Fluent Essays

Week 5 - Assignment: Analyze a Case Study on Supervising Employees Previous Next  Instructions Read the newspaper article (Waxmann, 2018) provided in the resources this week, and then analyze it. Do this by summarizing the problem, providing three plausible solutions, and discussing the impact of these solutions. Select and recommend one of these solutions. Follow this format: Write an introductory paragraph. Summarize the problem in the case study. Provide three plausible solutions to the problem. Analyze the impact of these three plausible solutions. Recommend which solution you suggest should be implemented and articulate reasons for your recommendation. Write a conclusion paragraph. In your paper, please use clear, bolded headings to separate the paper into sections. Length:  3-5 pages References:  Include a minimum of two scholarly resources, including the newspaper article. Your assignment should demonstrate thoughtful consideration of the ideas and concepts presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to Northcentral Universitys Academic Integrity Policy.    Week 8 - Assignment: Create a Brochure on Organizational Planning Previous Next  Instructions Returning to the fictional committee you are a part of in the city government in which you live (or another city, if you wish), you have been asked to create a brochure to distribute to employees. The topic of this brochure is strategic planning. Specifically, the brochure will help city employees understand the steps and concepts related to a new strategic planning process initiated by the city manager. Since all of your fellow department heads trust you, and have applauded your efforts to educate them through your previous assignments, they are asking you to create a brochure to educate all employees about the concepts of strategic planning, including what level of input employees will have (you have been given the authority to decide this, by the city manager, and were instructed to include this in the brochure; so, you can decide on this matter). Importantly, because the plans are still being deliberated, and are not yet clear, you are unable to discuss specifics of the strategic planning initiative. Therefore, you will create a brochure that discusses strategic planning more generally. Using at least three sources, create a brochure (in 11 or 12-point font) using the template that is included this week. In the brochure, explain the process and reasons behind strategic planning. Find photos online and add them to the brochure, where appropriate. Your goal is to produce a brochure that your colleagues will happily share with their staff. Include sources, as well as photo credits and links to the photos, at the end of the brochure, in 9-point font. Length: 2 pages References:  Include a minimum of three scholarly resources. Your assignment should demonstrate thoughtful consideration of the ideas and concepts presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to Northcentral Universitys Academic Integrity Policy. 10/18/21, 1:32 PM PUB-7008 V1: Principles of Organization and Management (9860829994) - PUB-7008 V1: Principles of Organization and Manag… https://ncuone.ncu.edu/d2l/le/content/168195/printsyllabus/PrintSyllabus 1/4 Week 5 PUB-7008 V1: Principles of Organization and Management… Supervising Public Employees: Theory and Practice This week (and next week) examines the supervision of employees, specifically within the public administration context. Human resource management is very much integrated into the life and business of public agencies and nonprofit organizations, just as it is in the corporate environment. As a public administrator, you want to understand the way things ‘work’ in your agency or organization, even if they only indirectly relate to you. Government agencies, especially, can have regulations governing their recruitment and human resource management that many businesses, in general, may not. In addition, bureaucracy and regulations related to unions, can add complexity to hiring someone. Arthur (2004, p.14) identifies nine core areas that relate to human resources in all organizations: legal issues, the employment process, testing, compensation, performance management, benefits administration, employee relations, training and development, and human resources information systems. Tschirhart and Bielefeld (2012, pp. 256-257) distinguish between human resource capacity, which “refers to the abilities, experience, and talent of the people who conduct the work of the organization internally…”, and human resource management, which “refers to the policies and practices in place to mobilize and maximize this capacity.” Though Tschirhart and Bielefeld write specifically within the context of nonprofit organizations, government agencies share similarities with nonprofits when it comes to human resources. For example, they offer employment opportunities outside of the private sector and offer employee values and service opportunities that may be attractive to job candidates. Understanding human resource management will allow you to appreciate administration in its broader context, as well as particular aspects related to building a workforce, for example, issues related to diversity. Among the themes explored this week is the value of ensuring a diverse workforce. Why is diversity important to an organization? As Pynes (2013, p. 110) states, “Diversity can lead to more creative alternatives and higher-quality ideas, primarily from the introduction of different and opposing ideas and viewpoints.” This week’s assignment—a case study—allows you to engage with issues related to diversity and employee relations by confronting issues dealing with a very recent and serious concern that can affect any public organization. The case study is based on https://ncuone.ncu.edu/d2l/home/168195 10/18/21, 1:32 PM PUB-7008 V1: Principles of Organization and Management (9860829994) - PUB-7008 V1: Principles of Organization and Manag… https://ncuone.ncu.edu/d2l/le/content/168195/printsyllabus/PrintSyllabus 2/4 Books and Resources for this Week Pynes, J. (2013). Human resources management for public and nonprofit organizations: A strategic approach. San Francisco, CA: Jossey-Bass. Link Pynes, J. (2013). Human resources management for public and nonprofit organizations: A strategic approach. San Francisco, CA: Jossey-Bass. Link concerns that city employees have in San Francisco (related to racism and discrimination). The assignment asks you to consider the problem represented in the article, explore plausible solutions, and then recommend one of them. Be sure to review this weeks resources carefully. You are expected to apply the information from these resources when you prepare your assignments. References: Arthur, D. (2004). Fundamentals of human resources management (4th ed.). Saranac Lake, NY: American Management Association. Pynes, J. (2013). Human resources management for public and nonprofit organizations: A strategic approach. San Francisco, CA: Jossey-Bass. Tschirhart, M., & Bielefeld, W. (2012). Managing nonprofit organizations. San Francisco, CA : Jossey-Bass. 75 \% 6 of 8 topics complete javascript:void(0); https://ncuone.ncu.edu/d2l/le/content/168195/viewContent/1586738/View https://ncuone.ncu.edu/d2l/le/content/168195/viewContent/1586739/View 10/18/21, 1:32 PM PUB-7008 V1: Principles of Organization and Management (9860829994) - PUB-7008 V1: Principles of Organization and Manag… https://ncuone.ncu.edu/d2l/le/content/168195/printsyllabus/PrintSyllabus 3/4 Pynes, J. (2013). Human resources management for public and nonprofit organizations: A strategic approach. San Francisco, CA : Jossey-Bass. Link Pynes, J. (2013). Human resources management for public and nonprofit organizations: A strategic approach. San Francisco, CA: Jossey-Bass. Link Pynes, J. (2013). Human resources management for public and nonprofit organizations: A strategic approach. San Francisco, CA: Jossey-Bass. Link Tschirhart, M., & Bielefeld, W. (2012). Managing nonprofit organizations. San Francisco, CA: Jossey-Bass. Link Waxmann, L. (2018, Sept 19). African American workers blast city for racism, discrimination in hiring. San Francisco Examiner. Link Week 5 - Assignment: Analyze a Case Study on Supervising Employees Assignment Due October 24 at 11:59 PM Read the newspaper article (Waxmann, 2018) provided in the resources this week, and then analyze it. Do this by summarizing the problem, providing three plausible solutions, and discussing the impact of these solutions. Select and recommend one of these solutions. https://ncuone.ncu.edu/d2l/le/content/168195/viewContent/1586740/View https://ncuone.ncu.edu/d2l/le/content/168195/viewContent/1586741/View https://ncuone.ncu.edu/d2l/le/content/168195/viewContent/1586742/View https://ncuone.ncu.edu/d2l/le/content/168195/viewContent/1586743/View https://ncuone.ncu.edu/d2l/le/content/168195/viewContent/1586744/View https://ncuone.ncu.edu/d2l/le/content/168195/viewContent/1586708/View 10/18/21, 1:32 PM PUB-7008 V1: Principles of Organization and Management (9860829994) - PUB-7008 V1: Principles of Organization and Manag… https://ncuone.ncu.edu/d2l/le/content/168195/printsyllabus/PrintSyllabus 4/4 Follow this format: Write an introductory paragraph. Summarize the problem in the case study. Provide three plausible solutions to the problem. Analyze the impact of these three plausible solutions. Recommend which solution you suggest should be implemented and articulate reasons for your recommendation. Write a conclusion paragraph. In your paper, please use clear, bolded headings to separate the paper into sections. Length: 3-5 pages References: Include a minimum of two scholarly resources, including the newspaper article. Your assignment should demonstrate thoughtful consideration of the ideas and concepts presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to Northcentral Universitys Academic Integrity Policy. Upload your document and click the Submit to Dropbox button. � Public and nonprofit organizations are confronting a variety of eco-nomic, technological, legal, and cultural changes with which they must cope effectively if they are to remain viable. The key to viability is well-trained and fl exible employees. To be responsive to the constantly changing environment, agencies must integrate their human resources management (HRM) needs with their long-term strategic plans. The four chapters in this part explain how society and workplaces have changed and the strategic human resources management (SHRM) implications of these changes for organizations. Chapter 1 discusses some of the differences between public sec- tor agencies and nonprofi t organizations. It reviews some of the exter- nal factors that affect the internal operations of an organization, such as changes in economic conditions and the fiscal uncertainty that such changes can bring to an agency, and the social and cultural changes affecting the demographic composition of the workforce. Most organizations today have a more diverse group of employees than ever before, bringing different experiences and new expectations into the orga- nization. The legal environment must always be monitored for change. Equal employment opportunity, labor relations, and compensation and benefi ts are all regulated by law. PART ONE HUMAN RESOURCES MANAGEMENT IN CONTEXT 1 p01.indd 1p01.indd 1 6/20/2013 9:01:37 AM6/20/2013 9:01:37 AM Pynes, J. E. (2013). Human resources management for public and nonprofit organizations : A strategic approach. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:23:38. C o p yr ig h t © 2 0 1 3 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 2 Human Resources Management for Public and Nonprofi t Organizations There is also an increased emphasis on accountability and perfor- mance management in public and nonprofi t organizations. Staff need crit- ical knowledge skills, abilities, and other characteristics to perform specifi c jobs, but they also need to be fl exible and willing to deal with rapid and unstructured change. Knowledge-specifi c skills and general competencies are important. To make this possible, HRM needs to be more closely inte- grated with the organization ’s objectives and mission. Chapter 2 addresses the strategic side of HRM and the importance of strategic human resources and human resources planning. It explains why SHRM and HRM planning are critical to agencies ’ missions. SHRM believes that realistic planning is not possible unless strategic planning takes into consideration information on current and potential human resources. Human resources planning requires the assessment of past trends, an eval- uation of the current situation, and the projection of future events. The external and internal environments must be scanned, and changes that might affect an organization ’s human resources must be anticipated and planned for. Also discussed is the effect of information technologies on SHRM. Technological changes such as the increased use of computers, information systems, databases, telecommunications, and networking have changed the way agencies are structured and work is organized and man- aged. Organizations need to recruit, hire, and provide training to individ- uals who have the skills and motivation to adapt to technological changes. Chapter 3 focuses on the legal environment and the federal laws gov- erning equal employment opportunity. Equal employment opportunity requires that employers not discriminate in the administration and exe- cution of all HRM practices, such as recruitment, selection, promotion, training, compensation, career development, discipline, and labor-manage- ment relations. To understand the legal environment of equal employment opportunity, public and nonprofi t administrators must be familiar with the laws and regulations that govern its implementation. Chapter 4 is devoted to exploring the issues of managing a diverse workforce. As already noted, the composition of public and nonprofi t work- forces has changed. Women, racial and ethnic minorities, returning war veterans, and older, disabled, homosexual, and transgendered workers are more visible in today ’s workplace than in the past. Other types of diversity issues exist in agencies as well. Diversity must be understood if organizations want to deal effectively with employees regardless of their different characteristics. When diversity is well managed, all employees are supported, valued, and included. A supportive work environment enables employees to achieve their fullest potential. p01.indd 2p01.indd 2 6/20/2013 9:01:37 AM6/20/2013 9:01:37 AM Pynes, J. E. (2013). Human resources management for public and nonprofit organizations : A strategic approach. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:23:38. C o p yr ig h t © 2 0 1 3 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 3 � After reading this chapter, you should be able to • Understand the responsibilities and roles of human resources management • Understand what constitutes public organizations • Explain why civil service systems or merit systems exist in the pub- lic sector • Understand what constitutes nonprofi t organizations • Identify the challenges facing human resources management today Human resources management (HRM) is the design of formal systems in an organization to ensure the effective use of employees ’ knowl- edge, skills, abilities, and other characteristics (KSAOCs) to accomplish organizational goals. HRM concerns the recruitment, selection, training and development, compensation and benefi ts, retention, evaluation, and promotion of employees, and labor-management relations within an orga- nization. In public and nonprofi t agencies, the greatest expenses and the greatest assets are employees. Unlike many for-profi t organizations that can CHAPTER ONE INTRODUCTION TO HUMAN RESOURCES MANAGEMENT IN THE PUBLIC AND NONPROFIT SECTORS c01.indd 3c01.indd 3 6/20/2013 9:38:41 AM6/20/2013 9:38:41 AM Pynes, J. E. (2013). Human resources management for public and nonprofit organizations : A strategic approach. