Introduction

Private charitable contributions constitute a significant part of nonprofit resources, representing an average of 13.3% of the total revenues of the reporting public charities in 2013 (McKeever 2015). In addition to the practical importance of charitable contributions, scholars explain that private gifts often have an impact disproportionate to their share of nonprofit revenue because they convey organizational priorities more effectively than other sources of revenue (Worth 2014). Although the importance of charitable contributions varies significantly across fields of service and individual organizations, they are a symbolic foundation of support for these organizations even when they are not an organization’s largest or primary source of revenue (Froelich 1999). As Moore (2000, p. 185) explains, charitable contributions are the defining and unique source of revenue since they are set up exclusively to capture and channel philanthropic endeavors.

Nonprofit organizations seeking charitable support from individuals and foundations engage in a multitude of activities, which are collectively referred to as fundraising. The process of fundraising includes a wide array of activities, from identifying individuals and groups, cultivating prospects, soliciting actual gifts, to recognizing donors afterward. Fundraising also brings in more than money to nonprofit organizations, as fundraising messages create awareness of the organization and its program among those solicited (Thornton 2006). Because of both symbolic and practical importance of charitable and philanthropic giving, fundraising is an essential part of nonprofit management. To many people, fundraising is even considered synonymous with nonprofit organizations (Worth 2014).

Although fundraising is crucial for many nonprofits, research suggests that the strategic priority of fundraising activities varies considerably among different organizations (Worth 2014). Most notably, the priority of fundraising and related activities differs across the subsectors. For instance, private contributions account for a relatively small portion of total revenues of health service organizations, whereas religious organizations and human service organizations rely primarily on private giving (Worth 2014). Research shows that religious organizations, which accounted for slightly more than 6% of the reporting public charities in 2013, received 32% of the total contributions made in the USA (McKeever 2015). Health-related organizations, which made up almost a quarter of the nonprofit sector in 2013, received 7.4% of the charitable contributions. When studying nonprofit fundraising, such differences across the subsectors must be considered. In addition to the subsector differences, organizational and environmental contingencies also determine the priority of fundraising. For example, fundraising may have different strategic implications depending on the share of charitable contributions in total revenue. For organizations where such income constitutes a substantial part of revenues, fundraising activities are critical to sustainability. The priority of fundraising may also vary according to national and local economic conditions, as the availability of financial resources fluctuates between an economic downturn and booming economy.

In addition to the organization-specific contingencies, nonprofit fundraising is also affected by general economic conditions. Economic recession affects all organizations, regardless of sector. Corporate profits decline, the unemployment rate rises, and government has a smaller tax base. Still, nonprofits are particularly hard hit because their survival, in part, depends on voluntary charitable contributions from individuals and institutions, and charitable contributions tend to fluctuate considerably according to economic conditions. During the great recession in the late 2000s, foundations lost a significant share of their asset values due to the stock market crash and households faced a loss of assets and retirement savings, which resulted in a severe decrease in individual and foundation giving (Joseph 2011). Surveys of nonprofit organizations indeed report that nonprofits fared worse during the recession-driven years (Brown et al. 2013; Salamon et al. 2009). Such changes in economy and resource pool will inevitably affect nonprofit organizations’ priorities, including the strategic importance of fundraising. Despite the continued discussions regarding the effects of recessions on nonprofit organizations and their management, little is known about how these organizations react to changing economic circumstances. This study addresses this gap in knowledge by examining how nonprofit organizations adjust their fundraising activities when faced by a recession.

Research also finds that while all nonprofit organizations struggle during recession, the recession effects differ across the subsectors (Joseph 2011; Salamon et al. 2009), and this study focuses exclusively on the subsector of art, culture and humanities (ACH) to better understand the association between fundraising expenditure and economic-financial conditions (Worth 2014). By limiting our focus to a particular subsector, this study controls for wide variation in fundraising expenses across subsectors. These organizations account for nearly 10% of the reporting public charities in the USA and received approximately 5% of the total charitable contributions made in 2014 (McKeever 2015). Research also shows that ACH organizations, such as theaters and orchestras, were particularly hard hit during the great recession of 2007–2009, when compared to other types of public charities (Joseph 2011; Salamon et al. 2009). As Joseph (2011) explains, subsectors such as human services and health care are viewed as vital and indispensable, and the demand for their services tends to increase in difficult economic times. On the other hand, art and culture are considered nonessential and receive less attention in difficult times. Therefore, art and culture organizations become more financially vulnerable during a recession than other types of nonprofit organizations, meaning more explicit recession effects may be observed among ACH organizations.

