross receipts are greater than a
predetermined threshold. In 2008, organizations with gross receipts over $100,000 were required to file a Form 990
or 990EZ.
2
management and general expenses line should include salaries and expenses of the
nonprofit’s chief executive officer and his or her staff;3 expenses incurred managing
investments; lobbying costs; costs of board, committee, and staff meetings; general legal
and accounting expenses; office management; auditing, human resources, and other
centralized services; and preparation, publication, and distribution of the annual report.4
3. The Office of Management Budget (OMB) Circular A-122, which establishes principles
for determining costs of grants, contracts, and other agreements with nonprofits, defines
administrative expenses as “general administration and general expenses such as the
director's office, accounting, personnel, library expenses, and all other types of
expenditures not listed specifically as one of the subcategories of ‘Facilities.’”5
4. In addition to OMB Circular A-122, the Office of Community Services (OCS) issued an
Information Memorandum (IM 37) in 1999 to help grantees better understand how to
report their CSBG expenditures in the programmatic reports required under the block
grants legislation. Grantees are instructed to use two functional categories: direct program
expenses and administrative costs. Use of CSBG funds and reporting requirements adhere
to three criteria: meeting the program’s intended outcomes to address the causes of
poverty as stated in the CSBG legislation, achieving consistency with Health and Human
Services (HHS) audit and financial management standards, and ensuring a common basis
for relating expenditures to the CSBG Results Oriented Management and Accountability
(ROMA) System. The guidance in IM 37 specifically refers to CSBG administrative
expenditures, whereas the definitions listed in items 1–3 above apply to administrative
expenditures of the entire organization.
According to IM 37, administrative costs refer to central executive functions that do not directly
support a specific project or service. These costs are incurred for common objectives that benefit
3
Unless part of their time is spent directly supervising program services or fundraising activities.
4
From the IRS, “2010 Instructions for Form 990 Return of Organization Exempt from Income Tax,”
http://www.irs.gov/pub/irs-pdf/i990.pdf, accessed September 7, 2011.
5
From the Office of Management and Budget, “Circular No. A-122 Revised May 10, 2004,”
http://www.whitehouse.gov/omb/circulars_a122_2004/, accessed July 26, 2011. OMB Circular A-122 does not
apply to colleges and universities, which are covered by OMB Circular A-21, “Cost Principles for Educational
Institutions.”
3
multiple programs administered by the grantee organization, or the entity as a whole, and as such
are not readily assignable to a particular program funding stream. Administrative expenses relate
to the general management of the grantee organization, such as strategic planning, board
development, executive director functions, accounting, budgeting, personnel, procurement, and
legal services. In contrast, direct program costs are linked specifically to the delivery of a
specific program or service that is intended to achieve one of the funding outcomes or objectives
of CSBG.6
One example of conflicting guidance concerns the allocation of facility costs. OMB Circular A122 designates a separate line item for these costs; IM 37 allows CSBG grantees to allocate
facility costs between program expenses and administrative expenses. Another example concerns
development and grant writing activities. CSBG funds can be used to create new programs,
support existing ones, and coordinate and enhance a wide variety of programs or resources that
are responsive to the needs of the local community. The development/grant writing costs
associated with leveraging other resources and making programs self-sustaining are not
addressed in IM 37. In contrast, FASB and OMB Circular A-122 regard grant writing as a
fundraising expense. The IRS also considers grant writing a fundraising expense, unless the
grantor requires it to be reported as a program expense. The IRS does not consider
development/grant writing part of management and general expenses. IM 37, on the other hand,
is silent on this topic.
ADMINISTRATIVE EXPENSES AS A PROXY FOR EFFICIENCY
Funders, both public agencies and private donors, want to ensure that nonprofit organizations
that receive or are considered for funding use their resources prudently. Governments rely
heavily on nonprofits to deliver a range of critical human services through $100 billion in
contracts and grants (Boris et al. 2010). Given this volume of business, government officials
want to assure taxpayers that public dollars are being used wisely. Administrative expenditures
are often used as a proxy for fiscal responsibility.
6
From the U.S. Department of Health and Human Services, Administration for Children and Families, Office of
Community Services, “Community Services Block Grant Program, Information Memorandum No. 37,”
http://www.acf.hhs.gov/programs/ocs/csbg/guidance/im37.html, accessed July 26, 2011.
4
There is no generally accepted standard for designating an appropriate level of resources that
should be spent on administrative expenditures. The U.S. General Accounting Office (GAO)
reported in 2002 that nonprofits spent on average 13 percent of their budgets on general
management—namely, salaries, travel, professional fees, and other expenses not otherwise
designated to specific program line items. The majority of funds (85 percent, on average)
covered program expenses, and about 3 percent was used for fundraising.7
Efforts to Assess Nonprofits by Their Administrative Expenses
Financial information on nonprofit organizations is not as readily available and timely as
information about for-profit enterprises, which regularly provide quarterly reports to
shareholders and potential investors (Keating and Frumkin 2003). In the nonprofit sector, funders
rely mostly on annual IRS Form 990 filings, financial audits, and annual reports. Although the
IRS files are made available to the general public through services such as the National Center
for Charitable Statistics and GuideStar, data processing and release of this information by the
IRS generally takes a few years before it is publicly available. Administrative expenses are
extracted from these reports and factored into financial ratios that gauge the health of an
organization. This is a common and simple way to assess the efficiency of nonprofits; however, a
number of scholars have sharply criticized the method (Gregory and Howard 2009, Hager and
Greenlee 2004).
With increased demand for accountability, a number of efforts are under way to develop
mechanisms that assess and compare the efficiency and effectiveness of charitable organizations.
One of the early and better known efforts is Charity Navigator,8 an online nonprofit evaluator
that rates the financial health of organizations using financial ratios based on the IRS Form 990s
filed by nonprofits. An entity’s efficiency is analyzed through four performance categories:
program expenses, fundraising expenses, fundraising efficiency, and administrative expenses.
Under administrative expenses, Charity Navigator states that, “as with successful organizations
7
The 3 percent figure for fundraising is based on nonprofits that report their fundraising expenses. Percentages cited
here have been rounded.
8
Charity Navigator (http://www.charitynavigator.org) is an independent charity evaluator founded in 2002. Its
purpose is to direct philanthropic dollars to the most efficient and responsive nonprofits in the country. Using the
IRS Forms 990, it assesses charitable organizations along a number of dimensions, including administrative
expenditures, and then summarizes the scores into a four-star rating system.