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:23:38. C o p yr ig h t © 2 0 1 3 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 4 Human Resources Management for Public and Nonprofi t Organizations use technology to automate the production of their products and reduce staff, public and nonprofi t organizations typically provide some type of service. Thus, they rely on the professionalism and competence of their employees. Machines cannot be substituted for most public and nonprofi t employ- ees. As a result, public and nonprofi t agencies are labor intensive; employee costs are typically between 50 and 80 percent of their budgets (Cascio & Boudreau, 2008; Fitz-enz, 2000, 2009, 2010). Employees are also public and nonprofi ts ’ greatest assets. Whether referring to top leadership, depart- ment directors or managers, or fi rst-level employees, the quality and com- petencies of the workforce differentiate successful agencies or departments from others. Why is one police department more effective than another when dealing with similar problems and situated in local governments with similar incomes and demographics and with similar responsibilities? Why is one substance abuse treatment center more effective than another if they are using similar clinical protocols and techniques and have clients with similar problems? The answer is likely to be related to the profession- alism and competencies of their employees. The study of HRM has existed for a long time, despite having different names. Scientifi c management addressed the principle of breaking job positions down into their simplest tasks. It was concerned with production effi ciencies through making the best employee and job match and also addressed employee motivation by developing incentive pay systems. Additional psychological aspects of HRM were developed to select individuals for military positions. Intelligence, aptitude, and psychological tests were developed to screen and place employees in various positions. The fi eld of industrial/organizational psychology has played, and contin- ues to play, a critical role in the development of HRM activities. Human resources management has evolved to encompass systems for the effec- tive recruitment, selection, evaluation, and training and development of employees. Compensation studies to pay employees fair salaries and pro- vide them with benefi ts that are important to them are also important com- ponents of HRM systems. Fair compensation serves to retain and motivate employees. Human resources management responsibilities change as society changes. Today, public and nonprofi t organizations are facing serious eco- nomic challenges, changes in the legal environment, and social, cultural, gen- erational, technological, and educational changes. A strategic HRM system identifi es these changes and challenges and develops effective strategies to address them. c01.indd 4c01.indd 4 6/20/2013 9:38:41 AM6/20/2013 9:38:41 AM Pynes, J. E. (2013). Human resources management for public and nonprofit organizations : A strategic approach. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:23:38. C o p yr ig h t © 2 0 1 3 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . Introduction to Human Resources Management 5 The Public Sector The public sector is composed of a variety of government organiza- tions. Government agencies are owned and controlled by the people. Government is used to maintain a system of law, justice, and social organi- zation. It protects individual rights and freedoms, provides security and sta- bility, and provides direction for the nation. It also provides public goods, regulates certain industries and activities, and corrects problems that the markets create or are unable to address (Rainey, 2003). In the United States, we have a variety of federal, state, and local gov- ernment agencies. Federal employees work directly for federal agencies and receive their compensation and benefits from the federal govern- ment. Federal Bureau of Investigation agents are federal employees, as are doctors working for the National Institutes of Health and the Centers for Disease Control. Other federal employees may work for the Federal Aviation Authority, the Securities and Exchange Commission, and the Food and Drug Administration. (To see the scope of federal departments and agencies, go to http://www.whitehouse.gov/government/independent-agencies.html.) In 2010, more than 3 million civilian employees were employed directly by the federal government (US Census Bureau, 2012h). State employees work directly for state agencies and receive their com- pensation and benefi ts from state governments. Each state has a different number of agencies. The compensation and benefi ts given to state employ- ees vary across the states. In 2010, 5.3 million employees were employed directly by state governments (US Census Bureau, 2012g). There are more than eighty-eight thousand units of local govern- ment: counties, cities, villages and townships, and special districts such as school districts, fi re districts, park districts, hospital districts, museum and zoo districts, and parks and recreation districts. Local government employ- ees work directly for local units and receive their compensation and ben- efi ts from the local governments and taxing districts. The number of local units varies across the states, as do compensation and benefi ts given to local government employees. Even within the same county, county employ- ees may be paid different salaries from employees working for city gov- ernments located in the county. Also, special district employees receive different salaries and benefi ts. There is often little consistency across local government units. In 2010, the number of local government employees was 14.2 million. Most public employees work for local units (US Census Bureau, 2012f). c01.indd 5c01.indd 5 6/20/2013 9:38:41 AM6/20/2013 9:38:41 AM Pynes, J. E. (2013). Human resources management for public and nonprofit organizations : A strategic approach. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:23:38. C o p yr ig h t © 2 0 1 3 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . http://www.whitehouse.gov/government/independent-agencies.html 6 Human Resources Management for Public and Nonprofi t Organizations Individuals working directly for federal, state, or local units are consid- ered to be government employees. In a democracy, government is owned by all of its citizens, and most of the revenues that support government agencies typically come from taxes. Government ’s objectives are political in nature. Public agencies are infl uenced by certain values found in the private sector such as effi ciency, effectiveness, timeliness, and reliability. But they are also infl uenced by values not necessarily found in the private sector and often are in confl ict with one another, such as accountability to the public at large and to elected offi cials, being responsive to the rule of law and governmental authorities, being responsive to public demands, being open to external scrutiny and criticism, adhering to strict ethical standards, and conducting public affairs with the goals of fairness, equal treatment, social equity, and impartiality (Rainey, 2003). Civil Service and Merit Systems Many public agencies are required to comply with civil service or merit systems to facilitate these values and objective employment practices in public agencies: • Federal government . The Pendleton Act, passed in 1883, set up an independent, bipartisan civil service commission to make objective, merit- based selections for federal jobs. Those individuals best qualifi ed would receive a job or promotion based on their KSAOCs. The terms civil ser- vice system and merit system are often used interchangeably. This is because merit provides the foundation for civil service systems. The ability to per- form tasks is dependent not on political affi liation but on individual skills and abilities (i.e., merit considerations). The intent of the merit system was to remove the negative effects of patronage (granting jobs to political supporters) in appointing individuals to federal positions. Public employ- ees were expected to perform their work in a politically neutral manner. In 1978, the Civil Service Reform Act made changes to federal personnel policies. The Civil Service Commission was eliminated, and the Offi ce of Personnel Management and the Merit Systems Protection Board took its place. However, being politically neutral, along with experience, education, and expertise, are still important criteria for selecting federal employees. • State governments . The federal government encouraged state and local governments to develop civil service or merit systems as a condition of receiving federal grants (Aronson, 1974). The federal government has a vested interest in seeing that state and local programs supported by its funds are administered in an effi cient and professional manner. The c01.indd 6c01.indd 6 6/20/2013 9:38:41 AM6/20/2013 9:38:41 AM Pynes, J. E. (2013). Human resources management for public and nonprofit organizations : A strategic approach. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:23:38. C o p yr ig h t © 2 0 1 3 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . Introduction to Human Resources Management 7 recipients of federal monies were to ensure the proper administration of grant programs. Standards were initially issued in the 1930s and continued through the 1970s when the Intergovernmental Personnel Act of 1970 was passed, which gave grants to state and local governments to improve their personnel practices. The authority for state merit systems is typically out- lined in state statutes, which direct a specifi ed agency to issue the necessary rules and regulations that have the effect of law and the necessary admin- istrative procedures to carry out its provisions. Most civil service systems have independent civil service commissions that are patterned after the fi rst Civil Service Commission. They are bipartisan in composition and usu- ally have three to fi ve members who serve staggered terms and are typically appointed by the governor. They are usually responsible for overseeing hiring and promotions, but they may also be involved in adjudicating griev- ance or discharge hearing and developing or approving job classifi cation schedules. • Local governments . The administrative structure and the authority granted to local governments are typically found in their charters. This pro- vision for chartering local governments is found in state constitutions and state statutes. For example, the Illinois state statute permits seven varieties of local government structure: aldermanic-city, trustee-village, commission, manager, special charter, strong mayor, and administrator. Each form has its own rules for the selection and type of offi cers, their powers and respon- sibilities, and their general operations. Any municipality may adopt the civil service provisions of the Illinois Municipal Code, but they are not required to do so. Should they adopt civil service provisions, they must adhere to them. All relevant offi cers and employees must be appointed, promoted, and removed according to civil service rules. In jurisdictions with civil service systems in place, applicants are typically appointed after they have passed a standardized selection procedure. The selection procedure could consist of written examinations, a combination of prior experience and education, or oral interviews. Where competition exists for positions, candidates are ranked by their scores from high to low, with the agency appointing one of the top-ranking candidates. Different rules apply to different civil service systems. Some systems allow managers to select one of the top three ranked candidates to be selected, others allow one of the top fi ve ranked candidates to be selected, and others allow a larger range of acceptable candidates. Some public employees are exempt from civil service requirements. The exemptions permit chief executives to select people who are in agreement with their c01.indd 7c01.indd 7 6/20/2013 9:38:42 AM6/20/2013 9:38:42 AM Pynes, J. E. (2013). Human resources management for public and nonprofit organizations : A strategic approach. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:23:38. C o p yr ig h t © 2 0 1 3 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 8 Human Resources Management for Public and Nonprofi t Organizations priorities for policymaking and politically sensitive posts. In most state and local governments, department directors are appointed by the chief execu- tive. Many public sector HRM regulations and responsibilities are codifi ed in statutes, which means that any changes need the respective legislative body to make the change. Chief executives and managers often have lim- ited administrative and managerial discretion, and increases in compensa- tion and benefi ts are often dependent on legislative approval. Public agencies often grant hiring preference to veterans of the US armed services. Additional points may be added to the scores of eligible veterans applying for public sector positions. Economic Challenges More than 46 million people in the United States are living poverty, and at least 16 million of them are children younger than sixteen. The pov- erty rate for blacks is 27.6. percent, Hispanics 25.3 percent, non-Hispanic whites 9.9 percent, and Asians 12.3 percent. For children under eighteen years old, the poverty rate is 21.9 percent (DeNavas-Walt, Proctor, & Smith, 2012). When times are tough, the demand for public services grows. Low- income residents are dependent on a variety of services, such as housing assistance, assistance for medical care, food, unemployment benefi ts, trans- portation, and utility bills. Middle-income Americans are increasingly concerned about jobs, health insurance, pensions, housing, and income security. Wage and salary increases have not kept up with increases in the cost of housing, gasoline, food, edu- cation, and insurance. Residents concerned about their living expenses tend to keep a close eye on government spending and want tax relief. At the same time, state and local governments are facing budget defi cits and have to make budget cuts. Problems with the housing markets and foreclosures, leading to reduced property taxes, reductions in sales taxes due to declines in con- sumer spending, and increasing unemployment rates have led to reductions in spending, so state and local revenues are falling. As a result of diffi cult economic times, public agencies are looking to reduce expenses. Strategies to save money include not hiring employees with benefi ts and instead hiring supplemental direct-hire employees who work irregular hours; they receive a paycheck from the agency for time worked but do not receive health insur- ance, retirement pensions, vacation or sick leave, and other benefi ts. In some organizations, they are referred to as other personnel services workers . Governments are also using more contract workers. These workers work for public agencies, but they are procured through a staffi ng agency or other third party. These arrangements, as well as seasonal, part-time, on-call, and c01.indd 8c01.indd 8 6/20/2013 9:38:42 AM6/20/2013 9:38:42 AM Pynes, J. E. (2013). Human resources management for public and nonprofit organizations : A strategic approach. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:23:38. C o p yr ig h t © 2 0 1 3 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . Introduction to Human Resources Management 9 temporary agency work, are referred to as nonstandard work arrangements . Many previously employed full-time workers are now filling short-term openings as contractors, consultants, freelancers, and temporary workers (Grossman, 2012; Thompson & Mastracci, 2005; “Surge in Temp Jobs,” 2012). A survey conducted by the Society for Human Resource Management (SocHRM) found the primary reasons that agencies hire temporary workers include to complete specifi c projects (27 percent); as additional resources during busy times or cycles (25 percent); as a gap fi ller until they can hire full-time employees (17 percent); as a way to try out workers for full-time jobs (13 percent); to reduce benefi ts and other labor costs (95 percent); and because they have diffi culty fi lling key skill positions (4 percent); and other reasons (6 percent) (SocHRM, 2011, cited in Grossman, 2012). Alternative Service Delivery Privatization and contracting out occur when public sector agencies con- tract with private nonprofi t, private for-profi t, or other public agencies to provide specifi c services. A typical privatization agreement specifi es that a private or nonprofi t entity is responsible for producing particular services. The public employer chooses the service level and pays the amount speci- fi ed in the contract, but leaves decisions about production methods to the contracted fi rm. From an administrative perspective, privatization is often viewed as a way to save tax dollars, reduce the public payrolls, minimize government spending, and boost productivity. Supporters claim that contracting out government programs will lead to greater effi ciency and more effective operations. They maintain that competition and fewer restrictions allow the contractors to be more cost- effi cient and responsive and that cost savings can be achieved through the economies of scale used by one vendor to provide services to many commu- nities and organizations. It is believed that nonprofi t and private fi rms, not hampered by bureaucratic rules and regulations, can be more innovative than public sector ones (Savas, 2000, 2002). However, research on the cost savings of privatization is inconclusive. There are examples of sweetheart deals with contractors, cost overruns, ineffi ciencies, and less-qualifi ed staff providing important services. Furthermore, transparency, accountability, and concern for the public interest are often lacking (Feeney & Kingsley, 2008; Greenblatt, 2004; Moe, 1987; Sclar, 2001; Starr, 1987). Technological Innovations Innovations in technology are changing the way organizations are struc- tured and how work is organized and managed. More agencies are c01.indd 9c01.indd 9 6/20/2013 9:38:42 AM6/20/2013 9:38:42 AM Pynes, J. E. (2013). Human resources management for public and nonprofit organizations : A strategic approach. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:23:38. C o p yr ig h t © 2 0 1 3 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 10 Human Resources Management for Public and Nonprofi t Organizations embracing telework. The General Services Administration ’s Office of Strategy Management implemented a thirty-day “telework wave” where employees were supposed to report to their offi ces and instead work from home or other GSA buildings. The purpose was for them to learn differ- ent patterns of behavior, different patterns of communication, different cultures, and different ways of operating (Rausnitz, 2012). Approximately one in fi ve workers worldwide telecommute according to a poll conducted by Ipsos/Reuters. Telecommuting is most popular in India, where more than 50 percent of workers were working from home, followed by 34 percent in Indonesia, 30 percent in Mexico, and smaller percentages in Argentina, South Africa, and Turkey. Less than 10 percent of people work from home in Hungary, Germany, Sweden, France, Italy, and Canada. The treasurer of Cuyahoga County, Ohio, has replaced fi ve workers with an automated tax processing system. Instead of opening envelopes and scanning and encoding checks, an automated processing system provides those functions (Johnston, 2011). Police departments are turning to an online talking animated virtual offi cer to assist residents in fi ling an online crime report for nonemergency … PART ONE UNDERSTANDING, ENVISIONING, AND CREATING c01.indd 1c01.indd 1 4/30/2020 6:45:13 PM4/30/2020 6:45:13 PM Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56. C o p yr ig h t © 2 0 2 1 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . c01.indd 2c01.indd 2 4/30/2020 6:45:14 PM4/30/2020 6:45:14 PM Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56. C o p yr ig h t © 2 0 2 1 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 3 CHAPTER ONE UNDERSTANDING NONPROFIT ORGANIZATIONS I t all starts with the mission. Nonprofi t organizations have a distinct man- date to be good stewards of the resources they receive toward the pursuit of their mission, whether those resources come in as philanthropic dollars, government contracts and grants, membership dues, or earned income through revenue-generating activities. In this book we focus primarily on how nonprofi ts pursue their missions in the general social, cultural, legal, historical, and economic context of American life. We offer some examples from other countries and believe much of what we offer is applicable to international contexts. Still, this is a book about leadership and manage- ment and thus needs to be embedded in a particular place and time. The importance of context becomes clear when we look at the compe- tencies proposed in November 2011 for nonprofi t managers and leaders by the Non-Profi t Management Education Section of NASPAA (National Association of Schools of Public Affairs and Administration). Members of this NASPAA section suggest that students pursuing nonprofi t careers should be able to apply knowledge and understanding of 1. The history, values, ethics, and philosophies of nonprofi t organizations, and the need for transparency in nonprofi t management practices to maintain the public trust 2. The current legal frameworks for operating a nonprofi t organization, and the process of forming an incorporated nonprofi t organization c01.indd 3c01.indd 3 4/30/2020 6:45:14 PM4/30/2020 6:45:14 PM Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56. C o p yr ig h t © 2 0 2 1 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 4 Managing Nonprofi t Organizations 3. The fundamental principles and concepts of fi scal management, rev- enue generation, and fundraising, and the ethical imperative to be a good steward of the fi nancial resources of the nonprofi t sector 4. The leadership challenges of the sector as they relate to the strategic management of nonprofi t organizations, which requires integrating the roles, responsibilities, and relationships of the board of directors, the executive director, the employees, the volunteers, and all stake- holders in meeting the mission of the organization 5. The human resource and volunteer management principles necessary to manage a nonprofi t organization’s core services and functions 6. The standards for accountability, performance measurement, and program evaluation, and the appropriate techniques for using both quantitative and qualitative methods to measure the performance of nonprofi t organizations The contents of this book can serve as a foundation for these six com- petency areas. We go beyond building knowledge and understanding in each area and add additional topics to enhance leadership and manage- ment capacity. To orient readers and provide a roadmap of what is to come, we offer a quick overview of each part and chapter. A Roadmap Through the Chapters Our comprehensive approach to excelling at managing and leading non- profi ts is built around competency and curriculum guidelines developed by NASPAA and by NACC (Nonprofi t Academic Centers Council). A summary of the NACC guidelines appears in the Appendix, where they are mapped to the chapters in this book. The six NASPAA competency guidelines have been given earlier in this chapter. Both NASPAA and NACC recognize the impor- tance of understanding the historical development of the nonprofi t sector and its values base. These issues are touchstones for our chapters. We discuss how ideas about specifi c management and leadership topics evolved over time and whether or not they are backed up by theory and empirical evidence. We repeatedly return to the ways in which values infl uence management and leadership decisions as well as the behaviors of board members, donors, staff, volunteers, and others, and how all this affects the effectiveness of a nonprofi t. As a social psychologist and a sociologist, we are steeped in our respec- tive disciplinary traditions. However, we draw from additional disciplines as well to introduce readers to source documents and thought leaders for c01.indd 4c01.indd 4 4/30/2020 6:45:14 PM4/30/2020 6:45:14 PM Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56. C o p yr ig h t © 2 0 2 1 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . Understanding Nonprofi t Organizations 5 the ideas in the book. All our topics and recommendations for practice are grounded in the academic literature. In choosing our main examples we made sure that readers would have enough background information and in some cases even videos for a further exploration of these cases. We also provide additional learning tools in the form of questions for discussion and exercises at the end of each of the main content chapters. In Part One, we discuss understanding, envisioning, and creating non- profi t organizations. In Chapter One, after this introduction to the book, we give a general overview of the nonprofi t sector. In Chapter Two we explore ways to consider the effectiveness of nonprofi ts and encourage ethical behav- ior among those working within them. We look at multiple dimensions of organizational effectiveness: goal achievement, resource acquisition, health and effi ciency of internal processes, stakeholder satisfaction, and ability to learn and adapt. In Chapter Three we examine topics important to those interested in establishing a nonprofi t organization and laying an effective groundwork for future action. We show the many different origins of non- profi ts. Drawing on the entrepreneurship literature, we consider how people, capital, and opportunity come together in nonprofi ts to deliver social value. We also discuss how to make the case for a new nonprofi t, including writing the business plan. Chapter Four covers options for organizational structure. We look at formalization, complexity, and other structural elements that infl u- ence information processing, and we consider possible structural defi ciencies. In Part Two we turn to strategizing, resourcing, and aligning, because throughout their existence nonprofi ts should have a mission and a vision and should acquire and manage resources to pursue them. Chapter Five covers the formulation of strategy. Topics include the general strategic orientations that nonprofi ts adopt and the strategic planning process. We also consider the emergence of strategies in nonprofi ts. Chapter Six cov- ers resource acquisition. In this chapter we examine the variety of revenue sources employed by nonprofi ts, including grants, gifts, and earned income. We discuss philanthropy, addressing types of gifts and donors, as well as fund development and grant proposal writing. Chapter Seven reviews fi nan- cial stewardship and management. We outline best practices for policies, accounting, budgeting, banking, borrowing, fi nancial risk management, auditing, and fi nancial analysis. Chapter Eight provides knowledge and tools for effective marketing. We cover the philosophy of and orientations to marketing, marketing planning, and branding. In addition we explore options for the pricing, promotion, and distribution of goods and services. In Part Three we focus on human resources and discuss leading, man- aging, and delivering the mission. Chapter Nine covers boards and the broader topic of governance. We discuss the responsibilities of boards, roles c01.indd 5c01.indd 5 4/30/2020 6:45:14 PM4/30/2020 6:45:14 PM Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56. C o p yr ig h t © 2 0 2 1 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 6 Managing Nonprofi t Organizations of executive directors in relation to boards, determinants of board effective- ness, options for board confi gurations and composition, and tools for facili- tating governance and managing confl ict. Chapter Ten adds leadership and executive directors to the mix. We explore the basis of leadership and the responsibilities of executive directors. We also consider nonprofi t founders, leadership transition, and leadership development. In Chapter Eleven we turn our attention to strategic human resource management. We look at ways to measure and build human resource capacity. We then look at human resource management through the stages of initial involvement, develop- ment, maintenance, and separation. As a follow-up to Chapter Eleven, in Chapter Twelve we explore performance as determined by ability and motiva- tion. We offer tools to increase ability and to enhance motivation to perform. Our fi nal section, Part Four, covers evaluating, connecting, and adapting the nonprofi t. We begin with program evaluation in Chapter Thirteen. We see an effective program evaluation process as key to accountability man- agement. We review how to prepare for evaluation, choose an evaluation approach, apply theories of change and logic models, clarify program goals, and collect data, all with an eye to meeting the practical challenges to effec- tive evaluation. Chapter Fourteen covers public and government relations. In this chapter we look at image and reputation, strategic communication, and the public relations process. We also cover risk assessment and crisis manage- ment. Focusing on government relations, we discuss lobbying and advocacy. Chapter Fifteen covers partnerships, alliances, and affi liations. We examine reasons for collaboration, types of relationships, the collaboration process, and ways to promote successful collaborations. Chapter Sixteen introduces readers to models of organizational change and innovation in nonprofi ts, external and internal drivers of change, and resistance to change. We lay out strategies for managing change and innovation processes and include ideas on how to generate innovations. In Chapter Seventeen, our fi nal chapter, we consider the future of nonprofi t management. We share both our own and others’ thoughts on trends in the nonprofi t sector and how they may change nonprofi t management practices. Our goal is to leave readers with ideas on how they may develop their leadership skills for an ever-changing world. The Nature of Nonprofi t Organizations This book is not about management and leadership in general; it is about management and leadership in the nonprofi t sector. Yet it may not be clear t what we mean by nonprofit, given the many different types of nonprofits in the United States and the alternative terms used to describe the sector. c01.indd 6c01.indd 6 4/30/2020 6:45:14 PM4/30/2020 6:45:14 PM Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56. C o p yr ig h t © 2 0 2 1 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . Understanding Nonprofi t Organizations 7 Although none of these terms describe the nonprofi t sector completely, each emphasizes an important aspect of it. The term voluntary sector emphasizesr that the sector benefi ts greatly from the work of volunteers. The sector has always been rooted in voluntarism and although the degree of voluntary par- ticipation in service delivery and management varies across the organizational types in the sector, all have boards of directors and most do not offer any form of monetary compensation or reimbursement for expenses to board mem- bers. Independent