The literature suggests that how an organization allocates its resources across different expenditure categories reflects its priorities (Hildreth and Kelley 1985; Smith et al. 1985). Research also finds that organizational priorities vary, depending on the internal and external conditions. Differences in priorities, in turn, will result in dissimilarities in how organizations allocate their resources across different expenditure categories. While traditional economic perspective on nonprofit organizations regards them as passive recipients of charitable donation from altruistic donors, more recent literature views nonprofits as making strategic choices facing scarce donor resources. In the latter approach, how an organization distributes its scare resources across expenditure categories represents its strategic decision in managing their resource dependence (Thornton 2006). Therefore, the amount of resources a nonprofit allocates to fundraising activities can be an indicator of the strategic importance of these activities. In this study, we examine how the priority of fundraising differs among ACH organizations and across time, focusing on how resource dependencies and the general economic condition explain the differences in the ratio of fundraising expenses. That is, what drives an organization’s allocation of its resources on fundraising activities? This study uses the financial data of ACH organizations retrieved from the National Center for Charitable Statistics (NCCS) in the USA during the period of 2005–2012.

Recession and the Priority of Fundraising

Recessions create a sense of insecurity and lack of control among individuals and institutions. Facing declining resources, nonprofit organizations experience a higher level of uncertainty in terms of how to continue to deliver services, if not uncertainty in terms of how to survive at all (Never 2011). During the 2007–2009 recession, the nonprofit sector as a whole faced a decline in revenue (Brown et al. 2013; Salamon et al. 2009). Among all sources of revenue, nonprofits experienced a substantial decline in private contributions, at both individual and corporate levels. The Urban Institute reports that private charitable contributions declined by 9.5% from 2007 to 2008 and by 3.9% from 2008 to 2009 (Blackwood et al. 2012). Fundraisers’ assessments of the giving environment also suggest that it hit its lowest level during the 2007–2009 recession since the Center on Philanthropy started to publish Philanthropic Giving Index in 1998 (Besel et al. 2011).

In response to a declining economy and falling charitable giving, nonprofit organizations adopt various strategies to sustain their operation. One of the coping strategies nonprofits take when facing declining revenue, and a decline in individual and corporate contributions in particular, is to increase their fundraising efforts, launching new or expanded campaigns (Salamon et al. 2009). Fundraising activities require a high level of professionalism by the organization’s staff, and therefore, demand staff time and administrative overhead (Hodge and Piccolo 2005). Research also suggests that competition for donation drives the fundraising expenses up (Rose-Ackerman 1982). The declining charitable support during the economic downturn leads to increased competition for limited philanthropic resources among nonprofits, which in turn, escalates their fundraising expenses.

On the contrary, economists point out that donors perceive fundraising expenditures as costs of their donation (Okten and Weisbrod 2000). Many charity watchdog organizations provide a nonprofit’s fundraising expense as a percentage of the total expense in their guidelines for donor decisions–potential donors, and the public generally view a lower percentage of fundraising expense as a positive sign of performance.Footnote 1 When fundraising expenses are considered as a cost of donation, they have a negative effect on donation (Okten and Weisbrod 2000). Therefore, nonprofits are under pressure to lower their fundraising expenses in order to stay competitive in the charitable contribution market. As result, increasing competition for charitable donations may result in a decrease in the ratio of fundraising expenditure due to nonprofits’ efforts to attract potential donors. Generally speaking, ACH organizations are known to generate a larger part of their revenue from charitable contributions compared with other 501(c)(3) organizations (Wing et al. 2008; Young 2016). Studies also report that ACH organizations tend to have a higher overhead expense ratio than other types of public charities, suggesting that these organizations are under pressure to minimize non-program expenses (Hager et al. 2002). Okten and Weisbrod (2000) further argue that the current level of nonprofit fundraising is significantly off the optimal—profit maximizing—level, substantially short in some subsectors and excessive in other subsectors. If ACH organizations’ fundraising has indeed exceeded the optimal level, a cost-effective decision during an economic recession will be reducing fundraising expenses.