5
in any sector, effective charities must recruit, develop, and retain talented people. At the same
time, they ensure that these administrative expenses remain reasonable and in line with the
organization’s total functional expenses.” For the Charity Navigator system, a nonprofit’s
administrative expenses are divided by total expenses to derive a percentage that can be checked
against Charity Navigator’s rating scale, which reflects the assumption that lower is better.9
Based on a study of 30 major metropolitan markets, Charity Navigator reports the typical (i.e.,
median) value for administrative expenses for public charities is 9.6 percent of total expenses.10
HHS Administrative Efficiency Measures for CSBG
In FY 2009, HHS ACF introduced an administrative efficiency measure for eligible entities that
receive CSBG subawards. The measure is intended to set priorities, monitor progress, and reduce
the proportion of CSBG funds subgrantees spend on administrative expenses. The measure is
calculated as the total amount of subgrantee CSBG administrative funds expended each year (the
numerator) divided by the total amount of subgrantee CSBG funds expended per year (the
denominator). The data for this measure are provided through the CSBG Information System
(CSBG IS) Survey, collected by NASCSP. This efficiency measure applies only to CSBG funds,
not administrative expenses for the organization as a whole.
The target for subgrantee’s CSBG administrative expenses, based on historical trend data, was
set at 19.00 percent for FYs 2009 and 2010. Subgrantees were able to produce even more
efficient results for these years, reporting CSBG administrative expenses of 16.96 percent in FY
2009 and 16.04 percent in FY 2010.
Strengths and Limitations of Financial Ratios
One strength of financial ratios is that they are simple and responsive to the needs of funders and
donors. Administrative expenses and other financial data tell funders how a nonprofit spends its
money and which organizations are likely to be “the most efficient stewards of their [resources]”
(Hager et al. 2005). These measures also help funders assess whether a nonprofit is financially
9
From Charity Navigator, “How Do We Rate Charities’ Financial Health?”
http://www.charitynavigator.org/index.cfm?bay=content.view&cpid=35, accessed September 7, 2011.
10
From Charity Navigator, “Metro Market Study 2010,”
http://www.charitynavigator.org/index.cfm?bay=studies.metro.main, accessed January 19, 2012.
6
viable and likely to sustain its operations. Such information can be linked to the scope and depth
of the organization’s programs. Further, financial measures (e.g., revenues, expenditures, assets,
and liabilities) are easier to obtain than measures of capacity and effectiveness. They provide
funders with a quick and common proxy for assessing and vetting nonprofits (Hager and
Greenlee 2004).
However, financial ratios also have shortcomings. For example, nonprofits tend to account for
fundraising and administrative expenditures in idiosyncratic ways (Hager and Greenlee 2004).
Some nonprofits ignore rules for allocating expenses that have both programmatic and
fundraising content, often charging no expenses to fundraising, keeping their fundraising ratio
low or nonexistent. Further, the rules for preparing financial records can vary. Audited financial
statements are prepared according to Generally Accepted Accounting Principles (GAAP), while
the IRS Form 990 is prepared according to IRS regulations, which differ somewhat from GAAP.
More important, “focusing on financials sometimes misses the big picture … it takes the place of
trying to determine whether the organization is doing a good job of fulfilling its mission or not”
(Hager and Greenlee 2004). By focusing only on a nonprofit’s financial performance, it
underplays other dimensions that may ultimately be important. A small nonprofit, for instance,
that reports high administrative expenses may be better suited to serve the community in which it
is embedded than a larger one with relatively low overhead costs but little knowledge of program
beneficiaries or community needs. An organization’s outcomes need to be considered as well as
its fiscal stability. Both elements must be strong to demonstrate success in meeting community
needs.
Financial ratios can be helpful in ascertaining a nonprofit’s efficient use of resources and solid
financial footing, but notions about the “right level” of administrative costs can result in some
nonprofits underreporting administrative expenses. This obscures the picture about what it takes
to run an effective organization. Results from the national Nonprofit Overhead Cost Study find
that nonprofit workers reiterate long-held beliefs about foundation support of overhead
expenses—that is, funders prefer to pay solely for program expenses and not administrative
expenses or a share of the overhead costs necessary for an organization to function (Center on
Philanthropy 2007). Nonprofits believe that funders are looking for low administrative expenses
as a sign of efficiency—an ideal perpetuated by Charity Navigator and others.
7
Research on nonprofit administrative expenses confirms the assumption that nonprofit
professionals have about funder bias for slim administrative budgets. In a competitive
fundraising environment, funders—public and private—are more likely to support organizations
that are deemed efficient, based on a relatively large percentage of funds being used for program
purposes versus administrative needs (Frumkin and Kim 2001; Pollak et al. 2001; Gregory and
Howard 2009). Such expectations can start “a vicious cycle” which “fuels the persistent
underfunding of overhead” (Gregory and Howard 2009). Nonprofits feel pressure to conform to
the mandate that administrative expenses be kept to a minimum and respond in two ways: they
spend too little on administrative costs, and they underreport their expenditures on tax forms and
in fundraising materials. This in turn perpetuates unrealistic expectations. Over time, funders
expect grantees to do a whole lot more for a whole lot less than it really costs an organization.
Data from the Nonprofit Overhead Cost Study indicate that roughly 10 to 13 percent of nonprofit
human service providers may be underreporting their administrative and fundraising costs based
on “plausible” management and general expenses as reported on the Form 990.11 Smaller
organizations are less likely than larger ones to file plausible expenditure information (Pollak et
al. 2001), suggesting that smaller nonprofits may need more training and technical assistance in
reporting administrative expenses than larger nonprofits.
Implications for Organizational Capacity
The tendency to pare down administrative expenses to the bare minimum has serious
implications for a nonprofit’s organizational capacity and ultimately its ability to deliver
programs and services to clients. An organization faced with scarce revenue sources and hobbled
by inadequate administrative budgets is left with few options for covering the full cost of
delivering its services and programs and can make decisions that compromise its ability to serve
its clientele. Low pay for administrative positions, for example, makes recruiting and retaining
skilled and experienced staff a challenge. Some executive directors ultimately do the
administrative tasks their staff cannot manage (Hager et al. 2005). Indeed, extremely low
administrative expenditures can be a signal that an organization is not investing in the
11
The researchers considered the following Form 990 entries as problematic and therefore not “plausible”: reporting
no management and general expenses –13 percent of all nonprofits did this; and reporting all expenses as
management and general expenses –2 percent of nonprofits did this. The percentages for nonprofit human service
providers are somewhat lower than these overall aggregate statistics.