sector, or rr third sector, emphasizes that the sector is part of nei-rr ther government nor the business sector, although it may have close relations with both. Not-for-profi t sector emphasizes the distinction from profi t-focused r enterprises. Charitable sector underscores the sector’s role in providing direct r relief to those in need. Philanthropic sector highlights the fact that many organi-r zations in the sector receive charitable donations. Civil society sector emphasizesr that many organizations in the sector are the embodiment of an engaged group of citizens with a shared interest in improving their communities. Tax- exempt sector points out that these organizations are eligible for exemptionsr from most taxes. These exemptions are granted to promote activities benefi t- ing the public. Social sector captures the role of the sector in enhancing ther social fabric. Other countries use yet other terms to describe the organiza- tions that people in the United States call nonprofi ts. Popular names include nongovernmental organizations (NGOs) ands civil society organizations. Throughout this book, we use the term most commonly used in the United States, the nonprofi t sector. It does not mean that the organizations in rr the sector cannot make a profi t. Organizational growth may rely on obtain- ing more resources than are needed to cover current expenses. What the term nonprofi t stresses here is that these organizations do not exist to maket a profi t to enrich private owners, as businesses do. In fact, nonprofi ts do not have owners or stockholders who are legally entitled to a share of the organization’s profi ts. Any profi ts made should be allocated toward the accomplishment of the organization’s mission. Diversity in the Nonprofi t Sector In the United States the common feature of all nonprofi t organizations is that they qualify for tax-exempt status under the U.S. Internal Revenue Code.1 Of the close to 1.6 million registered nonprofi ts in the United States, the majority are public charities, about 1 million. This group, exempt under Section 501(c)(3) of the tax code, includes but is not limited to churches, hos- pitals, clinics, schools, day-care centers, all manner of human service organi- zations, museums and theaters, and a variety of neighborhood organizations. c01.indd 7c01.indd 7 4/30/2020 6:45:15 PM4/30/2020 6:45:15 PM Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56. C o p yr ig h t © 2 0 2 1 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 8 Managing Nonprofi t Organizations Members of this group have broad public support, rather than funding from a single source, and are considered public-serving organizations. In g Chapter Three we go into more detail on the qualifi cations an organization must meet to be classifi ed as a public charity. Public charities employ over 7 percent of the country’s paid workforce. The U.S. tax code recognizes twenty-fi ve types of nonprofi ts, including public charities, the most common type. About 100,000 nonprofi ts are clas- sifi ed as private foundations. These nonprofi ts make grants to support worthy causes and may operate their own programs using funding from a single source or a small number of sources. Over 500,000 tax-exempt organiza- tions are classifi ed as other types of nonprofi ts, such as chambers of com- merce, fraternal organizations, social and recreational clubs, and business leagues. These nonprofi ts provide valued services and attract resources as mutual benefi t (member-serving) organizations. Overall in 2009, registered gg nonprofi ts in all Internal Revenue Service (IRS) categories accounted for 9 percent of the wages and salaries paid in the United States. There is no precise, accurate count of the number of organizations mak- ing up the U.S. nonprofi t sector. The U.S. government does not require churches and other religious places of worship to register as nonprofi ts, so it is diffi cult to get a handle on how many exist. One estimate is that there are close to 280,000 religious congregations in the country, all eligible for the benefi ts given to 501(c)(3) nonprofi ts.2 There are also many grassroots orga- nizations that are not legally incorporated and thus left uncounted. These may be local, volunteer organizations that have a political change agenda or that rely on volunteer workers to care for and help others using little fi nancial capital or physical infrastructure. David Horton Smith suggests that the nonprofi t sector also contains what he refers to as deviant nonprofi ts, such as gangs, cults, covens, and quasi-underground organizations such as the Ku Klux Klan. These organizations operate outside normal conventions and are not legally recognized or tax exempt, but they are like nonprofi ts in not being organized to make a profi t.3 A variety of factors account for the existence of this diverse set of orga- nizations.4 In the early history of the United States, voluntary action was the primary way things got done in communities. Lacking an extensive govern- ment and with limited private wealth, citizens voluntarily banded together to deal with social problems. Some nonprofi ts were established to provide ser- vices that neither government nor businesses would or could effectively pro- vide. Nonprofi ts often function in areas where markets are lacking, such as the provision of food and shelter to those without money to pay for them. In addition, nonprofi ts provide services that government, with its reliance on c01.indd 8c01.indd 8 4/30/2020 6:45:15 PM4/30/2020 6:45:15 PM Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56. C o p yr ig h t © 2 0 2 1 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . Understanding Nonprofi t Organizations 9 voter mandates, cannot. For example, nonprofi ts provide public health ser- vices and education that government is unable to fund with public dollars. Nonprofits serve a number of other functions. They are an impor- tant feature of the U.S. political landscape, providing vehicles for com- bining people’s individual voices and pushing their desires for action. Advocacy nonprofi ts can be found on all sides of political issues. In this way they contribute to pluralism in the U.S. political system. Nonprofi ts may also provide people with places to meet and to relate to others who share their interests and values. This gives individuals ways to have fun and to enjoy activities such as sports competitions or cultural festivals. In this way nonprofi ts contribute to the establishment of social capital and the solidarity of American society, helping individuals to form bonds of trust and reciprocity with others. These bonds make it easier for community members to jointly address matters of common concern. When commu- nity members trust each other and can rely on each other to help when needed, joint actions such as community watch programs are more effec- tive. Nonprofi ts also help with personal development needs. They allow individuals to express their spirituality, creativity, and altruistic impulses and to develop social and leadership skills. At their core, nonprofi ts nur- ture and sustain the values and identities of their participants. Between September of 2009 and September of 2010, 26.3 percent of Americans over sixteen years of age volunteered through or for a nonprofi t. In 2010, nonprofi t organizations received $290.9 billion in charitable con- tributions (of which $211.8 billion came from individuals). These fi gures attest to the importance of nonprofits to the social fabric of American life. Couple this with the fi nancial scope of the nonprofi t sector and non- profi ts’ importance increases. In 2009, the nonprofi t sector’s share of the gross domestic product (GDP) was 5.4 percent. In that year, public chari- ties reported over $1.41 trillion in revenues. They also held $2.56 trillion in total assets. Leading and Managing in the Nonprofi t Sector Leaders and managers of nonprofi ts face a variety of challenges. One of the most important is to keep the mission in mind in all decision making. Nonprofi ts must operate to fulfi ll their mission and are limited in their engagement in activities far afi eld from it. In addition they must keep in mind that the real owner of a nonprofi t is the public.5 It is the public to whom they are ultimately accountable. There are no designated sharehold- ers or owners to please. Nonprofi ts are subject to the claims, and possible c01.indd 9c01.indd 9 4/30/2020 6:45:15 PM4/30/2020 6:45:15 PM Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56. C o p yr ig h t © 2 0 2 1 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 10 Managing Nonprofi t Organizations control, of many stakeholders, including donors, clients, board members, staff, volunteers, government at all levels, and community members. The expectations of these stakeholders can vary widely and leaders must bal- ance competing demands. Lester Salamon and others describe a number of additional challenges.6 Many nonprofi ts face fi scal diffi culties, some starting with government cut- backs in the 1980s in areas where nonprofi ts were active. Government assis- tance has became more targeted and tied to stricter requirements. Not all nonprofi ts experiencing losses in government funding have been able to offset those losses with growth in private giving or earned income. There is growing competition as more for-profi ts move into areas traditionally served by nonprofi ts, such as health care, higher education, and employ- ment training. The rise of B corporations, which are required to make deci- sions good for society, not just their shareholders, adds to the continuing erosion of sector boundaries.7 In addition nonprofi ts are under pressure from funders who are demanding more evidence that the nonprofi ts they fund are making a measurable positive impact, with some funders seeing themselves as investors with rights to infl uence strategic decisions. The legitimacy of the nonprofi t sector has been challenged on a num- ber of fronts. One challenge is presented by those who feel this sector is part of an expanding government welfare state and is serving as an instru- ment of government. Another comes from those who feel it is too profes- sionalized and out of touch with those it serves. These criticisms, coupled with a number of high-profi le scandals, have raised public concerns about the nonprofi t sector. This confronts nonprofi ts with a distinctiveness impera-s tive.8 Nonprofi ts need to reinforce their identity and their worthiness for the benefi ts and discretion afforded them. As this short summary of challenges illustrates, today’s nonprofi t lead- ers must navigate turbulent waters in the pursuit of their organization’s mission. As part of a larger network of actors, some with contradictory views and approaches to pressing social problems, nonprofi ts are shaping our current reality and our future. Innovations that emerge and are tested in nonprofi ts will contribute to fundamental debates about what is possible and how to achieve it or avoid it. We wrote this book with the sincere hope that it will not only provide information and tools to enhance the capacity of nonprofi t managers and leaders but also inspire individuals to consider careers in the nonprofi t sector. Whether serving in a paid position, as a board member, or as a vol- unteer, individuals working in the nonprofi t sector have the opportunity to act on their values and promote their vision for a better world. c01.indd 10c01.indd 10 4/30/2020 6:45:15 PM4/30/2020 6:45:15 PM Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open(http://ebookcentral.proquest.com,_blank) href=http://ebookcentral.proquest.com target=_blank style=cursor: pointer;>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56. C o p yr ig h t © 2 0 2 1 . Jo h n W ile y & S o n s, I n co rp o ra te d . A ll ri g h ts r e se rv e d . 11 CHAPTER TWO EFFECTIVE AND ETHICAL ORGANIZATIONS T he Chicago Association of Neighborhood Development Organizations (CANDO) Tclosed its doors in 2002 after suffering disagreement about its mission, diffi culty TT gaining fi nancial support, and disengagement by its members.1 Even its leaders ques- tioned the need for CANDO by the end of its last strategic planning process. What happened to this organization after almost twenty-three years of serving neighborhood development agencies and advancing policy benefi ting them? On some dimensions the organization was effective. It membership had grown from 20 agencies to over 220. However, this growth may partially explain its downfall as it tried to serve more and more diverse interests. Also, individual member agencies were becoming more powerful, partly due to the successful efforts of CANDO to get them legitimacy and resources. As they became more self-reliant, they had less need for CANDO. Many CANDO members pursued contracts from the City of Chicago, making them reluctant to support CANDO’s efforts to aggressively lobby the city for resources and changes. Over time a new generation of leaders, with less fi re in their bellies for advocacy and community organizing, took charge of CANDO. Expectations for quantifi able results grew, both for CANDO and its member agencies. In the end, CANDO’s lack of focus and expansive, noncontroversial programming left it with apathetic board members, staff, and external stakeholders who lacked the desire to fi ght for its survival. The Baptist Foundation of Arizona (BFA) closed after over fi fty years in exis- tence, but … Audience members raise their hands to support a statement from Supervisor Sandra Lee Fewer during a hearing on The Citys discriminatory hiring practices at a meeting of the Board of Supervisors Government Audit and Oversight Committee at City Hall on Wednesday, Sept. 19, 2018. (Kevin N. Hume/S.F. Examiner) African American workers blast city for racism, discrimination in hiring LAURA WAXMANN / Sep. 20, 2018 12:00 a.m. / NEWS / THE CITY African Americans make up just 15 percent of the workforce employed by the City and County of San Francisco yet comprise 36 percent of its terminations, and a quarter of all employees released before they complete probation. 