Finance

Employee Benefit Financing and Municipal Bankruptcy

Employee Benefit Financing and Municipal Bankruptcy
Journal of Government Financial Management 62(1): 12-19.

Ives, Martin and Thad Calabrese
01/01/2013

Five municipalities with populations over 100,000 have declared bankruptcy since 2008, as have some smaller ones, including Central Falls, RI, in 2011. The bankruptcies have unsettled citizens, current and retired employees, and creditors of the governments involved; further, the apparent increasing willingness of municipal officials to file for bankruptcy has raised concerns nationwide. Municipal bankruptcy is exceedingly rare. Only 650 US Bankruptcy Code Chapter 9 municipal bankruptcy cases were filed between 1937 and 2012; by contrast, 2009 alone saw more than 11,000 Chapter 11 corporate reorganization filings. The bankruptcy of Central Falls shows what can happen when systematic underfunding of employee benefit promises runs into a weak, declining economy. Central Falls is a relatively poor municipality. The consequences of bankruptcy can be severe for citizens, employees and creditors. As the current bankruptcy filings unfold in the courts, there is growing alarm among those concerned with government finances regarding the impact of bankruptcy on future borrowing costs and on the safety of employee benefit promises.

How Microfinance Really Works

How Microfinance Really Works
The Milken Institute Review

Morduch, Jonathan
01/01/2013

About half of the world’s adults lack bank accounts. Most of these “unbanked” are deemed too expensive to serve, or not worth the hassle created by banking regulations. But what may be good business from a banker’s perspective isn’t necessarily what’s best for society. The inequalities that persist in financial access reinforce broader inequalities in the distribution of income and wealth. This is the opening for microfinance and also its challenge. Microlending has been sold as a practical means to get capital into the hands of small-scale entrepreneurs who can then earn their way out of poverty. The idea appeals to our impulse to help people help themselves and to our conviction that bottom-up development depends on the embrace of the market. By eschewing governments and traditional charities, the sector promises to sidestep the bureaucracy and inertia that have hobbled other attempts to expand the opportunities of the poor.

Running on Empty: The Operating Reserves of US Nonprofit Organizations

Running on Empty: The Operating Reserves of US Nonprofit Organizations
Nonprofit Management & Leadership 23(3): 281-302.

Calabrese, Thad.
01/01/2013

Operating reserves allow nonprofit organizations to smooth out imbalances between revenues and expenses, helping to maintain program output in the presence of fiscal shocks. We know surprisingly little about why nonprofits might save operating reserves and what factors explain variation between organizations' savings behavior. Findings suggest that operating reserves are reduced in the presence of concentrated public funds, access to debt, fixed assets, and endowment. However, size is not an important predictor, indicating that the lack of reserves is not limited to small nonprofit organizations but is instead a sectorwide issue. Significant numbers of nonprofits maintain no operating reserves at all. One potential explanation is that organizations discount the benefits of reserves because they are evaluated on spending, focusing instead on the “benefits of costs.” This preference for spending over reserving may also help explain the general lack of liquidity in the sector beyond operating reserves alone.

Debt, Donors, and the Decision to Give

Debt, Donors, and the Decision to Give
Journal of Public Budgeting, Accounting, and Financial Management, volume 24, no. 2: 221-254

Calabrese, Thad, Grizzle, C.
06/01/2012

There has been a significant amount of work done on the private funding of nonprofits. Yet, despite the enormous size of the nonprofit sector as a whole, the importance of private donations to the sector, and the significance of the sector to public finances, there has been very little empirical research done on the capital structure of nonprofit organizations, and none has examined the potential effects of borrowing on individual contributions. Debt might affect donations because programmatic expansion might “crowd-in” additional donors, the use of debt might “crowd-out” current donors since expansion is undertaken at the behest of the organization (and not due to donor demand for increased output), donors might have a preference for funding current output rather than past output, or because of concerns that the nonprofit will be unable to maintain future programmatic output. These potential effects of debt on giving by individuals have not been the focus of research to date. The primary data for this paper come from the “The National Center on Charitable Statistics (NCCS)-GuideStar National Nonprofit Research Database” that covers fiscal years 1998 through 2003. The digitized data cover all public charities required to file the Form 990. The final sample contains 460,577 observations for 105,273 nonprofit entities. The results for the full sample support a “crowding-out” effect. The analysis is repeated on a subsample of nonprofits more dependent upon donations, following Tinkelman and Mankaney (2007). The restricted sample contains 121,507 observations for 36,595 nonprofit organizations. The results for the subsample are more ambiguous: secured debt has little or no effect, while unsecured debt has a positive effect. The empirical analysis is then expanded to test whether nonprofits with higher than average debt levels have different results than nonprofits with below average debt levels. The results suggest that donors do remove future donations when a nonprofit is more highly leveraged compared to similar organizations.
Nonprofits may fear that the use of debt signals mismanagement or bad governance, worrying that donors will punish the organization by removing future donations. The results presented here suggest a more complicated relationship between nonprofit leverage and donations from individuals than this simple calculus. On the one hand, increases in secured debt ratios (from mortgages and bonds) seems to reduce future contributions, possibly because donors are wary of government or lender intervention in the nonprofit’s management, or possibly because of the lack of flexibility inherent in repaying such rigid debt. On the other hand, unsecured debt, while more expensive, seems to crowd-in donations, even at increasingly higher levels when compared to similar organizations. There are at least two important conclusions from this analysis. First, during times of fiscal stress, nonprofits are often tempted to use restricted funds in ways inconsistent with donor intent simply to ensure organizational survival. Rather than violate the trust of certain donors, the results here suggest that nonprofits would be better off utilizing unsecured (possibly short-term) borrowing to smooth out cash flow needs. This option, however, assumes that nonprofits have access to some type of borrowing which is not true for many organizations. A second conclusion one might draw, therefore, is that policy considerations should be made to expand access to debt for nonprofits. The results here suggest that certain types of unsecured debt might in fact draw in additional resources, allowing nonprofits to leverage these borrowings for additional resources. By encouraging this type of policy option, nonprofits would not only gain access to increased revenue sources, but might be able to maintain programmatic output during times of fiscal stress.