Although it is not possible to test if each organization’s fundraising is above, below, or at the optimal level, we believe that nonprofit organizations spend more on fundraising activities during the recession regardless of where they are in the fundraising efficiency curve. With a significant decline in philanthropic resources, nonprofit organizations will be driven more by competition rather than the equilibrium of marginal costs and benefits of fundraising. In this sense, charitable contributions and giving can be perceived as a shared resource system where each organization acts independently, seeking to increase its share of the resource. In an unfavorable economic condition, nonprofits will strive to survive at any costs. Therefore, we hypothesize that nonprofit organizations increase their fundraising expenses during recession.

H 1

Fundraising becomes a higher priority during recession.

Revenue Mix and the Priority of Fundraising

While we expect nonprofits’ fundraising expenditures to change according to economic conditions, it is important to understand that an organization’s resource niche shapes its strategic choices (Never 2011). Studies show that business income is a major source of revenue for many nonprofits (McKeever 2015). Nonprofits’ earned income includes revenues from sales of goods, services rendered, or work performed. Schools charge students tuition, hospitals charge patients fees, museums charge visitors admissions, and symphony orchestras generate their income from ticket sales. According to the Urban Institute report (2015), the income that 501(c)(3) nonprofits earned from commercial activities in 2013 accounted for an average of 72% of their total revenue. Charitable contributions include individual and institutional giving to the organizations, and they accounted for 13.3% of the total revenue of public charities in the same year (McKeever 2015). ACH organizations are reported to rely more on charitable contributions than an average 501(c)(3)s, as private contributions account for approximately 40% of their revenue and program service revenue for about 30% (Wing et al. 2008). However, these numbers are average statistics, and the research shows that each nonprofit organization has a unique combination of these and other sources (Brooks 2000; Fischer et al. 2011).

Resource dependence theory explains that an organization distributes its resources according to the priority of each activity, which is largely determined by its dependence on particular sources of income. Organizations that have the ability to generate revenues through sale of goods, service or membership have a different set of priorities from ones that rely primarily on private contributions (Hodge and Piccolo 2005). In an organization where commercial activities account for a more substantial part of revenue generation, a greater emphasis will be given to commercial marketing activities. On the other hand, fundraising activities will receive a greater strategic importance in an organization where charitable contributions are a major source of revenue.

H 2

Fundraising is a higher priority for donative nonprofits than for commercial nonprofits.

The resource dependence theory explains that the survival of an organization is subject to its ability to acquire and maintain resources (Carroll and Stater 2009; Pfeffer and Salancik 1978). The theory also posits that management makes strategic decisions within the context of constraints, based in part on existing and anticipated resource dependencies (Greening and Gray 1994). According to this perspective, organizations adjust their patterns of behavior to acquire and maintain needed resources in different circumstances (Ulrich and Barney 1984). The revenue volatility during the recession, in turn, is partly dependent on the unique set of resource dependences of each organization (Froelich 1999). Therefore, there will be fundamental differences in organizational efforts to obtain resources depending on each organization’s mix of funding streams and hence, in their organizational priorities. In other words, those relying on income from fees for service and contracts and those depending on private charitable contributions choose different survival tactics when facing a recession. In sum, the theory predicts that an organization’s reaction to an economic downturn differs depending on its revenue structure.

In particular, this study hypothesizes that during a recession, donative nonprofits, i.e., those relying more of their resources on private contributions, will make more of an effort to raise funds than commercial nonprofits, i.e., those generating a larger proportion of revenue from business activities, because donative nonprofits perceive a greater risk from declining charitable contributions. When an organization derives the majority of its revenue from the sale of goods and services, greater priority will be given to maintaining the level of sales and marketing activities than diverting its resources to fundraising. Research also finds that specializing in a dominant single revenue source can lead to a great efficiency (de los Mozos et al. 2016), and this suggests that nonprofits having either source of income as a dominant source is likely to concentrate their efforts on what they have already invested in. Therefore, we hypothesize that the increase in fundraising expenses during the recession is greater for the organizations relying heavily on charitable contributions spend more on fundraising compared with organizations generating more income from commercial sources.

H 3

The recession effect on the priority of fundraising is greater for donative nonprofits than for commercial nonprofits.

Data and Method

This study establishes a quantitative model that empirically examines ACH organizations’ fundraising expenses in the economic recession period. The model also tests how the reliance on business and charitable revenue explains ACH organizations’ adjustments in fundraising expenses during the recession. This study employs a panel data of ACH organizations’ financial information from 2005 to 2012, which are available from Statistics of Income (SOI) files of the National Center for Charitable Statistics (NCCS). The SOI data include detailed financial information of public charities from the IRS Form 990.