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Those statistics, and allegations of racism and discriminatory hiring practices by city departments, were the subject of heated testimony during a three-hour hearing Wednesday before the Board of Supervisors’ Government Audit and Oversight Committee. “We will be here until this problem is resolved,” said Joseph Bryant, executive director of SEIU 1021. “There is no space for racism or discrimination in this city.” Supervisor Jane Kim called for the hearing in response to a request from the union earlier this summer. It also came on the heels of an executive directive issued Tuesday by Mayor London Breed calling on department heads to ramp up efforts around recruitment and retention of a more diverse, fair and inclusive workforce. SEE RELATED: Breed issues directive to combat workplace discrimination in city departments The directive urges the City’s Human Resources Department to hire two full- time staff members to focus on diversity recruitment and requires city departments to begin reporting instances of disciplinary action to human resources, among other changes. On Wednesday, dozens of current and former city workers poured into City Hall to share personal experiences of discrimination in the hiring process as well as retaliation by superiors, filling the meeting chamber to capacity. Social worker Malorie Branch told the committee that she experienced “racism and targeted bullying” from a former supervisor before being released from probation. “I had an accident where I was rear-ended in a county vehicle. I was injured and I left for medical leave. I had two weeks before my probation was up,” said Branch. “They didn’t call me, they didn’t check on me. They fired me. How many social workers do we have that are black working for San Francisco County?” Employed as a secretary with the San Francisco Police Department for 25 years, Madeline McMillan, who is black, said that an accident temporarily forced her off the job. When she returned, a “young white police officer” had taken over McMillan’s desk and duties. After failing to gain support from her supervisors, McMillan said that she proceeded to file a discrimination complaint. https://googleads.g.doubleclick.net/pcs/click?xai=AKAOjsu9-Dyysl77OO-MrbskVNZWfEtcMAtgyz4qJvKIAldY9s801_8o6CIB5JecAiQlxaGE8TAR16VwwNOKTwxU--BSiITMkccM2HiFV7lU6rhx4OtzoMcUXYlCWYXs-nx9oISo3nn7P1IYfOF2c98mlzJqTny0AAEhoQygbDiVZBQwKHqC2pabNQ63ak_xtshcj4JKDRNoVe_1N3ciFWoEErLcBSEPmOtqK1M6beRhPpO0c89xUZghx4WImCQaWhuxnfoI72Ga0UgpAcRXU0SxlP5H6DezaQM3w3L10fDh2MVEOfqHRRYmt8ZgMpehRm3F9lhhMRU&sai=AMfl-YQfdtznqW4WMgUagpAJqiGuavdCQr_qlqdirwT5jiA5y4XAc1nu88Ogndn-y8zLGJm8OSFbLbZTVYaU&sig=Cg0ArKJSzDlzDN_fl8N9&fbs_aeid=[gw_fbsaeid]&adurl=https://nobhillgazette.com/ownyourworth-2021/ 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http://www.sfexaminer.com/breed-issues-directive-combat-workplace-discrimination-city-departments/ “Once the complaint went through, I was removed from my desk, I was moved down the hall to an isolated area where no one was,” she said. “I got a reply back form [Human Resources Director] Micki Callahan saying there was no merit to my discrimination or retaliation complaint.” The city workers and their allies criticized a presentation given by the Human Resources Department that highlighted San Francisco’s diversity initiatives and some successes in hiring black employees. “Current demographics show that The City is actually a diverse employer,” said Human Resources Director Micki Callahan, adding that the current “success” can be attributed to diversity initiatives such as “merit-based hiring, anti- discrimination policies” and pipeline programs meant to remove barriers for minority applicants. Callahan pointed out that despite the steady dwindling of San Francisco’s African American Population — which a 2017 census placed at roughly 5.5 percent — black people make up 15 percent of city hires, “well above labor market availability.” “New hires [are]19 percent. So it shows that our workforce programs and some of these initiatives are yielding good results,” said Callahan, who faced periodic interruptions from a jeering crowd. “Promotions of African Americans are at 14 percent, roughly equivalent. I would characterize that as acceptable or good news.” But Bryant said those statistics do not reflect the reality of many San Francisco’s City workers of color. “The people here today are all making sacrifices. They are either taking vacation off work, their lunch breaks, or time away from their family to express their frustration,” he said. Supervisor Vallie Brown, who sits on the committee, agreed and described the current statistics as “a siren that is going off.” Supervisor Sandra Lee Fewer, who is not a member of the committee but attended the hearing, called the testimony from city workers across nearly all of its departments “extremely disturbing.” “When I hear of an isolated incident, I see it as that and I get it,” she said. “But when I hear repeatedly about the lack of investigation, that people are being harassed to the point of physical deterioration, and when I hear it’s impossible for them to go back into the workplace because of the hostility — these are issues that people marched and lost their lives over in the 1960s and we are still here.” The committe voted to continue the hearing and Fewer asked Human Resources to provide more data in areas such as pay discrepancies, the rates at which black City workers transition from temporary to permanent positions, and retention rates. “San Francisco claims to be the most progressive city but the racism here is very systemic and sophisticated,” said Fewer. “It takes a lot of looking at the root causes but also dismantling some of the policies that we have that are racist and inequitable. How do we know that? Because the outcomes are racist and inequitable.” [email protected] POLITICS 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https://www.sfexaminer.com/tag/politics/ February 2020 Notes: all years referred to in describing the budgetary effects of changes in the economy are federal fiscal years, which run from October 1 to September 30 and are designated by the calendar year in which they end. years referred to in describing estimated changes to the economy are calendar years. Numbers in the text and tables may not add up to totals because of rounding. How Changes in Economic Conditions Might Affect the Federal Budget: 2020 to 2030 Some of the uncertainty in budget projections stems from the fact that the federal budget is highly sensitive to economic conditions, which are difficult to predict. If conditions differed from those in the Congressional budget Office’s economic forecast, budgetary outcomes could diverge from those in the agency’s baseline budget projections.1 To show how variations in economic conditions might affect the budget, CbO analyzed how the budget might change if values of the following key economic variables differed from those in the agency’s forecast: • The growth of productivity and, consequently, the growth of real (inflation-adjusted) gross domestic product (GDP); • Labor force growth, which would also affect real GDP growth; • Interest rates; and • Inflation. 1. See Congressional budget Office, The Budget and Economic Outlook: 2020 to 2030 (January 2020), www.cbo.gov/ publication/56020. In the past, the analysis included in this report has appeared as an appendix in the annual Budget and Economic Outlook. This year, however, it is published separately because the timing of recent legislation did not allow enough time to include it in that report. To illustrate the budgetary effects of economic changes, CbO created and analyzed four scenarios to develop “rules of thumb” for those variables. The scenarios reflect the following changes from the agency’s current eco- nomic forecast: slower productivity growth, slower labor force growth, higher interest rates, and higher inflation. each of those changes would increase deficits above the amounts in CbO’s baseline budget projections; how- ever, the values of any of the variables could be higher or lower than they are in CbO’s forecast. because the rules of thumb are roughly symmetrical, if productivity or the labor force instead increased more quickly than projected, or if interest rates or inflation were lower than projected, deficits would be smaller than they are in the agency’s baseline budget projections. Specifically, CbO’s analysis yielded the following results: • If productivity grew at a rate that was 0.1 percentage point slower each year than it is in the agency’s economic forecast, annual deficits would be larger than projected by amounts that would climb to $63 billion by 2030, CbO estimates. Over the 2021–2030 period, the cumulative deficit would be $306 billion larger than it is in CbO’s baseline projections. • If the labor force grew at a rate that was 0.1 percentage point slower each year than it is in CbO’s economic forecast and the unemployment rate http://www.cbo.gov/publication/56020 http://www.cbo.gov/publication/56020 2 How CHanges in eConomiC Conditions migHt affeCt tHe federal Budget: 2020 to 2030 feBruary 2020 remained unchanged, annual deficits would be larger than those in the agency’s baseline budget projections by amounts that would grow each year and reach $35 billion by 2030, CbO estimates. The cumulative deficit for 2021 to 2030 would be $162 billion larger than it is in the agency’s baseline budget projections. • If all interest rates—including both the rate on 3-month Treasury bills and the rate on 10-year Treasury notes—were 0.1 percentage point higher each year than they are in CbO’s economic forecast, deficits would increase progressively over the projection period by amounts that would rise to $31 billion in 2030. The cumulative deficit for 2021 to 2030 would be $185 billion larger than it is in the agency’s baseline projections. • If all wage and price indexes—including the GDP price index, the consumer price index for all urban consumers (CPI-u), the chained CPI-u, and the employment cost index for wages and salaries of workers in private industry—rose by 0.1 percentage point more each year than they do in CbO’s economic forecast, annual deficits would be larger than projected by amounts that would climb to $28 billion by 2030. The cumulative deficit for the 2021–2030 period would be $148 billion larger than projected. Background When economic conditions differ from those in the agency’s forecast, actual federal spending and revenues are likely to differ from CbO’s projections because economic conditions affect federal revenues and outlays in several ways. revenues depend on the total amount of income that is subject to taxation, including wages and salaries, other income received by individuals, and corporate profits. Those types of income generally rise or fall (though not necessarily proportionally) in response to changes in economic growth and inflation. In addi- tion, the Treasury regularly refinances portions of the government’s outstanding debt—and issues more debt to finance new deficits—at market interest rates. Thus, the amount that the federal government spends to pay inter- est on its debt is directly tied to those rates. Spending for many mandatory programs is also affected by economic growth and inflation—either explicitly (for example, through cost-of-living adjustments), or indirectly. Finally, although actual spending for discretionary programs is determined solely by Congressional action, CbO’s projections of such spending are affected by changes in inflation when such spending is not constrained by the caps on discretionary budget authority that are in place under current law.2 economic conditions could differ from those in CbO’s forecast for a variety of reasons. Shifts in economic trends are difficult to identify, and until forecasters can identify those shifts, they may make incorrect inferences about the future trajectory of the economy. For exam- ple, CbO and other forecasters were slow to appreciate recent shifts in trends in interest rates. Changes in policy can also cause economic outcomes to differ from CbO’s projections. as one of many examples, future changes in immigration policy could have significant implications for the growth of the labor force. Furthermore, the full effect of specific policy changes may not be immedi- ately apparent, so actual conditions may diverge from CbO’s projections even if the projections are intended to account for those policy changes. Finally, sometimes changes in economic conditions, such as turning points in the business cycle, simply cannot be predicted on the basis of available information. The estimates in this report are used to calibrate CbO’s budgetary feedback model. The budgetary feedback model, like the rules of thumb, was built to approximate how the federal budget would respond to changes in the economy. However, the budgetary feedback model provides a unified framework to quantify such changes, whereas the rules of thumb instead depend on a wider array of models specific to individual federal programs to generate estimates.3 The Economic Variables That CBO Examined CbO examined how differences in key economic vari- ables would affect the budget projections by analyzing four illustrative economic scenarios; those simplified 2. The bipartisan budget act of 2019 (Public Law 116-37) increased the limits on most discretionary funding that were in place under the budget Control act of 2011 (P.L. 112-25) for 2020 and 2021. after 2021, funding that is currently constrained by the caps is, by law, projected to grow with inflation. The relatively small amount of discretionary funding that is not constrained by the caps is projected to grow with inflation starting in 2021. 3. See Nathaniel Frentz, Jaeger Nelson, Dan ready, and John Seliski, A Simplified Model of How Macroeconomic Changes Affect the Federal Budget, Working Paper 2020-01 (Congressional budget Office, January 2020), www.cbo.gov/publication/55884. https://www.cbo.gov/publication/55884 3feBruary 2020 How CHanges in eConomiC Conditions migHt affeCt tHe federal Budget: 2020 to 2030 scenarios underlie the agency’s rules of thumb. In each of those scenarios, the values of economic variables differ from those in the agency’s forecast by 0.1 percentage point each year starting in January 2020. The first two scenarios—involving slower productivity growth and slower labor force growth—incorporate changes to vari- ables that directly affect real GDP growth. Those changes would cause the economy to grow more slowly than it does in CbO’s forecast, thereby affecting other economic variables as well. The third and fourth scenarios— involving higher interest rates and higher inflation— differ from the first two in that they do not incorporate any changes in real GDP growth. CbO has produced an interactive workbook in which users can create their own alternative scenarios for productivity growth, labor force growth, interest rates, and inflation to see how revenues, outlays, and deficits might differ from CbO’s baseline budget projections.4 For simplicity, CbO constructed the scenarios so that the values for the four economic variables differ from those in the agency’s forecast by 0.1 percentage point in the direction that would worsen the budget outlook. The scenarios are not intended to indicate how actual economic conditions might differ from those in CbO’s projections. For example, the agency estimates that there is roughly a two-thirds chance that the average annual growth rate of real GDP over the next five years will be within 1.3 percentage points above or below the pro- jected rate. Similarly, there is about a two-thirds chance that the average annual rate of inflation (as measured by the GDP price index) over the next five years will be within 0.8 percentage points of the rate in CbO’s fore- cast in either direction, and the probability is the same that the average interest rate (on 10-year Treasury notes, in real terms) will be within 0.9 percentage points of the forecast rate in either direction.5 Productivity Growth. In this scenario, productivity growth is 0.1 percentage point slower each year than 4. Congressional budget Office, Workbook for How Changes in Economic Conditions Might Affect the Federal Budget: 2020 to 2030 (interactive tool, February 2020), www.cbo.gov/ publication/56097. 