8
infrastructure that will enable it to deliver a quality product in a reasonable and efficient manner.
As Tierney and Steele note, “Without the necessary investments in overhead, the organization
underperforms. It can't meet expectations, it becomes difficult to retain high-quality talent … it
might be hampered in attracting new funding and in ultimately serving the people it aims to
serve” (2011, 7).
The adverse effects of keeping administrative costs low are often felt most acutely in smaller
nonprofits. These organizations often can be cash strapped and have modest, if any, accounting
staff. Volunteers may be called upon to serve as part-time bookkeepers and work with
inexpensive, over-the-counter software packages that are not designed for nonprofits (Keating
and Frumkin 2003). In a study of nonprofit compliance with the Single Audit Act, findings
indicate that smaller nonprofits, those that are new to government grants, and those with prior
audit findings have a higher rate of adverse audit findings. The authors suggest that for cost or
other reasons, smaller nonprofits are being audited by less experienced auditors (Keating et al.
2003).
STATE CSBG ADMINISTRATIVE EXPENSES
In each State, one State agency is assigned to serve as the lead agency to carry out the duties set
forth by the CSBG Act. In addition to making subgrants to eligible entities and ensuring that
CSBG funds are used as intended, the State provides training and technical assistance, supports
communication among eligible entities, monitors the distribution of funds to ensure targeted
areas are reached, and supports other activities (CSBG Act Sec. 675C). Generally, States are to
distribute at least 90 percent of the CSBG funds to eligible entities to accomplish the goals of the
CSBG Act (see CSBG Act Section 672(2) for information regarding goals). In FY 2008, CSBG
expenditures reported by the 50 States and District of Columbia totaled $589.6 million.12
Expenditure amounts ranged from $2.5 million in Alaska to $58.0 million in California. Of the
51 jurisdictions in this analysis, CAAs in 46 States spent 90 percent or more of the State’s total
CSBG expenditures; CAAs in the remaining 5 States spent between 85.6 and 89.8 percent of the
12
This analysis uses data for FY 2008 because they reflect typical CSBG funding levels before the infusion of
CSBG ARRA funds in FY 2009.
9
State’s total CSBG expenditures. The remaining 10 percent of CSBG funds are used for other
functions, including administrative activities.
While the statute provides some flexibility on the percentage of funds that States must grant to
eligible entities, the language in the CSBG Act is stronger when discussing the requirements on
administrative expenses. “No State may spend more than the greater of $55,000, or 5 percent, of
the grant received…for administrative expenses, including monitoring activities” (CSBG Act,
Sec. 675C(b)(2)). The Act does not explicitly define administrative activities, but when the State
spends CSBG funds to support “Statewide coordination and communication among eligible
entities,” the State must categorize these funds as administrative expenses (CSBG Act, Sec.
675C(b)(1)(c)).
In FY 2008, States’ CSBG administrative expenses ranged from 0.87 percent (South Dakota) to
6.61 percent (Alabama) of their total CSBG expenditures.13 Indeed, South Dakota, Tennessee,
Missouri, and Indiana each reported using less than 2 percent of their CSBG expenditures for
administrative activities (Table 1).
Eight States (Georgia, Massachusetts, New Mexico, Ohio, North Carolina, Arizona, New Jersey,
and Alabama) reported administrative expenditures that exceeded 5 percent of their total CSBG
expenditures due to differences between the CSBG reporting period and the grant period. States
are able to spend up to 5 percent of their CSBG allocation on administrative expenditures.
However, they are also able to carry that money over to the next fiscal year, for a total authority
on the funds of 24 months. In other words, grantees report on a one-year period but have two
years in which to spend funds. The administrative percentages above that exceed 5 percent
include carryover funds from FY 2007 and do not take into account the funds distributed to
eligible entities that will be carried forward into 2009.
13
See Appendix A for the proportion of CSBG funds used for administrative purposes in each State and the District
of Columbia.
10
Table 1. States with the Lowest and Highest Shares of CSBG Expenditures Used for
Administrative Activities, FY 2008
Rank
State
States reporting less than 2 percent
on administrative expenses
1
South Dakota
2
Tennessee
3
Missouri
4
Indiana
Percentage of CSBG expenditures spent
on administrative expenses in FY 2008
0.87
1.33
1.34
1.88
States reporting more than 5 percent
on administrative expenses
44
Georgia
45
Massachusetts
46
New Mexico
47
Ohio
48
North Carolina
49
Arizona
50
New Jersey
51
Alabama
5.16
5.18
5.20
5.23
5.39
5.88
6.07
6.61
Sources: Data from the National Association for State Community Services Programs, Community
Services Block Grant (Annual Report, 2008); calculations by the Urban Institute.
The national CSBG Network provides training opportunities for State officials to learn how to
budget and allocate CSBG funds. NASCSP staff conduct training through webinars, at national
meetings, orientations and monitors’ training sessions, and by special request. NASCSP also
contracts on occasion with WIPFLI, a large and highly respected CPA and consulting firm, 14 to
provide training seminars to State agency officials. A 2011 session covered the purpose of CSBG
funding; the structure of a Federal program; sources of Federal regulation; examples of cost
allocation methods, including allowable methods and direct versus indirect costing; and tools for
budgeting and managing CSBG funds. In addition, CAPLAW (i.e., the Community Action
Program Legal Services) and the Community Action Partnership offer financial training to the
CSBG Network that generally focuses on issues related to OMB compliance and other related
14
Established in 1930, WIPFLI has more than 1,100 partners and associates worldwide. It ranks among the top 30
accounting and business consulting firms in the United States and is a member of PKF International, Ltd., the tenth
largest global accounting network in the world. WIPFLI’s client base includes both nonprofit organizations and
governmental units.
11
topics. These training programs, although voluntary, provide support and guidance to State
officials and CAA leaders responsible for managing CSBG funds.
CSBG ELIGIBLE ENTITIES’ ADMINISTRATIVE EXPENSES
Unlike States, the eligible entities (e.g., primarily CAAs) do not have legislative restrictions on
their use of CSBG funds for administrative purposes. However, like all nonprofits, they are
motivated to keep overall administrative costs low and target resources toward direct services to
address the underlying causes of poverty and strengthen communities.