Dependent Variable

This study examines how the priority of fundraising differs across different economic conditions and among different organizations. As discussed in Introduction, how an organization allocates its scarce resources across different expenditure categories reflects its priorities (Hildreth and Kelley 1985; Smith et al. 1985). In particular, this study measures the priority of fundraising in a nonprofit organization with the ratio fundraising expense to total expenditure. The dependent variable, fundraising expense %, is defined as:

$${\text{Fundraising}}\;{\text{expense}}\;(\% ) = \frac{{{\text{Total}}\;{\text{Fundraising}}\;{\text{Expenses}}}}{{{\text{Total}}\;{\text{Expenses}}}} \times 100$$

Independent Variables

Economic Recession

The independent variable of primary interest in this study is the economic recession. It is generally believed that the USA entered a recession immediately following the bursting of the housing bubble in the mid-2007 and the housing market correction and subprime mortgage crisis in 2008. The National Bureau of Economic Research (NBER) points to June 2009 as the final month of the recession (2010). The empirical model includes a dummy variable indicating the 3-year period of 2007, 2008 and 2009, which measures the overall impacts of economic recession on fundraising expenses.

Revenue Mix

This study examines the difference in ACH organizations’ fundraising expenses during the recession period. In particular, this study focuses on the shares of business income and charitable contributions in total revenue. The shares of business income and charitable contributions are measured as the percentage of each source out of the total revenue. The proportion of business income to total revenue is measured with the information from Part VIII, Line 2 g in the Form 990. The proportion of charitable contributions is measured using the information from Part VIII, Line 1 h in 990. These variables are defined as:

$$ {\text{Business}}\;{\text{Income}}\; ( {\text{\% )}} = \frac{{{\text{Program}}\;{\text{Service}}\;{\text{Revenue}}}}{{{\text{Total}}\;{\text{Revenue}}}} \times 100$$
$${\text{Charitable}}\;{\text{Contribution}} (\% ) = \frac{{{\text{Total}}\;{\text{Contribution}}}}{{{\text{Total}}\;{\text{Revenue}}}} \times 100$$

Revenue Mix and Recession

In addition to the overall recession effect on ACH organizations’ fundraising, this study examines if the recession effect differs depending on the revenue structure (see Hypothesis 2). The empirical model includes interaction terms between the recession dummy variable and the percentages of program service revenue and charitable contribution revenue.

Control Variables

Our empirical model considers an organization’s unique financial situation and environmental condition that can affect its fundraising and other expenses.

Organization’s Financial Health

First, the model controls for the two organizational-specific financial conditions: an organization’s financial performance and capacity. In keeping with the extant literature (Tuckman and Chang 1991), we include the previous year’s equity ratio and operating margin to measure financial performance. Research suggests that high financially performing nonprofit organizations are more likely to limit fundraising expenses in order to contain their overhead spending than low financially performing organizations, as donors may perceive a high fundraising expenses as inefficiency (Chikoto-Schultz and Neely 2016; Weisbrod and Dominguez 1986). It is also possible that organizations that struggled financially in the past year invest more in fundraising to overcome fiscal challenges.

In addition to the financial performance, the empirical model includes financial capacity to consider an organization’s ability to receive, solicit and operate funds. Studies consistently show that smaller organizations are most vulnerable during the time of an economic downturn (Chikoto-Schultz and Neely 2016). On the contrary, larger organizations have a greater financial capacity to absorb shocks from a bad economy, therefore, stay more resilient. We incorporate total revenue size and total assets to measure financial capacity, which provides a signal on financial strength. Furthermore, the total revenue size indicates the short-term capacity as a proxy of organization size, as well, and total net assets indicate the long-term financial capacity.