5. CbO estimated those ranges on the basis of an analysis of its forecasting accuracy over the past four decades for GDP and since 1984 for inflation and interest rates. For more on the uncertainty underlying economic forecasts, see Congressional budget Office, CBO’s Economic Forecasting Record: 2019 Update (October 2019), www.cbo.gov/publication/55505. it is in CbO’s economic forecast, causing real GDP to be about 1.4 percent lower in 2030 than forecast (see Table 1). Slower productivity growth, in turn, would affect other economic variables, such as the size of the labor force, wage rates, and interest rates. Labor Force Growth. In the second scenario, the labor force’s rate of growth is 0.1 percentage point slower each year than the rate in the agency’s economic fore- cast, causing real GDP to be about 0.7 percent lower than forecast in 2030. If the population grew at the rate that CbO projects, the slower growth of the labor force would cause the labor force participation rate to fall below the agency’s current estimates. That difference would grow by a roughly equal amount each year until the labor force participation rate was about 0.6 per- centage points lower in 2030 than forecast. Like slower productivity growth, slower labor force growth would affect other economic variables. Interest Rates. In the third scenario, interest rates are 0.1 percentage point higher each year than those in CbO’s forecast. Inflation is held equal to the forecast rate in this scenario, so the corresponding rule of thumb shows the effects of higher real interest rates. unlike the other scenarios, this scenario does not include any changes to the projected amounts of interest payments made or received by individuals or businesses. Inflation. In the fourth scenario, inflation is 0.1 per- centage point higher each year than it is in the agency’s economic forecast. all economic indicators that are mea- sured as nominal values, such as GDP, taxable income, and interest rates, increase in response to higher infla- tion, but indicators that are measured as real values, such as real GDP, are the same as they are in CbO’s economic forecast. Applying the Rules of Thumb CbO’s rules of thumb provide a rough sense of how changes in those economic variables would affect the federal government’s revenues and outlays. The rules of thumb are roughly symmetrical and scalable, which means that they can be used to analyze a number of sce- narios in which values for those variables differ from the ones presented here, although there are some caveats. Symmetry. each rule of thumb is roughly symmetrical. Thus, if the growth of productivity or the labor force was instead 0.1 percentage point faster than in CbO’s http://www.cbo.gov/publication/56097 http://www.cbo.gov/publication/56097 https://www.cbo.gov/publication/55505 4 How CHanges in eConomiC Conditions migHt affeCt tHe federal Budget: 2020 to 2030 feBruary 2020 baseline or if interest rates or inflation were 0.1 percent- age point lower than in CbO’s baseline, the effects would be about the same as those shown here, but with the opposite sign. Scalability. In addition to being symmetrical, the rules of thumb are roughly scalable—that is, an increase or decrease in the value of a given economic variable will produce a roughly proportional increase or decrease in the resulting budgetary effects. For example, if pro- ductivity growth was 0.2 percentage points slower each year than it is in CbO’s economic forecast rather than 0.1 percentage point slower as it is in the scenario discussed here, the increase in the deficit would roughly double. However, the scalability of the rules of thumb is limited. The more the values of economic variables differ from those in CbO’s forecast, the less accurate the estimates produced using the rules of thumb are likely to be. although two of the illustrative scenarios incorporate a broad set of interactions among several economic variables, all four rules of thumb are nevertheless simpli- fied and do not account for more complex interactions among variables—such as those among growth in real GDP, inflation, and the unemployment rate. That lim- itation becomes more pertinent as the difference between the value of an economic variable in a given scenario and in CbO’s forecast increases. Certain elements of the tax code and some provisions relating to mandatory out- lays also make it likely that as such differences increase, estimates produced using the rules of thumb will become less and less accurate. Moreover, the rules of thumb are based on scenarios in which the values of variables differ from the values in CbO’s economic forecast by the same amount each year. The rules of thumb can be applied to scenarios in which the differences vary somewhat from year to year, but they cannot be used to accurately estimate the budget- ary effects of significant variations in those differences over the 10-year period. For example, if the rate of labor force growth differed from the value in CbO’s forecast by 0.5 percentage points in 2030 but was the same as the forecast value in all other years, the average annual difference would be a little less than 5 basis points (that Table 1 . Differences Between the Illustrative Scenarios and CBO’s Economic Forecast in 2030 Percent Level of Real GDP Level of Nominal GDP Labor Force Interest Rate on 10-Year Treasury Notes (Percentage points) Level of the GDP Price Index Level of the Employment Cost Indexa Slower Productivity Growth -1.4 -1.4 -0.2 -0.10 0 -1.2 Slower Labor Force Growth -0.7 -0.7 -1.0b -0.05 0 0.4 Higher Interest Rates 0 0 0 0.10 0 0 Higher Inflation 0 1.1 0 0.10 1.1 1.1 Source: Congressional Budget Office. In the scenario for each rule of thumb, economic variables differ by 0.1 percentage point from those in CBO’s economic forecast in the direction that would worsen the budget outlook, but those variables could be higher or lower than forecast. Each rule of thumb is roughly symmetrical. If, for example, the rate of productivity growth was 0.1 percentage point faster than CBO projected, real GDP would be higher than it is in the agency’s economic forecast rather than lower, as it is in the table. GDP = gross domestic product. a. The employment cost index for wages and salaries of workers in private industry. b. Although the growth of the labor force in this scenario is 0.1 percentage point lower than it is in the agency’s economic forecast each year, the resulting reduction in the size of the labor force in 2030 is only 1.0 percent (rather than 1.1 percent, as might be expected from 11 years of growth that was 0.1 percentage point slower) because the initial decline in the labor force is slightly offset by an increase in the supply of labor resulting from higher wage rates. 5feBruary 2020 How CHanges in eConomiC Conditions migHt affeCt tHe federal Budget: 2020 to 2030 is, 0.05 percentage points).6 CbO’s estimate of the budgetary effect over the decade would not, however, be one-half the amount shown for the scenario for slower labor force growth (a difference of 0.1 percentage point each year), nor would the agency’s estimate of the bud- getary effect in 2030 be five times greater than the value for that year under the illustrative scenario. both esti- mates would be considerably smaller than those ratios. To assess the scalability of the rules of thumb, CbO compared estimates produced by means of the simplified calculations in its online workbook with estimates made by means of a broader set of models that the agency uses to assess the effects of economic changes on the bud- get. CbO found that the four rules of thumb produced approximations of the estimates generated using CbO’s economic and budget models as long as the values for each of the variables did not differ from the forecast val- ues by more than a certain amount. Specifically, the rules of thumb were scalable as long as the annual differences from the forecast values were within the following ranges: • For productivity growth, between −0.5 percentage points and 0.5 percentage points; • For labor force growth, between −0.75 percentage points and 0.75 percentage points; • For interest rates, between −1.0 percentage point and 1.0 percentage point; and • For inflation, between −1.0 percentage point and 1.0 percentage point. In general, differences outside those ranges in any given year would generate budgetary effects that could not be reasonably approximated by the rules of thumb and therefore would require a more detailed analysis. Caveats. If economic conditions changed in such a way that they reflected the changes incorporated in two or more of the simplified scenarios, the budgetary effects would most likely differ from the sum of the esti- mates calculated using the individual rules of thumb. For example, if rates of productivity growth and labor force growth were both slower than they are in CbO’s 6. One basis point is equivalent to one one-hundredth of a percentage point, or 0.01 percentage point. basis points are commonly used as a unit of measure for differences of less than 1 percentage point. economic forecast, the two effects would interact and lower output growth by more than would be suggested by simply adding those effects. The rules of thumb capture the budgetary effects of spec- ified changes in the economy, but they do not account for the source of those changes, which could include changes in policy. For example, a proposal might call for an increase in government spending that would affect inflation. The rule of thumb regarding inflation approx- imates the budgetary effects that would result from the estimated changes in inflation—but it does not incorpo- rate the budgetary effects of the increased spending itself, nor does it encompass other effects on the economy besides a change in inflation. In addition, some changes in policy could alter how changes in the economy affect the federal budget. For example, a new tax policy that changed effective tax rates would probably affect the relationship between changes in the economy and revenues. Changes to that relation- ship would cause the budgetary effects resulting from changes in the economy to differ from those that would be estimated using the rules of thumb. Changes in Productivity Growth and Labor Force Growth The growth of productivity and the growth of the labor force are important determinants of real GDP growth. all else being equal, faster productivity growth and faster labor force growth both lead to greater economic growth and thus reduce budget deficits. Slower productivity growth and slower labor force growth both reduce the growth of GDP, thereby worsening the budget outlook.7 Slower Productivity Growth The first rule of thumb illustrates the budgetary effects of productivity growth that is slightly weaker than CbO currently anticipates. Specifically, if productivity grew at a rate that was 0.1 percentage point lower each year than the rate in the agency’s economic forecast, annual deficits would be larger than projected by amounts that would climb to $63 billion by 2030, CbO estimates. In the 2021–2030 period, the cumulative deficit would be 7. For further discussion of how changes in the labor force participation rate (which lead to changes in labor force growth) and changes in productivity affect GDP, as well as of the uncertainty of such projections, see Congressional budget Office, The 2016 Long-Term Budget Outlook (July 2016), Chapter 7, www.cbo.gov/publication/51580. http://www.cbo.gov/publication/51580 6 How CHanges in eConomiC Conditions migHt affeCt tHe federal Budget: 2020 to 2030 feBruary 2020 $306 billion larger than it is in CbO’s baseline projec- tions (see Table 2). In this analysis, CbO examined how the slower growth of total factor productivity (that is, real output per unit of combined labor and capital services) might affect GDP, income, and interest rates. The agency found that slower-than-anticipated productivity growth would lead to slower growth in GDP because both labor and capital would be producing less than projected in CbO’s current economic forecast. If workers produced less, the average hourly wage rate would be lower; therefore, the supply of labor would also decline. as a result, total labor income would be lower. Meanwhile, if capital produced less output, the returns on that capital would also decline, further decreasing total taxable income. Lower returns on capital would also cause private investment to be lower. Treasury securities compete with other investments for investors’ money, so those lower rates of return on pri- vate investments imply that rates on Treasury securities would also be lower. Other variables, such as the unem- ployment rate and inflation, could be affected as well; however, this simplified scenario does not include the effects of changes in those variables. If actual productivity growth was 0.1 percentage point lower each year than it is projected to be, GDP and total income would be about 1.4 percent lower by 2030 than they are in the current forecast, CbO estimates. Meanwhile, interest rates would be about 1 basis point below those in the agency’s forecast for 2020, and that difference would increase by roughly 1 additional basis point in each subsequent year. by 2030, interest rates would be about 10 basis points lower than in the forecast (see Table 1 on page 4). If economic growth slowed in each year as a result of lower productivity growth, taxable income would also grow more slowly than projected, and tax reve- nues would fall below CbO’s baseline projections by increasing amounts over time, resulting in a shortfall of $85 billion in 2030. between 2021 and 2030, the drop in revenues stemming from the slower growth in income would increase deficits by a total of $414 billion. Over that 10-year period, slower income growth would also lead to a $26 billion net decrease in mandatory out- lays for programs whose spending is either explicitly or implicitly linked to wage growth. Outlays for Medicare, Medicaid, unemployment insurance, and Social Security would decrease by nearly $33 billion; that decrease would be partially offset by an increase of over $6 bil- lion in outlays for the refundable portions of the earned income tax credit, the child tax credit, and the american Opportunity Tax Credit.8 because slower productivity growth would push interest rates down, the amount of interest that the federal gov- ernment would pay on the debt projected in CbO’s base- line between 2021 and 2030 would decrease by $107 bil- lion. However, if revenues were reduced by the amounts indicated above, the federal government would need to borrow more than projected to finance the resulting net increase in the deficit. That additional borrowing would add $25 billion to interest payments between 2021 and 2030. Together, those effects would result in net interest outlays that were $82 billion less than the amount in the agency’s baseline projections over the 2021–2030 period. Slower Labor Force Growth The second rule of thumb illustrates the budgetary effects of the labor force’s growing more slowly than CbO anticipates. Specifically, if annual growth in the labor force was 0.1 percentage point slower than it is in CbO’s economic forecast and the unemployment rate remained unchanged, annual deficits would be larger than those in the agency’s baseline budget projections by amounts that would grow each year and reach $35 billion by 2030, CbO estimates. The cumulative deficit for 2021 to 2030 would be $162 billion larger than it is in the agency’s baseline budget projections (see Table 2). The budgetary effects under this scenario are considerably smaller than those under the scenario involving slower productivity growth because the resulting economic effects are smaller (see Table 1 on page 4). To arrive at this rule of thumb, CbO began by ana- lyzing how the slower growth of the labor force under the illustrative scenario might affect GDP, income, and interest rates. Slower-than-projected growth in the labor force would push the average wage rate above CbO’s current estimate. Those higher wage rates would bring about a small boost in labor income and in the supply of labor, which would partially offset the effects of the ini- tial decline in labor force growth. Despite those effects, total labor income would be less than it is in CbO’s 8. Tax credits reduce a taxpayer’s income tax liability. If a refundable credit exceeds a taxpayer’s liability, all or a portion of the excess is refunded to the taxpayer and recorded as an outlay in the budget. 