To better understand how CAAs report administrative expenditures for their agencies, and how
CSBG funds are used locally, telephone interviews were conducted with the financial officers of
23 CAAs in eight States.15 The interviews were designed to learn how CAAs track and classify
agency-wide expenditures and the intrinsic value of CSBG funding for the organization.
Types of Expenses Allocated to Administration
Following guidelines from OMB Circular A-122 and OCS directives, CAAs allocate their
expenses between program and administrative cost categories. In general, CAAs report their
overall operations and management expenses as administrative costs. However, because OMB
and OCS guidelines are sometimes subject to interpretation, and definitions of program and
administrative costs differ depending on the regulatory authority and reporting purpose, the
financial reports submitted by eligible entities may not be completely comparable.
Staff time
The vast majority of interviewees reported that the time of non-program staff is classified as
either administrative expenses or a combination of administrative and program expenses (Table
2). Half the CAAs interviewed (52 percent) charged their executive director’s time solely to
administration, while two-fifths (44 percent) attributed their director’s time to both
administration and programs. For finance and accounting personnel, the allocation of their time
15
The eight States selected (California, Georgia, Massachusetts, Minnesota, New York, Oklahoma, Virginia, and
Washington) correspond to those that participated in site visits as part of the larger CSBG ARRA Evaluation study.
See Appendix B for a description of the methodology used to select the States and CAAs, and the protocols used for
conducting the interviews.
12
was more evenly split between charging only administrative costs (48 percent of the study’s
CAAs followed this pattern) and charging a combination of administration and program costs
(44 percent). Program staff time was nearly all charged to program expenses.
Table 2. Allocation of Staff Time by Staff Position (percent)
Staff position
Executive director
Finance/accounting staff
Program staff
Support staff*
Allocated to
programs
only
4.3
8.7
95.7
4.5
Allocated to
administration
only
52.2
47.8
0.0
18.2
Allocated
between
programs &
administration
43.5
43.5
4.3
77.3
Total
100
100
100
100
Source: Urban Institute interviews of 23 CAA financial officers.
*
Twenty-two of the 23 respondents reported having support staff.
Of the 10 interviewees who reported having development or fundraising staff, the majority (six)
charged this time as an agency administrative expense. Only three CAAs expensed this staff time
to both administrative and program costs, and one indicated that all development staff time was
charged as a program cost.
In-house information technology (IT) staff time is regarded as either an administrative or a
program cost. There is no clear pattern on which expenditure category is more frequently used.
Thirteen CAAs interviewed have in-house IT staff; one uses an IT consultant. One CAA reported
all IT staff time to programs, while seven CAAs report it as a combination of program and
administrative costs. Six CAAs reported IT staff time exclusively to administrative expenses.
All CAAs interviewed said they had a time card system, with the vast majority (87 percent)
being able to track staff hours by specific programs or activities. Tracking staff time by program
activity yields a more accurate division of labor costs between program and administrative
activities.
Other types of administrative expenses
Most CAAs in the sample regard such expenses as rent, computers, printing, postage, and so on,
as a combination of administrative and program expenditures (Table 3). Less than 10 percent of
these CAAs expensed rent, printing, and postage exclusively to program operations. Roughly
one in five interviewees said travel costs were generally considered program costs.
13
Table 3. Allocation of Organizational Expenses (percent)
Organizational expense
Rent/mortgage*
Computers & IT-related
Printing/copying
Telephone
Postage
Supplies/miscellaneous
Travel**
Allocated to
programs
only
9.5
0.0
8.7
0.0
8.7
4.3
18.2
Allocated to
administration
only
0.0
4.3
0.0
0.0
0.0
4.3
4.5
Allocated
between
programs &
administration
90.5
95.6
91.3
100.0
91.3
91.3
77.3
Total
100
100
100
100
100
100
100
Source: Urban Institute interviews of 23 CAA financial officers.
*
Twenty-one of the 23 respondents reported having rent or mortgage expenses. Two CAAs owned
the space they occupied.
**
One respondent did not report travel expenses.
Ten of the 17 CAAs that reported capital expenses (e.g., building additions and major equipment
purchases) classified the expenses under both agency administration and programs. Six of the 17
attributed capital expenses to programmatic activities, and only one said its capital expenses fall
under administration.
Use of CSBG Funds
According to most interviewees, CSBG funds are used primarily for programmatic purposes. But
the flexibility of CSBG funds enables CAAs to use this support in various ways—similar to a
general program support grant that might be obtained from a private foundation. It may be used
to fill in funding gaps of other programs, start new and innovative efforts, or provide leverage for
securing other sources of revenue. One financial officer characterized CSBG as the “umbrella
program” that covers all the other programs of her agency. CSBG assists in supporting varied
expenses, including staffing and space for other services.
A common use of CSBG funds is to bolster programs and services. Twenty-one of the 23 CAAs
interviewed used their CSBG funds to help with other programs such as local homelessness
prevention, employment, child care, youth development, food and nutrition, education, and
energy programs. Part of the cost of these programs is covered through other Federal programs
such as Head Start, Weatherization, and The Emergency Food Assistance Program (TEFAP),
with CSGB filling in gaps and supplementing program activities. One in three interviewees said
14
their organizations allocated 60 percent or more of CSBG funds to help fund other programs,
which is an allowable use of CSBG funds under IM 37. Interviewees suggested that CSGB funds
provide an operational platform from which other programs and services may be delivered to
address the causes of poverty in local areas. One interviewee said that without CSBG, the CAA
would lose at least 10 of its 40 programs and be forced to lay off 150 to 200 people.
Other CAAs use CSBG to launch new programs or strengthen existing ones, which eventually
are funded from other sources. One interviewee characterized this as the “entrepreneurial spirit”
developed with CSBG. He said that without the initial infusion of CSBG funding, most of his
organization’s 35 programs would not have started. In fact, three-quarters of the interviewees
reported that they use CSBG funds to leverage additional revenue to meet critical, inadequately
funded needs (such as food banks, long-term care ombudsman programs, employment programs,
and homelessness prevention initiatives) and other services for low-income families and
children.
One CAA staffer indicated that the ability to use CSBG funds to support the agency’s homeless
shelter proved invaluable, as it demonstrated a financial base for this service and resulted in
securing funds from other revenue sources. Another interviewee recounted how his CAA used
CSBG funds to set up a health clinic and apply for grants from other Federal agencies. In this
case, staff time was covered by CSBG. The clinic eventually became a separate, independent
nonprofit.