Organization’s Environmental Condition

While this study tests how ACH organizations’ fundraising expenses change during the recession, the dummy recession variable alone may not fully account for the impacts of economic recession. Most of all, the impacts of economic recession might have varied across years and geographic regions. Therefore, the empirical model includes additional measures to control for variation in economic condition over time and regions. First, we consider a set of dummy variables that indicate each year following the specification of time fixed effects in a panel dataset in order to better capture the time-variant effects of economic recession on fundraising efforts. These variables control for seasonal changes in economic conditions that might affect the potential capacity for fundraising and financial conditions of NPOs and estimate the year-by-year changes in an organization’s fundraising expenses as well as the overall trend in fundraising efforts. In addition to the dummy variable of economic recession and the year dummy variables, this study also uses a set of county-level economic indicators in order to control for regional differences. The model includes such measures as income level, unemployment rate and poverty rate in each county, which are retrieved from the US Bureau of Economic Analysis (2017), Bureau of Labor Statistics (2017) and Bureau of Census (2017), respectively.Footnote 2 These three indicators control for the regional differences in economic conditions that can affect nonprofits’ financial condition and strategy across regions. Moreover, we control the empirical models with the linear time trend variable and its interaction terms with a set of county dummy variables, which estimate the fixed effects of county-specific differences. As robustness check, the interaction terms can control year-to-year changes that vary across counties from the linear trend (Greene 2011).

Empirical Strategy

This study examines the changes in ACH organizations’ fundraising expenses from 2005 to 2012, which include the great recession between 2007 and 2009. However, roughly 21% of the observations reported no fundraising expense, and consequently, the panel dataset used for the analysis contains a large proportion of zero observations. Approximately 75% of the ACH organizations in the sample had reported zero fundraising expense in one or more years during the entire sample periods of 2005–2012. The skewness in the distribution due to a large number of zero observations violates the OLS’s normal distribution assumption, and consequently, the OLS estimation is likely to be biased (2017). Instead, this study employs the Tobit maximum likelihood estimation (MLE) of a left-censored dataset to obtain consistent and efficient estimates in light of the large sample (2017), which deals with a limited dependent variable and allows for the censoring mechanism. The basic assumption of Tobit regression is that there exists a latent variable y* (fundraising efforts) that is a continuous variable with a normal distribution, and this y* is positively correlated with the observed variable y (proportion of fundraising expenses). Previous research employed Tobit regression in the censored dependent variable situation where there exists a large number of 0 s in observations, such as estimating volunteer hours (Greene 2011) and charitable donations (Dietz et al. 2014).

Model Specification

For the empirical analysis, the model is defined as:

$${\text{FE}}_{it}^{*} = \alpha + \sigma {\text{REC}}_{t} + \delta_{1} {\text{BIZ}}_{it} + \delta_{2} {\text{BIZ}}_{it} {\text{REC}}_{t} + \rho_{1} {\text{PHIL}}_{it} + \rho_{2} {\text{PHIL}}_{it} {\text{REC}}_{t} + \gamma {\text{FS}}_{it - 1} + \theta {\text{CO}}_{ijt} + \varepsilon_{it} .$$

This empirical model supposes a latent variable \({\text{FE}}_{it}^{*}\). This latent variable linearly depends on the explanatory variables (\({\text{REC}}_{t} ,{\text{BIZ}}_{it} ,{\text{PHIL}}_{it} , {\text{FS}}_{it - 1} ,\) and \({\text{CO}}_{ijt}\)). In the Tobit regression model, the latent variable is observed only when it is greater than 0:

$${\text{FE}}_{it} = \left\{ {\begin{array}{*{20}c} {{\text{FE}}_{it}^{*} } & {{\text{if}}\;{\text{FE}}_{it}^{*} > 0} \\ 0 & {\text{otherwise}} \\ \end{array} } \right.$$

where the dependent variable, \({\text{FE}}_{it}\), indicates fundraising expenses measured as the proportion of fundraising expenses of total expense of an organization \(i\) in a fiscal year \(t\). \({\text{REC}}_{t}\) is the variable of primary interest in this study, which is a dummy variable that indicates the recession period, coded as 1 when observations are from year 2007, 2008 or 2009, and 0, otherwise. This variable measures the overall effect of the great recession on fundraising expenses of ACH organizations. The two variables \({\text{BIZ}}_{it}\) and \({\text{PHIL}}_{it}\) measure the revenue mix of an organization; \({\text{BIZ}}_{it}\) measures the proportion of business income and \({\text{PHIL}}_{it}\) measures the proportion of charitable contributions in the total revenue. The interaction terms between these variables and the recession variables account for the differences in nonprofits’ reaction to an economic recession depending on their revenue structure.