7feBruary 2020 How CHanges in eConomiC Conditions migHt affeCt tHe federal Budget: 2020 to 2030 baseline. Meanwhile, the number of workers using a given amount of capital would fall below the number projected in CbO’s economic forecast, so the returns on that capital would decline as well. as described above, the resulting decline in the rates of return on private investment would imply that interest rates on Treasury securities would be lower than they are in CbO’s eco- nomic forecast. although other variables—including the unemployment rate, inflation, the distribution of labor income, and rates of retirement—could also be affected by the labor force’s growing more slowly than projected, this rule of thumb does not incorporate the effects of such changes. In CbO’s estimation, if the rate of growth in the labor force was 0.1 percentage point slower than anticipated, GDP growth would also be slower each year. Meanwhile, interest rates would be slightly lower than forecast for 2020, and that difference would increase in each subse- quent year. by 2030, GDP and labor income would be 0.7 percent lower than they are in CbO’s forecast, and interest rates would be about … Congressional Budget Office Budget Line of Business Fall Forum October 31, 2019 Megan Carroll Budget Analysis Division CBO’s Relationships With Agencies: Communication Is Key 1 CBO CBO’s Role 2 CBO The Congressional Budget Act of 1974 established the House and Senate Budget Committees to set federal spending policy and identify priorities for allocating budgetary resources. 3 CBO To support the Budget Committees in carrying out those responsibilities, the Budget Act also established the Congressional Budget Office and required it to provide:  Baseline budget projections—annual reports on projected spending, revenues, and deficits under current law; and  Cost estimates for legislation that summarize the legislation’s incremental budgetary effects relative to the baseline. 4 CBO The Budget Act also addressed the critical need for open communication and data sharing between CBO and other federal agencies. To meet its responsibilities, CBO must understand how agencies operate and carry out federal laws. As a result, CBO consults with agencies on an ongoing basis. CBO’s analysts aim to develop strong relationships with agencies’ staff members. CBO does not release the names of the people it consults. 5 CBO CBO also relies on experts from many other places, including:  The Office of Management and Budget (OMB);  The Joint Committee on Taxation;  Other Congressional committees;  The Government Accountability Office;  The Congressional Research Service; and  Think tanks, universities, interest groups, industry, and state and local governments. 6 CBO How CBO Uses Information From Agencies to Prepare Baseline Projections 7 CBO CBO’s baseline projections are constructed to reflect an assumption that current laws governing taxes and spending generally remain unchanged. The projections serve as a benchmark that the Congress can use to enforce rules and procedures for considering legislation that would affect the budget. 8 CBO CBO’s Process for Developing and Reviewing Baseline Projections 9 CBO Analysts consult staff members at federal agencies to understand:  How CBO’s estimates for prior projections compare with actual results;  Atypical patterns in actual and projected budgetary effects;  Key factors that affect how programs are implemented and the timing and magnitude of budgetary outcomes;  The outlook for planned activities and potential changes in the Administration’s policies; and  How pending litigation may affect an agency’s activities. 10 CBO At the end of each fiscal year, CBO reviews actual budget results in preparation for updating the agency’s account-level projections for spending and revenues. During that time, analysts frequently consult their counterparts at other agencies and OMB about how programs and accounts functioned in the previous year and are expected to function in the future. That work begins in October and culminates with the release (usually in January) of the annual Budget and Economic Outlook, which contains CBO’s baseline projections. 11 CBO In most years, CBO updates those January baseline projections in the spring, when it analyzes the President’s budget request for the upcoming fiscal year. Analysts use information contained in the President’s budget request to adjust CBO’s projections of spending and revenues under current law and to estimate the budgetary effects of the Administration’s proposals. They also review the budget justifications that agencies provide to the Congress (and other public documents) and consult experts at the agencies for additional insights and information. 12 CBO How CBO Uses Information From Agencies to Prepare Cost Estimates 13 CBO CBO’s cost estimates provide information that the Congress can use to implement its rules and procedures for considering legislation that would affect the federal budget. Each estimate tells a concise story about a legislative proposal’s incremental effects on federal taxes or spending. It also indicates whether the proposal would impose mandates on state, local, or tribal governments or private-sector entities. 14 CBO CBO consults agencies’ staff members throughout the year when preparing cost estimates. Statutory requirements ensure that CBO places the highest priority on preparing estimates for proposals that are most likely to receive active consideration by the Congress. The scope of estimates varies, as does the amount of time allowed to prepare them. Often, time frames are short. 15 CBO CBO’s Process for Developing Formal Cost Estimates 16 CBO In Step 1, CBO’s analysts carefully study the proposed legislation and assess the way it would change current law. This step involves consulting technical experts at federal agencies to understand how the agencies might implement the legislation and to determine whether its implications are clear. 17 CBO In Step 2, analysts research potential incremental budgetary effects. They solicit information about those effects from a variety of sources. In some cases, analysts consult publicly available government data and information. In others, they use data provided specifically at CBO’s request. 18 CBO Step 3, in which analysts analyze and quantify budgetary effects, is often the most complex and time-consuming. No single approach works for all estimates, and the best method will depend on the question being addressed, the data available, and the time available to produce the cost estimate. The key is to determine how enacting the legislation would change the behavior of affected individuals and institutions. 19 CBO To analyze those changes in behavior, CBO may ask: How would federal agencies, states, or affected industries and individuals react to a legislative proposal’s directives and incentives? Would the legislation result in an agency’s undertaking activities that it would not pursue under current law? Would the legislation change the scope of existing efforts? How much time would be needed to carry out envisioned activities? Are the schedules proposed for implementing those activities feasible? 20 CBO CBO also asks technical questions about budget execution, such as:  What is the process for obligating and expending the funding that is provided for a given activity?  How much time typically passes between the point when funding is provided and the point when it is spent?  What is the status of existing balances of funding? Does an agency expect to obligate and spend them under current law? 21 CBO To estimate budgetary effects, analysts use a variety of tools to synthesize the data and information that they gather. Often, they also perform sensitivity analyses to assess how outcomes depend on different factors. 22 CBO CBO also looks at potential mandates on other governments and the private sector. Analysts often ask such questions as:  How are nonfederal entities affected by current law?  If a bill would prohibit or require an activity, how would behaviors change?  What are the relationships between federal agencies and state governments that are involved in implementing federal laws? 23 CBO In Step 4, in which analysts communicate results, CBO strives to be transparent, providing clear, concise explanations and detailing the key components of the estimate. The overarching goal is to make information accessible by providing context, explaining technical terms, and effectively using tables. 24 CBO How CBO Prepares Baseline Budget Projections (February 2018), www.cbo.gov/publication/53532 How CBO Prepares Cost Estimates (February 2018), www.cbo.gov/publication/53519 “10 Things to Know About CBO,” CBO Blog (January 30, 2018), www.cbo.gov/publication/53520 “Frequently Asked Questions About Cost Estimates,” www.cbo.gov/about/products/ce-faq “CBO’s Activities Under the Unfunded Mandates Reform Act,” www.cbo.gov/publication/51335 “In Our Estimation,” www.cbo.gov/podcasts Additional Resources https://www.cbo.gov/publication/53532 http://www.cbo.gov/publication/53519 http://www.cbo.gov/publication/53520 https://www.cbo.gov/about/products/ce-faq https://www.cbo.gov/publication/51335 https://www.cbo.gov/podcasts CBO’s Relationships With Agencies: Communication Is Key Slide 2 Slide 3 Slide 4 Slide 5 Slide 6 Slide 7 Slide 8 CBO’s Process for Developing and Reviewing Baseline Projections Slide 10 Slide 11 Slide 12 Slide 13 Slide 14 Slide 15 CBO’s Process for Developing Formal Cost Estimates Slide 17 Slide 18 Slide 19 Slide 20 Slide 21 Slide 22 Slide 23 Slide 24 Additional Resources Intergovernmental Fiscal Relations: Coordination Failures and Fiscal Outcomes LUIZ R. DE MELLO, JR This article estimates the fiscal impact of coordination failures in intergovernmental fiscal relations. The coordination failures considered here are due to agency problems arising from the delegation of fiscal powers to sub-national governments, and com- mon pool problems associated with funding decentralised government spending through intergovernmental transfers. Particular attention is focused on the trade-off between coordination and fiscal decentralisation. Evidence provided for a sample of thirty countries suggests that coordination failures are likely to result in a deficit bias in decentralized policy making, particularly in the case of developing countries, for which the benefits of decentralization may be over-stressed. Developed countries were found to be less adversely affected by coordination failures and have therefore managed to pursue fiscal consolidation in a decentralized setup. INTRODUCTION The problem of coordinating intergovernmental fiscal relations in decentralised gov- ernments has puzzled theoreticians and practitioners in recent years. This is because, in general terms, policy outcomes may suffer from coordination failures in intergov- ernmental fiscal relations. These failures induce sub-national governments to spend inefficiently and beyond their means vihen fiscal policy is designed and implemented in a decentralised fashion. Policy failures tend to manifest themselves in terms of a deficit bias in decentralised policy making and higher costs of borrowing, given the risk premium associated with a higher probability of default.^ The most important sources of coordination failures are moral hazards arising from the delegation of fiscal Luiz R. de Mello, Jr., University of Kent, UK. The author is now at the Fiscal Affairs Department, International Monetary Fund, 700 19th St. NW Washington, D.C. 20431. The author is indebted to an anonymous referee and the participants of ECLACs 1998 Regional Seminar on Fiscal Policy for helpful comments. The usual disclaimer nevertheless applies. de Mello / Intergovernmental Fiscal Relations: Coordination Failures and Fiscal Outcomes powers to sub-national governments, and common pool problems associated with funding decentralised government spending through transfers from common pools of sharable tax revenues. In a nutshell, moral hazards in decentralised fiscal policy making, or agency prob- lems in general, are due to the asymmetry of information on the costs and benefits of government spending between the center and the sub-national governments to which fiscal powers are delegated. When important tax bases are devolved to sub-national governments, the central government may be unable to monitor how efficiently sub-national governments utilize their tax bases. The essence of common pool prob- lems is that the tax bases that are efficient and simple to administer by local govern- ments are few and poor.^ Due to the possibility of tax exportation, externalities in the provision of public goods and services, factor mobility and economies of scale, broad tax bases are best managed by the central government. It is therefore necessary for the center to share part of its tax revenues with sub-national governments to bridge the gap between the revenues mobilised in sub-national jurisdictions and decentralized spend- ing, hence correcting vertical fiscal imbalances. However, in this case, sub-national governments face the incentive to under-utilize their local tax bases to minimise the costs of decentralised provision borne by local taxpayers, and over-utilize national sharable tax bases.* Critics to fiscal decentralisation also argue that giving new budgetary rights and responsibilities to sub-national governments may be inconsistent with the task of si- multaneously promoting institutional clarity and transparency in budgeting and overall fiscal policy making, so that spending matches revenues at the sub-national level.^ Fiscal decentralisation may therefore aggravate fiscal imbalances and consequently endanger overall macroeconomic stability, unless sub-national governments are com- mitted to fiscal discipline, and the decentralisation package includes incentives for prudence in debt and expenditure management.^ The imposition of stringent con- straints on sub-national indebtedness and effective monitoring of sub-national fiscal positions are additional important prerequisites for successful fiscal decentralisation, in addition to the availability of expertise at the sub-national level and the ability of sub-national governments to manage efficiently an increased volume of resources. Despite these shortcomings, advocates of fiscal decentralisation stress the potential benefits of devolving fiscal responsibilities to sub-national levels of government on the grounds of increased efficiency in service delivery and reduced information and trans- action costs associated with the provision of public goods and services. Streamlining public sector activities and encouraging the development of local democratic traditions are also regarded as important objectives of fiscal decentralization programs. Also, the literature on fiscal federalism sustains that the main advantage of decentralized, rather than centralized, provision is that, under subsidiarity, local preferences and needs are likely to be best met by local, rather than national, governments.* Accountability and transparency in expenditure management can also be enhanced by bringing spending assignments closer to revenue sources, and hence to the median voter. Public Budgeting & Finance / Spring 1999 In short, with regard to the three traditional Musgravian functions of government, the critics of fiscal decentralisation stress the difficulties related to macroeconomic stability and redistribution, while advocates of decentralisation stress its benefits in terms of allocative efficiency.