When asked how much of CSBG funds were spent on administrative expenses in FY 2008, a
third of the CAAs interviewed (8 of 23) said 10 percent or less. The median share was 15
percent. A financial officer at one CAA said he really wanted all of his organization’s CSBG
funds to go toward programs. He noted that his CAA has such respect for CSBG funding that the
organization uses alternate funding (such as earned income and user fees) to cover administrative
costs. This tactic allows his CAA to spend 100 percent of CSBG funds on program services.
However, not all CAAs have alternate streams of revenue to cover administrative costs.
CSBG funds are meant to meet local needs and are designed to be more flexible than most other
government funds; as such, they can serve various organizational and community needs. One
CAA used CSBG funds to put in place the “appropriate infrastructure to administer our Federal
15
contracts correctly. It would have been very difficult otherwise as funding for such capacitybuilding activities is rare.” Another noted that CSBG funds are critical to meet the different
needs of the community. CSBG allows this agency to develop programs that address those needs.
Perspectives on Allocating Administrative Expenses
A consistent theme throughout the interviews was the negative stigma associated with
administrative costs. Managers wanted to spend as much of their CSBG funds on programs as
possible; however, several expressed concern over balancing their program and administrative
costs. As one interviewee stated, “the reality is there is a level of admin[istrative] cost that needs
to exist.”
The organizations interviewed strive to present an honest and accurate picture of how they spend
their funds, but several interviewees noted that the guidelines regarding administrative expenses
are complex and sometimes conflicting. Some expenses can be seen as both administrative and
programmatic, depending on the regulatory authority issuing the guidance and the purpose of the
report being completed. For example, IM 37 provides administrative and programmatic
definitions that sometimes differ from those identified under OMB Circular A-122. According to
Circular A-122, grantees can include all facility costs as a separately identified category in
calculating their administrative expenditures. For CSBG, grantees may allocate facility costs
between direct program costs (i.e., those facility costs attributable to the operation of direct
program activities) and administrative costs (i.e., those facility costs associated with general
management of the organization).16 Eligible entities must comply with IM 37 when reporting
CSBG funds, but they also must comply with the requirements and definitions outlined under
Circular A-122.
This complexity requires CAAs to be cognizant of the differences among legislative and
regulatory guidelines in order to ensure accurate reporting of administrative expenditures.
Interviewees followed different strategies for resolving such issues. A few organizations said that
16
According to statute, CSBG funds cannot be used for “the purchase, construction, or permanent improvement
(other than low-cost residential weatherization or other energy-related home repairs) of any building or other
facility” (Sec. 678F, 42 USC 9918). In practice, this statutory language is generally interpreted to mean that
mortgage expenses are not an allowable expense under CSBG, while rental expenses are an allowable expense.
Circular A-122 does not provide specific guidance on this matter.
16
when they were unsure how to allocate costs, they tended to report such expenses as
administrative rather than program costs, which inflates their reported administrative costs.
Another interviewee said that “Technically, everything is related to programs. There really are
no admin expenses.” She noted, however, that her organization and auditors abide by contract
and grant regulations and guidelines, as they understand these rules. One CAA fiscal executive
explained that she felt the need to work closely with the State to make sure that the CAA is
following regulations. Several interviewees stressed the importance of following the rules and
maintaining transparency. As one interviewee stated, “Everything is very clean and very
transparent. Anyone can walk in and trace any line item expense.”
Overall, the CAA respondents share the goal of minimizing administrative expenses as best they
can. They want to be good stewards of the resources available to them. They also do not want to
provoke an audit or give the impression that they are wasting taxpayer and funder dollars. Many
interviewees feel that more guidance is needed to clarify financial reporting issues.
COMPARISONS OF CAAS AND OTHER NONPROFITS
CAAs are sometimes regarded as unique organizations, having been founded during the 1960s
and 1970s in response to President Johnson’s War on Poverty. Being charged with addressing
the causes of poverty in local communities, their activities are extremely broad and necessitate
coordination of a wide range of services to fulfill the purposes outlined under the CSBG
legislation. But since the 1960s and ’70s, other nonprofits have emerged that also address
poverty issues. How do CAA agency-wide administrative expenses compare to those of similar
nonprofit organizations? Are CAAs’ organization-wide administrative expenses higher or lower
than those of other nonprofits?
To answer this question, a sample of nonprofit organizations comparable to CAAs in size and
types of services provided was drawn from the National Center for Charitable Statistics (NCCS)
database, a national repository of IRS Forms 990. The sample was stratified by four size
categories (small, medium, large, and mega) based on total agency expenditures and by primary
17
type of service provided according to the National Taxonomy of Exempt Entities (NTEE)
classification system.17 Appendix C describes the methodology used for drawing the sample.
Table 4. Distribution of CAAs and Comparable Nonprofits by Total Expenditures,
2008
Size
Small
Medium
Large
Mega
Unknown
Total
Expenditures
Less than $5 million
$5–$50 million
$50.01–$100 million
Greater than $100 million
Unknown
Total
No.
261
463
4
4
0
732
CAAs
Percent
35.7
63.3
0.5
0.5
0.0
100.0
Comparable
Nonprofits
No.
Percent
353
35.1
594
59.0
36
3.6
17
1.7
6
0.6
1,006
100.0
Source: Urban Institute, National Center for Charitable Statistics, Core Files (Public Charities, 2008).
Note: The CAAs in this study represent all CAAs that had a Form 990 on file with the IRS for FY 2008.
CAAs not included may have requested reporting extensions from the IRS and do not appear in the
NCCS database.
As Table 4 shows, the two groups are fairly similar in size, with comparable nonprofits slightly
larger than CAAs. About 5 percent of comparable nonprofits report annual total expenditures
over $50 million compared with 1 percent of CAAs. A somewhat higher share of CAAs than
comparable nonprofits fall in the medium-size category (63 percent versus 59 percent).
These size differences are also reflected in average and median annual expenditures. The average
(or mean) expenditures for the comparable group is almost two-thirds larger than expenditures
for the CAAs ($14.4 million versus $9.2 million, respectively). However, median expenditures
(i.e., the point where half the organizations are above or below this number) are much closer.
The median for CAAs is $6.3 million; for comparable nonprofits, it is $6.7 million.
The two groups are also statistically well matched based on their primary activity as defined by
NTEE codes (Table 5). Nearly 60 percent of each group is a human service nonprofit, while
almost 30 percent is community improvement and capacity-building organizations. The
17
The NTEE-CC classification system categorizes nonprofit organizations into 26 major groups under 10 broad
categories, including arts, culture, and humanities; education; environment and animals; health; human services;
international, foreign affairs; public, societal benefit; religion-related; mutual/membership benefit; and
unknown/unclassified.