The empirical model controls for the previous year’s organization-specific financial performance and capacity with the four variables, \({\text{FS}}_{it - 1}\). Using the lagged terms of the financial performance and capacity alleviates any concerns regarding an endogeneity of reverse causality. In addition to the organization-specific financial situation, this study also controls for selected geographic information, \({\text{CO}}_{ijt}\), as variation in counties’ regional economy and state regulation on charitable solicitation and reporting requirements can affect nonprofits’ fundraising activities. The model includes an organization’s state information, as well as unemployment rate and median income in a county \(j\) where each organization \(i\) is located in a fiscal year \(t\).Footnote 3

Lastly, to further rule out the differences across individual organizations, the model includes a set of dummy variables that indicate each organization as well as two sets of dummy variables for states and counties to control for the regional differences in the recession effects across counties and states and the differences in terms of state regulation and requirements on charitable solicitation. Since the economic recession period covers the 3 years, we assume that the impacts of the economic recession are different across years. As the specifications of fixed effects in a panel data, a set of year dummy variables is considered to capture the year-by-year variance in fundraising efforts, in addition to the dummy variable for economic recession.Footnote 4 This specification accounts for the year-by-year effects on fundraising efforts as the time fixed effects in a panel dataset.

Empirical Results

Descriptive Statistics

The sample for empirical analysis includes 1286 ACH organizations in 447 counties in the time span of 2005–2012.Footnote 5 Table 1 describes the sample with regard to their fundraising efforts and other financial characteristics well as the regional economy. ACH organizations in the sample are chosen according to the National Taxonomy of Exempt Entities (NTEE) major group classification. The total sample size of 6340 enables this study to account for variation in the effects on fundraising before, during and after the economic recession of 2007–2009.Footnote 6

Table 1 Sample description (n = 6340)
Full size table

Table 1 indicates that ACH organizations directed an average of 6.87% of their total expense to fundraising between 2005 and 2012, and these organizations generated twice as much of the revenue from charitable giving (53.14%) than from program service activities (27.05%). Table 1 reveals that charitable donations are the most important source of income in ACH organizations, unlike some other types of 501(c)(3) organizations.

Tobit MLE Results

Table 2 reports the Tobit MLE results that outline the association between the ratio of fundraising expenses and economic recession with the considerations of both year-to-year and region-to-region changes in the impacts of economic recession.Footnote 7 The primary purpose of this study is to examine how nonprofits’ fundraising expenses change during and after the recession. The results show that ACH organizations generally spent more of their expenses on fundraising activities when economy took a downturn. Table 2 reveals the Tobit MLE regression result that the share of fundraising expenses to total expense increased during the recession period of 2007–2009, which supports our first hypothesis.

Table 2 Tobit MLE regression results
Full size table

The second hypothesis tests if ACH organizations’ adjustment in fundraising expenses during an economic recession differs depending on their revenue mix. Overall, the findings reveal that, while all organizations spend substantially more on fundraising during a recession, donative nonprofits increase their fundraising expenses even more than commercial ones. These findings suggest that the strategic importance of fundraising activities increases with an organization’s reliance on charitable donation and decreases with its reliance on fees for service. In addition, the interaction terms of the two funding sources with the economic recession variable provide an insight that charitable organizations spend more on fundraising efforts, while an organization more depending on business income has made less fundraising efforts in the recession periods. These findings imply that ACH organizations spend more on fundraising expenses for their own financial growth in the recession period and their revenue structure differentiates their efforts on fundraising.

The results reveal that the organization-specific financial conditions have a varied relationship with fundraising expenses. Unlike what we expected, the two variables of financial performance in the previous year are positively associated with the current year’s fundraising expenses. An ACH organization that achieved a higher equity ratio and operating margin spends more on fundraising expenses than those with a lower equity ratio or operating margin. This finding suggests that high financially performing organizations try to keep up with the existing level of performance by increasing their fundraising expenses.

An ACH organization with the greater total revenue, which measures its short-term capacity, spends more on fundraising. On the contrary, the size of net asset, which measures an organization’s long-term financial capacity, is negatively associated with fundraising expenses. These findings suggest that short-term financial capacity and long-term have different implications in regard to ACH organizations’ fundraising efforts. Organizations with a greater long-term financial capacity may have less of an incentive to spend on fundraising, while organizations with a greater short-term financial capacity are under the pressure to match the previous year’s level of performance, and therefore, increase their fundraising.

The findings regarding the relationship between ACH organizations’ fundraising and the local economy show that ACH organizations facing a favorable economic condition spend less on fundraising and those facing a less favorable economic condition spend more on fundraising. In addition, the coefficients for the interaction terms between recession and the local economy variables (not included in Table 3 because of space limitation) reveal that organizations facing less favorable local economy expand their fundraising expenses more than those facing more favorable conditions.