The Accumulation of Nonprofit Profits: A Dynamic Analysis.

The Accumulation of Nonprofit Profits: A Dynamic Analysis.
Nonprofit and Voluntary Sector Quarterly 41(2): 300-324

Calabrese, Thad.
04/15/2012

Notwithstanding its importance as an internal source of financing, no analysis has examined why nonprofits choose to retain unrestricted net assets. As restricted net assets might not be used as desired by the nonprofit manager, unrestricted net assets are a more accurate definition of available internal resources than total net assets. This article tests several theories that might motivate nonprofit accumulation of unrestricted net assets. Furthermore, the empirical strategy employed allows an analysis of unrestricted net asset accumulation over time and overcomes several significant statistical estimation issues. The results suggest that nonprofits target profits and seek their accumulation over time, although targets may be set at very low levels. Furthermore, the results suggest that the low levels of profits accumulated annually are for the purpose of reducing organizational financial vulnerability. The results also suggest that many nonprofits behave as if leverage and unrestricted net assets are substitutes.

Alternative Service Delivery: Does Nonprofit Financing Influence State Tax Burden?

Alternative Service Delivery: Does Nonprofit Financing Influence State Tax Burden?
The American Review of Public Administration March 2013 vol. 43 no. 2 200-220, doi: 10.1177/0275074012439745

Carroll, Deborah A. and Thad Calabrese.
04/12/2012

We analyze panel data of U.S. states to determine whether nonprofit contribution and program service revenues are correlated with state tax burden. State tax burden is modeled as a function of (a) state tax policy, (b) nontax policy factors that affect state income, and (c) other exogenous factors that are independent of state tax policy and do not directly induce income; regression results reveal correlations with variables in all three categories. Intergovernmental revenue (IGR) paid to local governments, debt burden, tax exporting, a tax revenue limitation, and nonprofit revenue are most consistently correlated with state tax burden. Financial support for nonprofits in the form of contributions helps to reduce state tax burden and does so at a meaningful level. This finding implies nonprofits provide goods and services that are supplementary to government provision. However, the supplementary nature of nonprofit service provision is not universal. Further analysis of contribution and program service revenues for nonprofits in particular service categories finds either no correlation with state tax burden, a reduction in state tax burden, or an increase in tax burden imposed on state residents over time. By controlling for factors influencing demand for service provision and state tax policy changes, the regression results also provide evidence that government acts as a free rider.

Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India

Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India
American Economic Review 102 (2), April 2012: 1118-1139.

Bauer, Michal; Julie Chytilová; and Jonathan Morduch
04/01/2012

We use experimental measures of time discounting and risk aversion for villagers in south India to highlight behavioral features of microcredit, a financial tool designed to reduce poverty and fix credit market imperfections. The evidence suggests that microcredit contracts may do more than reduce moral hazard and adverse selection by imposing new forms of discipline on borrowers. We find that, conditional on borrowing from any source, women with present-biased preferences are more likely than others to borrow through microcredit institutions. Another particular contribution of microcredit may thus be to provide helpful structure for borrowers seeking self-discipline.

Do interest rates matter? Credit demand in the Dhaka Slums

Do interest rates matter? Credit demand in the Dhaka Slums
Journal of Development Economics, 97(2): 437-449

Dehejia, Rajeev; Heather Montgomery and Jonathan Morduch
03/01/2012

“Best practice” in microfinance holds that interest rates should be set at profit-making levels, based on the belief that even poor customers favor access to finance over low fees.  Despite this core belief, little direct evidence exists on the price elasticity of credit demand in poor communities.  We examine increases in the interest rate on microfinance loans in the slums of Dhaka, Bangladesh.  Using unanticipated between-branch variation in prices, we estimate interest elasticities from -0.73 to -1.04, with our preferred estimate being at the upper end of this range. Interest income earned from most borrowers fell, but interest income earned from the largest customers increased, generating overall profitability at the branch level. 

The 2013 Federal Budget's Impact on Communities of Color and Low-Income Families

The 2013 Federal Budget's Impact on Communities of Color and Low-Income Families

Women of Color Policy Network
02/23/2012

The Obama administration's budget proposal for fiscal year 2013 (FY 2013) strengthens the national economy by investing in schools, communities and safety net programs. The FY 2013 budget also includes a number of important investments in infrastructure that will spur much needed job growth in a time of economic uncertainty for many working and low-income families. It is critical that such investments take into account the persistently high unemployment in communities of color, and target spending to increase the economic security of the communities most impacted by the "Great Recession." Additionally, the budget includes important changes to the tax code that will lay the foundation for a fairer and more equitable economy.

Notre façon de voir la pauvreté [How we see poverty]

Notre façon de voir la pauvreté [How we see poverty]
FACTS, Special Issue 4 (Lutte contre la pauvreté), January 2012: 14-19.

Jonathan Morduch
01/01/2012

How we think about poverty is colored by how we measure it. For economists, that often means seeing poverty through quantities measured in large, representative surveys. The surveys give a comprehensive view, but favor breadth over depth. Typical economic surveys are limited in their ability to tease out informal activity, and, while they capture yearly sums, they offer little about how the year was actually lived by families. Year-long financial diaries provide a complementary way of seeing poverty, with a focus on week by week choices and challenges. The result is a re-framing of poverty and its relationship to money, calling for greater attention to financial access and a broader notion of how finance matters.

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