18
remaining CAAs and comparable nonprofits are classified as “Other.” These organizations tend
to focus on such activities as employment, food, agriculture, nutrition, and housing and shelter.
Table 5. Distribution of CAAs and Comparable Nonprofits by Primary Services
NTEE
Codes
P
S
J,K,L
Total
CAAs
Mission
Human Services
Community Improvement and
Capacity Building
Other
Total
Comparable Nonprofits
No.
434
213
Percent
59.3
29.1
85
732
11.6
100.0
No.
596
279
131
1,006
Percent
59.2
27.7
13.0
100.0
Source: Urban Institute, National Center for Charitable Statistics, Core Files (Public Charities, 2008).
In terms of geographic location, a slightly greater share of CAAs than comparable nonprofits is
located in the Midwest and South. In contrast, other nonprofits are more likely than CAAs to be
found in the West (Table 6). The concentration of CAAs in the Midwest and particularly the
South may reflect the historical origins of Community Action. Also, subsequent U.S. population
shifts to western States after the 1960s and ’70s may have encouraged the formation and growth
of other nonprofit organizations that address low-income needs.
Table 6. Distribution of CAAs and Comparable Nonprofits by Region
CAAs
Census Region
Northeast
Midwest
South
West
Total
No.
151
205
273
103
732
Percent
20.6
28.0
37.3
14.1
100.0
Comparable Nonprofits
No.
Percent
229
22.8
235
23.3
331
32.9
211
21.0
1,006
100.0
Source: Urban Institute, National Center for Charitable Statistics, Core Files (Public Charities, 2008).
Administrative Expenses of CAAs and Comparable Nonprofits
To understand how CAAs and a comparable group of nonprofits allocate their agency-wide
expenditures between program and administrative expenses, we looked at the percentage of total
expenditures an organization spent on administrative expenses as reported on its IRS Form 990.18
18
Percentage of administrative expenses is the total management and general expenses divided by total
expenditures. The Form 990 was extensively redesigned in 2008, and organizations had the option to use either the
19
This measure reflects administrative expenses for the whole organization, not just CSBG.
Because administrative expenses can vary by a number of organizational factors, the analysis
controlled for five factors, namely type of organization (CAA or comparable nonprofit), primary
type of service, organization size, location, and percentage of organizational funds received
through government grants. This last variable was included to facilitate comparisons because
many CAAs receive the bulk of their revenues from Federal funds.
Findings
As Table 7 illustrates, CAAs on average spend somewhat less on agency-wide administrative
expenses (6.8 percent) than the comparable group of nonprofits (8.2 percent). Also, the
percentage of administrative expenses is inversely related to an organization’s size. As an
organization gets larger, the share of total expenditures spent on administrative expenses
declines. Whereas small CAAs and comparable nonprofits spend roughly 9 to 13 percent of their
total budgets on administrative expenses, larger nonprofits spend approximately 5 to 8 percent.
Table 7. Average Percentage Spent on Administrative Expenses by Type and Size of
Nonprofit
Size
Small
Medium
Large
Mega
All nonprofits
CAA
9.2
6.6
5.9
6.1
6.8
Comparable Nonprofits
12.7
9.6
7.6
5.0
8.2
Source: Urban Institute, National Center for Charitable Statistics, Core Files (Public Charities, 2008).
The majority of CAAs (72 percent) report 10 percent or less of their organization’s total
expenses as administrative expenses, which indicates that 90 percent or more of their funds for
all operations go directly to program costs (Table 8). For CAAs with administrative costs over 10
percent, close to 90 percent spend between 10 to 20 percent on administrative costs. In contrast,
only half the comparable nonprofits (52 percent) have administrative expenses of 10 percent or
less of their total expenses. A third of this comparable group reports between 10 to 20 percent on
old or new form. For organizations using the old form, we divided Part II, line 44c (total management and general
expenses) by Part I, line 17 (total expenses). For organizations using the newly designed form, we divided Part IX,
line 25c (total management and general expenses) by Part I, line 18 (total expenses).
20
administrative expenses, and 13 percent indicate that they spend more than 20 percent of their
total operating budget on administrative expenses. These differences are statistically significant.
Table 8. Distribution of CAAs and Comparable Nonprofits by Percentage Spent on
Administrative Expenses
Percentage Spent on
Administrative Expenditures
0
0.01 to 5
5.01 to 10
10.01 to 20
Greater than 20
Unknown
Total
CAAs
No.
Percent
24
188
316
181
23
3.3
25.7
43.2
24.7
3.1
732
100.0
Comparable Nonprofits
No.
Percent
69
199
258
341
133
6
1,006
6.9
19.8
25.6
33.9
13.2
0.6
100.0
Source: Urban Institute, National Center for Charitable Statistics, Core Files (Public Charities, 2008).
Further analysis using Ordinary Least Squares (OLS) regression19 explored the strength of the
relationship between the percentage of revenues spent on administrative expenses and five
organizational characteristics: type of organization, primary type of service provided, size,
location, and percentage of funds received through government grants.
The results of the regression (see Technical Notes) provide additional evidence that CAAs spend
significantly less on agency-wide administrative expenses than the comparable group of
nonprofits. Size of the organization is statistically a strong and negative factor in explaining
levels of spending on administrative expenses—that is, as the size of the organization increases
the share of expenditures devoted to administrative expenses decreases. Economies of scale
come with greater size.
CONCLUSIONS
Administrative costs provide one measure of an organization’s efficient use of funds, although
they should not be viewed as the only measure for assessing performance. Many other factors—
19
Ordinary Least Squares regression is a procedure whereby the association between two values is represented by a
straight line drawn through the scatter of bivariate observations. The best-fitting line takes the most central path
through the scatter of observations.
21
such as the population served, types of services provided, location of the organization, and
program outcomes—are also important in assessing the efficiency and effectiveness of nonprofit
service providers.
This analysis focused on one aspect of organizational efficiency: administrative expenditures.
Based on an analysis of IRS Form 990 data, the study finds that CAAs, on average, tend to have
lower agency-wide administrative expenses than comparable nonprofit organizations. Moreover,
size matters: larger organizations achieve greater economies of scale and tend to use a smaller
percentage of their total operating budgets on administrative activities. These data support the
idea that CAAs are comparatively good stewards of Federal dollars.