Discussion and Conclusion

By examining ACH organizations’ fundraising expenses from 2005 to 2012, this study contributes to improved knowledge of nonprofit fundraising expenses and how they change under different economic conditions. This study represents a first attempt to examine nonprofit fundraising over an extended period that includes the great recession from 2007 to 2009. Overall, the findings of this study reveal that the ratio of fundraising expense to total expense increases as the economy takes a downturn. The change in ACH organizations’ fundraising expenditures over time suggests that nonprofit ACH organizations either increase their spending on fundraising activities or maintain the same level of fundraising expenses despite the cutbacks in other areas of expenses facing economic recession.

The findings also suggest differences in ACH organizations’ reaction to fundraising activities depending on their revenue mix. In general, the proportion of fundraising expenses decreases with the share of program service revenue and increases with the share of charitable contribution revenue. While ACH organizations increase their fundraising expenses during the recession, the magnitude of increase is substantially larger for more donative nonprofits and smaller for more commercial nonprofits. This finding suggests that nonprofit organizations make a strategic choice in the extent and level of fundraising depending on the relative importance of business and charitable revenue. It also suggests that obtaining resources through commercial activities has a crowd-out effect on fundraising efforts.

Our analysis reveals that regional economy and organizational financial conditions are closely related to nonprofit fundraising activities. As in the case of economic cycle, nonprofits operating under a difficult financial situation spend a greater proportion of expenses on fundraising. The proportion of fundraising expenses increases with the county unemployment rate and organizational budget deficit, and it decreases with the size of net assets.

In addition, the findings suggest that the proportion of fundraising expenses in ACH organizations has gone down between 2005 and 2012. Analyses of more recent data will help better explicate the overall trend in nonprofit fundraising. It is beyond the scope of this study to examine why there is a downward trend in the fundraising expense ratio. Still, research finds that today’s nonprofit organizations are under increasing pressure to lower their overhead because donors want them to spend as much as possible on program activities and as little as possible on non-program activities, including fundraising and other administrative activities (Gregory & Howard, 2009). Emergence of new communication technologies such as social network sites in recent years might also have contributed to the observed decrease, offering low-cost alternatives to traditional fundraising activities (Saxton and Wang 2014).

Despite the contribution, the results should be interpreted with a caution because the financial information used in the analysis is from the IRS Form 990. Nonprofit scholars and practitioners have raised serious concerns about accuracy of the financial information in 990s (Lee and Brudney 2012; Nesbit 2012). For one thing, nonprofit organizations have considerable leeway in defining and reporting fundraising expenses, and some organizations take more discretion than others (Eckel and Grossman 2004; Hossain and Lamb 2017). Wing and his colleagues (Andreoni and Payne 2011) also point out that a number of nonprofit organizations either understate their fundraising costs or report them as zero in order to look good to the donors and public. Such inaccuracies in the Form 990s can mislead analysis and result in biased estimates. Future research based on a more accurate and comprehensive measures of fundraising and other expenses will contribute to a better understanding how nonprofits conduct fundraising. Most of all, the IRS must establish clearer guidelines for calculating fundraising and other administrative expenses.

This study focuses on the proportion of fundraising expenses to total expense as to measure the priority of fundraising activities within an organization. While an organization’s expense structure provides valid indicators of its priorities and activities, the priority of fundraising cannot be entirely captured by the financial bottom line. For instance, fundraising efforts can be measured by the number of fundraising methods an organization adopts, how actively its board is involved in fundraising, or whether it has a staff member with expertise in fundraising. In addition, such factors as community building needs, donor intent and commitment and organizational culture can affect the priority of fundraising. These factors may also differ substantially across different subsectors and regions. While such information is not available in NCCS data, a qualitative study based on interviews with nonprofit executives and boards will help better understand how these intrinsic factors shape fundraising.

Lastly, this study limited its focus to ACH organizations in order to focus on the recession effect on fundraising and to control for the high variability in the priority of fundraising across nonprofit subsectors. While this limited focus allows us to examine the recession, revenue mix and fundraising relationship in a more controlled manner, the variability across subsectors itself deserves extensive research and it is possible the recession hits different subsectors differently. Future studies can examine how organizations in each subsector adjust their fundraising and other expenses under different economic circumstances and how differences in their funding structure, donor intent and client base mediate the recession effects.