While administrative expenses do not tell the whole story, they are an easy, accessible, and
nearly universal measure for gauging and comparing an organization’s efficiency. In a highly
competitive funding environment, nonprofits have much to gain by touting their efficiency
through financial data and metrics commonly used in the for-profit sector. But such financial
yardsticks must be accurately portrayed and comparably measured to be useful. If guidelines for
reporting financial information are unclear or conflicting, the resulting measures are likely to be
inconsistent across organizations, affecting one’s ability to compare and interpret results.
Both funders and nonprofit organizations want public needs to be met in the best possible way, at
the least cost, and with little waste. This analysis suggests three areas in which further attention
is needed:
First, the distinction between administrative and program expenses needs to be clarified
by government agencies that issue guidelines. Both the research literature and the CAAs
interviewed indicate that current guidelines from IRS, OMB, and OCS are not always
clear, and they are sometimes conflicting. Expert review of guidelines across issuing
authorities is needed to reduce or eliminate this ambiguity and improve the quality of
these financial measures. In particular, attention might be given to clarifying how facility
costs, grant writing/development activities, and information technology services are
classified.
Second, training and technical assistance for States and eligible entities (CAAs),
particularly for smaller organizations, is needed to help financial officers prepare
22
reporting documents. Comparisons of financial ratios, such as percentage of total
expenditures spent on administrative activities, are only valid if the data are comparable.
Interviews with CAA financial officers indicate that they do their best to comply with
Federal directives, but that unclear and conflicting guidelines can be problematic.
Third, because administrative costs, as a proportion of total expenses, decrease as a
nonprofit’s budget increases, funders might consider permitting a range of administrative
expense levels based on organizational size, with smaller nonprofits allowed higher
percentages than larger ones. The literature is less clear how the types of services
provided or the provider’s geographic location might affect administrative expenses.
These factors need further investigation before any policy recommendations can be made.
23
TECHNICAL NOTES
OLS Regression Results
Percentage Spent on Administrative Expenses by:
Type
Coefficient
-.094***
Standard
Error
-0.017
T score
-5.4
Mission:1
Human Services (P20)
Community Improvement and Capacity Building (K)
Other Human Services (other P)
0.004
0.002
-0.001
-0.007
-0.007
-0.01
0.5
0.27
-0.1
Size
-0.047***
-0.007
-6.66
Location:2
Northwest
Midwest
South
-0.005
-0.015
0.005
-0.008
-0.008
-0.008
-1.27
-1.88
0.63
0.003
-0.006
0.55
-0.008
2.7
Percent Government Grant
Type*Size
.023**
N 1,731
R squared
0.1097
Source: Urban Institute, National Center for Charitable Statistics, Core Files (Public Charities, 2008).
Note: Robust standard error in parentheses.
1
Others is omitted category.
2
West is omitted category.
Significance: *(0.05), **(0.01),***(0.001).
24
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Pollak, Thomas H., Patrick Rooney, and Mark A. Hager. 2001. “Understanding Management and
General Expenses in Nonprofits.” Overhead Cost Study Working Paper presented at the
2001 Annual Meeting of the Association for Research on Nonprofit Organizations and
Voluntary Action.
Tierney, Thomas J., and Richard Steele. 2011. “The Donor-Grantee Trap: How Ineffective
Collaboration Undermines Philanthropic Results for Society and What Can Be Done
about It.” Boston, MA: The Bridgespan Group, Inc.
26
APPENDIX A: CSBG ADMINISTRATIVE EXPENDITURES BY STATE, FY 2008
State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
State CSBG
administrative
expenses
635,621
119,465
276,283
381,746
2,898,833
272,442
317,854
149,194
417,402
911,643
828,928
115,209
144,299
1,429,437
176,174
281,497
249,979
226,746
755,861
73,129
446,118
810,392
680,227
351,687
517,112
239,744
157,963
116,596
132,528
120,735
584,604
185,184
2,285,647
823,261
99,945
1,350,208
365,877
203,470
921,127
151,155
306,231
24,398
172,101
1,180,463
188,893
173,382
515,947
Total CSBG
expenses
9,613,027
2,537,843
4,699,232
8,501,520
57,976,671
5,448,843
7,615,778
3,194,337
10,642,350
19,601,665
16,071,980
3,034,849
3,410,002
31,150,483
9,347,663
7,037,445
5,144,692
10,316,479
15,267,581
3,481,397
8,922,364
15,653,155
23,266,579
7,701,353
10,342,254
17,827,420
3,159,269
4,495,353
3,980,435
3,172,205
9,628,343
3,558,791
56,373,872
15,264,225
3,179,792
25,830,444
7,588,374
5,117,804
27,558,455
3,330,447
9,309,120
2,815,463
12,894,994
30,286,761
3,663,203
3,654,349
10,783,085
Percent
administrative
expenses
6.61
4.71
5.88
4.49
5.00
5.00
4.17
4.67
3.92
4.65
5.16
3.80
4.23
4.59
1.88
4.00
4.86
2.20
4.95
2.10
5.00
5.18
2.92
4.57
5.00
1.34
5.00
2.59
3.33
3.81
6.07
5.20
4.05
5.39
3.14
5.23
4.82
3.98
3.34
4.54
3.29
0.87
1.33
3.90
5.16
4.74
4.78
27
Rank by
administrative
expenses
51
30
49
24
42
40
22
29
18
28
44
15
23
27
4
20
34
6
35
5
41
45
8
26
39
3
37
7
11
16
50
46
21
48
9
47
33
19
12
25
10
1
2
17
43
31
32
Number of
CAAs in State,
FY 2008
22
1
10
16
54
3
12
1
1
31
20
4
6
37
24
18
8
23
42
10
17
24
30
28
17
19
10
9
3
6
25
8
45
35
7
52
20
17
42
8
15
4
11
38
4
5
26
State CSBG
Percent
Rank by
Number of
administrative
Total CSBG
administrative administrative CAAs in State,
State
expenses
expenses
expenses
expenses
FY 2008
Washington
387,468
7,803,925
4.97
36
30
West Virginia
363,179
7,263,596
5.00
38
16
Wisconsin
278,114
7,850,539
3.54
14
16
Wyoming
110,397
3,241,136
3.41
13
5
Total
24,905,895
589,610,942
4.22
935
Source: National Association for State Community Services Programs. Community Services Block
Grant (Annual Report, 2008).
Note: Total CSBG Award combines State administrative, discretionary, and CAA amounts. CAAs
counted above are only eligible nonprofit entities; other eligible entities such as public agencies and
tribes are not shown.
28
APPENDIX B: METHODOLOGY FOR THE PHONE INTERVIEWS
To complement the data analysis performed in this study, telephone interviews were conducted
with financial officers of CAAs. The interviews provided an opportunity to obtain on-the-ground
insights into how CAAs use and report their administrative expenditures.
The sampling frame for the interviews consisted of CAAs located in eight States: California,
Georgia, Massachusetts, Minnesota, New York, Oklahoma, Virginia, and Washington. These
States previously participated in site visits as part of the larger CSBG American Recovery and
Reinvestment Act (ARRA) Evaluation Study. States were chosen to promote geographic
diversity, ensure a viable mix of urban and rural settings, capture a range of socioeconomic
conditions and demographics, and include a mix of organizational capacities. CAAs that
participated in site visits conducted by Urban Institute (UI) researchers for the CSBG ARRA
Evaluation Study report were removed from this sampling frame. The frame was then stratified
by State and size, and organizations were randomly selected. This sampling method resulted in
33 CAAs being asked to participate in the study.
An email was sent to executive directors to request permission for a UI researcher to interview
their chief financial officer or a senior staff member well versed with the organization’s finances.
A follow-up email was sent to directors who did not respond to the initial request. Directors who
did not respond to emails were contacted by telephone. This resulted in a 70 percent response
rate, with 23 agencies completing an interview. Table B-1 shows the respondents by State, and
Table B-2 shows the respondents by size of CAA.20
20
Due to the small sample size, two-way cross tabulations are not included to protect the respondent’s identity and
ensure that answers remain confidential.
29
Table B-1. Sample by Geographic Location
State
California
Georgia
Massachusetts
Minnesota
New York
Oklahoma
Virginia
Washington
Total
Number of respondents
3
2
2
4
4
2
2
4
23
Percent
13.0
8.7
8.7
17.4
17.4
8.7
8.7
17.4
100
Table B-2. Sample by CAA’s Organizational Size
Size of expenditures
Small: Less than $5 million
Medium: $5 million to $50 million
Large: $50 million to $100 million
Mega: Greater than $100 million
Total
Number of
respondents
10
11
1
1
23
Percent
43.5
47.8
4.3
4.3
100.0
Semistructured interviews were conducted via telephone during normal business hours.
Interviews took place between August 3 and 23, 2011. Participants were informed that their
answers would be confidential and participation was voluntary. No incentives were offered to
participants.
30
APPENDIX C: METHODOLOGY FOR THE REGRESSION ANALYSIS
Sample
To select a comparison group of other nonprofit organizations similar to Community Action
Agencies (CAAs), the Urban Institute used a sampling frame of all nonprofit organizations that
filed IRS Forms 990 in 2008. The sampling frame was stratified by organization size based on
total expenses and then by the organization’s mission using the National Taxonomy of Eligible
Entities (NTEE) code. One observation had missing data and was dropped from this analysis.
Variables
Dependent Variable
The percentage of total expenses going to administrative activities in 2008 is the outcome
variable. The variable is constructed by using information provided on the organization’s Form
990. Specifically, management and general expenses were divided by total expenses to yield the
percent of administrative expenses. As noted earlier in the paper, management and general
expenses typically account for the non-programmatic expenses an organization incurs.
Independent Variables
A dummy variable is used to indicate the type of organization. Organizations classified as CAAs
are coded as 1, and organizations that are not CAAs are coded as 0. Organizations that are not
CAAs are organizations that were selected based on the sampling process described above and
are referred to as comparable nonprofits.
Control Variables
Mission refers to the organization’s main service area as classified on the Form 990 using the
NTEE system. Dummy variables based on the NTEE codes were used. Included in this study are
CAAs and comparable nonprofits that focus on human services (P), community improvement
and capacity building (S) and other [J (employment), K (food, agriculture, and nutrition), or L
(housing and shelter)] activities. The relationship between organizational mission and the
percentage of funds spent on administrative expenses is considered because organizations that
work in the same service area (or field) may have similar administrative expenses. More
specifically, the four service areas were defined by the following NTEE codes:
31
Major human service organizations
NTEE code of P20
Community improvement and capacity building
NTEE code of S
Other general human services
NTEE code of P, except P20
Other related human services
NTEE code J, K, or L
The size of an organization tends to inversely affect its administrative expenses, as shown in the
research literature. To control for size, total expenses from the organization’s 2008 Form 990 are
collapsed into an ordinal variable. The expenditure ranges for each group are as follows:
Small
Total expenses less than $5 million
Medium
Total expenses between $5 million and $50 million
Large
Total expenses between $50.01 million and $100 million
Mega
Total expenses greater than $100 million
The location of an organization can also explain differences in administrative expenses and is
included in dummy variables based on the U.S. Census Bureau’s four regions. Information on
location is derived from the State listed on the organization’s 2008 Form 990.
Northeast
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island, and Vermont
Midwest
Kansas, Illinois, Indiana, Iowa, Michigan, Minnesota, Missouri, Nebraska,
North Dakota, Ohio, South Dakota, and Wisconsin
South
Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia,
Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma,
South Carolina, Tennessee, Texas, Virginia, and West Virginia
West
Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada,
New Mexico, Oregon, Utah, Washington, and Wyoming
Since CAAs often receive a substantial portion of their revenue from Federal funds, the model
accounted for the percentage of revenue that organizations receive from government. The
percent government grant revenue is determined by dividing the amount of government grant
revenue by total revenue. Both variables were pulled from the organization’s 2008 Form 990.
32
Finally, after running a model specification test, an interaction variable was added to the model
to ensure the model was specified correctly. This required an interaction between type and size
of the organization.
Model
Ordinary Least Squares (OLS) is a method for estimating the unknown parameters in a linear
regression model. This method uses several assumptions to minimize the sum of the squares of
the errors made in solving every equation. That is, it minimizes the squares of the vertical
distances between the observed responses in the dataset and the responses predicted by the linear
approximation (Gujarati and Porter 2008).
The equation for the model used in this analysis is:
PAEi= β0i + β1(typei) + β2(mission_p20i) + β3(mission_ki) + β4(mission_pi) +
β5(sizei) + β6(northwesti) + β7(midwesti) + β8(government_grantsi) +
β9(type*sizei) + ei
33