^ Against this background, the objective of this article is to shed more light on the relationship between fiscal decentralisation and policy out- comes by providing empirical evidence for a sample of thirty countries for which data on government spending and fiscal balances are disaggregated between central and sub-national governments in the IMFs Government Financial Statistics. Motivation for the study of coordination in intergovernmental relations, as a prerequisite for sound macroeconomic governance and fiscal consolidation, is found in Roubini and Sachs (1989), Roubini (1991), and Fukasaku and de Mello (1998). Further motivation for this paper can be found in the recent developments in the consolidation of the Euro- pean Union. In Europe, deeper integration calls for higher degrees of decentralisation in fiscal policy making, given the need to match public sector provision with local preferences and needs, and commitment to fiscal conservatism as a result of monetary union. This paper stresses the challenges involved in the federalisation of fiscal policy making in Europe at the same time as avoiding excessive government deficits and hence preserving monetary discipline. The remainder of the article is organized as follows. Section 2 provides further details of the sources of coordination failures examined in this article. Section 3 analyses a number of fiscal indicators in a sample of developed and developing coun- tries, with the aim to compare and contrast the extent of fiscal decentralisation in different economies, and to highlight a few stylised facts. Emphasis is placed on the relationship between fiscal decentralisation, coordination failures, and fiscal outcomes. Section 4 presents empirical evidence, and Section 5 concludes. THEORETICAL CONSIDERATIONS: THE GENERAL ARGUMENT The focus of this article is on fiscal decentralisation, given that coordination failures in intergovernmental fiscal relations may lead to undesirable fiscal outcomes. When fis- cal decentralization drives a wedge between expenditures and sources of finance, sub- national governments face the incentive to overspend as a result of a common pool resource problem. As suggested earlier, this problem arises because the social returns of government spending exceed both private returns and social costs, and hence sub-national governments favour spending in their jurisdictions financed by a common pool of tax revenues. In this case, the burden of providing public goods and services can be shared across government jurisdictions, whereas the benefits of public sector spending can be internalised and hence generate a political payoff to sub-national governments. Also, overspending can be attributed to common pool funding because of competition among sub-national governments to secure a larger portion of sheirable funds in the form of grants and transfers from the central government. An additional type of common pool problem which has an immediate adverse de Mello / Intergovernmental Fiscal Relations: Coordination Failures and Fiscal Outcomes impact on macroeconomic stability is the following. In the case of rigid revenue- sharing arrangements, in which transfers are automatic, every time a central govern- ment raises taxes to reduce its own fiscal deficit, sub-national governments receive a corresponding revenue benefit which they are free to spend. This tends to inhibit the potential for reducing the consolidated fiscal deficit by increasing the tax burden, when revenues are shared vertically across government levels. This is also the case of na- tional expenditure programs that are sponsored and fully funded by the central govern- ment, without sub-national co-funding. Incentives to delay adjustment is another con- sequence of the common pool problem, since individual jurisdictions have limited incentives to act alone and strong incentives to free ride, if the burden of fiscal re- trenchment can be shared across jurisdiction, i.e., borders.^ In terms of agency problems, it is well known that delegation allows the center to provide goods and services according to local market information and, by separating responsibilities, more powerful incentives to encourage efficient provision can be put in place. Because local jurisdictions can identify community preferences more easily, decentralised policy making tends to reduce information costs.^ Delegation brings the government closer to the people, increases accountability in service delivery, and strengthens societys scrutiny of public sector actions. An agency problem between society and the government can therefore be solved, or minimised, by decentralizing fiscal responsibilities and devoling spending assignments to local governments. Never- theless, by reducing the informational distance between the government and society, fiscal decentralisation tends to increase the distance between the center and the decentralised agencies or local governments to which fiscal responsibilities are de- volved. This loss of control of the center over decentralized agencies or sub-national governments entails an efficiency loss in delegation, which increases with the informa- tional distance between both government levels, and renders the acquisition and pro- cessing of information inside the government more costly.•* In particular, the devolu- tion of tax bases to sub-national jurisdictions is likely to create a moral hazard in decentralised fiscal policy making, given that the central government may be unable to monitor how efficiently sub-national governments utilise their tax bases. Both problems—common pool and agency—are therefore intertwined, given that decentralisation implies delegation of spending functions to sub-national jurisdictions and creates vertical imbalances in financing. Policy recommendations to solve one of these problems may well exacerbate the other. Against this background, in providing public goods and services, there seems to be a trade-off between coordination, which requires some degree of centralisation in policy making, and the need for information on local needs and preferences, which is better extended at the local level.^ A strong case can be made in favor of centralized provision and policy making as far as dis- tributive and macroeconomic stabilisation policies are concemed. In this case, effi- ciency gains, which are the main advantages of decentralisation, may be dwarfed by the need to ensure good macroeconomic governance and fiscal discipline in a decentralised government structure. Also, both types of policy tend to be nationwide in Public Budgeting & Finance / Spring 1999 scope, rather than regional, particularly in developing countries, thus rendering the potential gains of decentralisation in terms of allocative efficiency less promising vis- k-vis the risks involved in macroeconomic governance.^ EMPIRICAL EVIDENCE The Testable Hypotheses Turning to empirical evidence, preliminary information on fiscal indicators is provided in Tables 1 and 2 for the sample of thirty countries under examination in this article. For the sake of international comparisons, a few stylised facts can be highlighted. First, governments tend to be smaller in Latin America, and particularly Asia, than in OECD countries. It is widely accepted that the demand for public goods and services increases with income, such that government spending tends to be larger in richer countries than in their poorer counterparts, ceteris paribus. Central government spend- ing ratios range from 20 percent of GDP in Asia, to 40 percent in the European countries of the OECD sample. The sub-national share of total government spending is below 5 percent in Asia, and ranges from 10 to 40 percent in Latin America, and from 12 to 60 percent in the OECD sample. In relative terms, sub-national governments tend to be large in countries where the central government is small in both OECD and Latin American countries. This is nevertheless not true in Asia (with the exception of India), where countries with small central governments also tend to have small sub-national governments. In the OECD sample and in Latin America, unlike Asia, a reduction in central government spending is achieved chiefiy by delegating public sector functions and spending responsibilities to sub-national governments, thus increasing their share in total government spending. Second, with regard to the sources of finance of sub-national spending, in Asia, sub-national governments rely heavily on transfers from the center. In the OECD area, there is a clear-cut distinction between the federations, where emphasis is placed on local tax revenue mobilization, and the European countries (as well as Australia), where intergovernmental transfers prevail as the main source of finance of sub-na- tional spending. The picture is less clear cut in Latin America, where fiscal outcomes tend to be poor, nationally and sub-nationally. Sub-national fiscal imbalances tend to be limited in the OECD area, despite relatively high sub-national spending shares. Asias fiscal centralism is associated with limited fiscal imbalances, nationally and sub-nationally. Against this background, important empirical questions to be asked are, first, whether decentralized fiscal policy making leads to a deterioration of sub-national finances and, second, whether such deterioration worsens the fiscal position of the central government. As suggested by Figure 1, fiscal outcomes tend to be worse in bigger governments, nationally and sub-nationally. On the other hand, in Figure 2 (Panel A), an increase in the sub-national share of total government spending does not de Mello / Intergovernmental Fiscal Relations: Coordination Failures and Fiscal Outcomes TABLE 1 Public Finance Indicators Country Consolidated Central Government Sub-national Governments Government Size Overall Balance Government Size Overall Balance Avrg. St.Dev. Avrg. S t D e v . Avrg. St.Dev. Avrg. St. Dev. Argentina 1 (1974-85) Argentina 2 (1986-92) Bohvia Brazil 1 (1983-89) Brazil 2 (1990-93) Chile .1(1974-80) Chile 2 (1981-88) Colombia Mexico Peru India Indonesia Malaysia Philippines Thailand 1 (1972-80) Thailand 2 (1981-94) SouthAfrica 1(1977-83) South Africa 2 (1984-93) Australia Austria Belgium Canada Denmark Finland France Germany Iceland Italy Netherlands Norway 1 (1972-78) Norway 2 (1979-94) Spain 1 (1980-89) Spain 2 (1990-93) Sweden Switzerland United Kingdom United States 16.1 12.2 16.0 36.3 32.5 32.8 25.2 13.2 19.4 16.9 15.0 20.1 28.1 13.8 15.5 17.2 24.0 32.3 24.8 36.9 48.5 22.5 38.4 31.1 41.1 29.7 29.5 42.8 52.4 36.6 39.8 26.2 28.8 38.8 18.4 31.1 2.7 2.5 5.7 15.1 5.6 4.4 5.3 1.5 5.8 2.1 2.3 2.5 4.0 4.2 1.5 2.3 2.7 2.6 3.1 3.9 6.0 2.1 4.5 5.9 4.6 3.0 3.0 7.3 4.4 2.3 2.0 5.9 16.2 7.3 2.8 3.4 1.8 -5.3 -1.0 -4.4 -3.8 -5.0 -1.6 0.5 -1.2 -5.0 -3.2 -6.3 -1.7 -5.3 -1.9 -2.9 -0.7 -A.6 -5.6 -1.6 -3.8 -7.0 -3.2 -0.7 -2.6 -2.3 -1.4 -3.2 -11.2 -3.7 -4.1 -0.3 -3.3 -3.6 -4.6 0.0 -3.2 -3.2 2.5 1.3 8.1 2.4 3.7 5.8 2.2 2.1 2.3 2.2 1.7 1.6 5.0 1.4 1.7 3.8 1.3 2.7 1.8 1.7 3.2 2.1 3.2 4.7 1.9 1.2 1.3 1.9 2.3 2.6 3.0 2.3 2.5 4.4 0.5 2.6 1.4 8.1 9.0 3.4 5.7 19.0 1.0 2.6 5.2 3.3 3.5 12.4 2.8 6.2 1.6 3.6 1.5 9.9 9.9 17.1 16.4 7.1 30.1 31.7 18.2 8.3 22.1 8.0 11.1 17.9 22.7 18.8 7.9 12.6 24.6 16.2 13.4 17.5 1.5 0.6 1.5 3.5 0.5 0.2 0.6 0.9 0.7 0.9 1.8 0.4 0.9 0.2 0.6 0.4 0.6 3.7 2.3 1.6 0.9 2.7 2.7 2.4 1.1 1.4 2.2 3.4 1.3 1.4 1.1 2.8 6.9 1.8 8.7 1.2 1.0 -2.9 -2.8 -0.1 -0.7 -2.5 0.0 -0.2 0.1 -0.3 0.0 -2.7 0.0 -0.8 0.1 0.1 0.1 -0.9 -0.4 -1.0 -0.5 -0.6 -2.2 -0.1 -0.1 -0.6 -1.4 -0.1 -1.0 -0.9 -1.4 -0.9 -0.4 -1.1 -0.8 -0.6 -0.7 0.9 1.5 2.1 0.3 0.5 0.5 0.1 0.4 0.3 1.3 0.1 0.6 0.1 0.9 0.1 0.0 0.1 0.2 0.3 0.8 0.5 0.7 1.2 0.6 0.4 0.3 0.6 0.4 0.6 1.0 0.4 0.8 0.3 0.8 0.9 0.7 1.1 0.4 Note: Countries for which a sizeable discrepancy (over 5 percentage points) in government size was observable are presented in two sub-samples. Public Budgeting & Finance / Spring 1999 TABLE 2 Inter-Governmental Fiscal Indicators Argentina 1 Argentina 2 Bolivia Brazil 1 Brazil 2 Chile 1 Chile 2 Colombia Mexico Peru India Indonesia Malaysia Philippines Thailand 1 Thailand 2 South Africa 1 South Africa 2 Australia Austria Belgium Canada Denmark Finland France Germany Iceland Italy Netherlands Norway 1 Norway 2 Spain 1 Spain 2 Sweden Switzerland United Kingdom United States Sub-national Fiscal Autonomy Tax Autonomy Avrg. 82.2 83.3 52.6 54.8 48.3 40.7 32.1 39.7 78.2 8.7 45.8 15.4 35.1 23.3 53.5 16.3 16.5 32.8 52.0 33.7 56.1 42.9 47.7 42.7 54.4 82.3 13.2 6.7 46.8 48.1 48.4 31.0 58.6 54.6 25.5 48.2 St. Dev. 6.8 12.1 13.8 4.4 3.8 8.1 2.7 5.0 5.6 2.1 1.3 3.2 4.0 2.8 13.3 1.2 3.6 2.3 4.0 2.8 4.2 3.5 2.8 4.5 2.5 12.3 7.3 2.4 0.8 4.2 15.1 1.4 1.9 1.2 15.7 1.7 Non-Tax Autonomy Avrg. 17.6 15.9 35.1 13.0 15.9 15.9 36.7 8.6 15.9 17.7 11.6 5.9 25.2 5.1 9.5 30.9 25.8 17.5 20.7 7.7 14.1 8.1 17.1 18.5 21.5 13.4 8.5 13.4 11.9 15.5 8.5 17.3 21.4 17.3 23.0 St. Dev. 6.4 11.4 12.2 4.0 3.6 3.6 9.0 1.9 5.2 3.3 1.3 1.0 3.4 1.1 1.7 2.1 5.9 3.1 1.6 1.1 0.8 0.6 2.0 2.0 1.2 7.7 1.3 5.2 3.9 4.3 0.7 15.8 2.2 3.1 1.9 Sub-national Fiscal Dependency Avrg. 6.8 31.7 34.4 43.1 30.1 47.8 6.0 72.5 42.5 78.7 21.7 35.1 71.5 35.6 49.4 55.7 47.4 26.3 58.6 28.6 47.3 31.0 39.3 23.1 6.7 77.3 78.5 19.6 39.1 35.1 51.2 24.6 23.3 53.1 31.1 St. Dev. 4.4 2.1 2.1 9.9 8.2 4.5 4.4 3.7 2.0 3.7 3.9 4.0 3.2 14.9 1.1 8.8 5.0 3.5 3.3 2.9 3.7 3.3 5.6 2.2 0.7 6.3 5.4 4.7 1.1 18.3 18.3 1.9 1.6 4.4 2.6 Sub-national Spending Share Avrg. ! 33.4 42.7 17.0 31.7 37.3 3.2 8.0 28.1 16.1 17.7 45.4 11.7 18.0 10.1 19.1 7.9 28.5 21.8 40.7 30.8 12.0 61.0 45.3 39.3 17.9 42.7 21.2 20.6 57.2 38.7 32.1 19.5 38.0 39.4 54.4 26.0 44.1 5t. Dev. 3.2 4.0 4.6 2.2 3.8 0.7 1.0 1.8 5.8 4.2 1.3 1.5 1.8 2.3 3.2 1.8 1.9 4.5 1.0 0.9 1.1 12.2 1.8 0.8 5.4 1.9 5.3 2.2 0.4 0.4 0.6 4.7 17.0 3.7 2.2 2.6 1.9 Note: In the case of Argentina, tax and non-tax revenue figures include intergovernmental transfers. de Mello / Intergovernmental Fiscal Relations: Coordination Failures and Fiscal Outcomes seem to affect the central governments fiscal position, which suggests that fiscal decentralization may be a solution to the rather disappointing picture in Figure 1. However, this conclusion does not hold if attention is restricted to the subsample of developing countries, in which an increase in sub-national government spending (as a share of total government spending) tends to worsen the fiscal position of the central government (Panel B ) . This negative correlation reveals an interesting relationship between policy outcomes and fiscal decentralisation in developing countries, which will be examined in greater detail below. Intergovernmental Coordination Failures and Fiscal Outcomes Because coordination failures cannot be measured directly, their impact on fiscal outcomes can be estimated indirectly when proxies for the potential sources of coordi- nation failures are available. The estimating strategy here consists of regressing the central governments budget balance, measured as the ratio of the fiscal deficit to GDP, on a set of regressors of two types: (i) fiscal decentralisation indicators, which are expected to proxy for the potential sources of intergovernmental coordination failures; and (ii) a number of control variables which have become standard in the public finance literature.* The fiscal decentralisation indicators used here are as follows: • Sub-national government spending (C) measures the extent of fiscal decentralisation. A high sub-national share of total public sector spending is expected to increase the scope for coordi- nation failures in intergovernmental fiscal relations, given the larger amount of resources controlled by sub-national jurisdictions. • Sub-national tax autonomy (P). This variable measures the ability of sub-national govern- ments to finance spending in their jurisdictions through local revenue mobilisation, and is therefore likely to be a good proxy for moral hazards in decentralised policy making. • Sub-national dependency on intergovernmental transfers (TR), or vertical imbalances. This variable is a proxy for coordination failures due to common pool problems by, it defines the gap between sub-national expenditure functions and revenue capacity, or between the benefits and costs of government spending. The control variables used here are as follows:^ 1. Money creation (Am). The incorporation of money creation in the estimating equation serves a number of purposes. First, it may be argued that decentralisation may foster central bank independence and ensure arms length transactions between the government and the banking sector, by increasing transparency in the assignment of public sector functions, including that of the central bank.̂ ^ In this case, fiscal decentralisation may be conducive to mon- etary discipline. Second, if decentralised policy making leads to a deficit bias, fiscal imbalances may be financed by money creation. The deficit bias may be due to the need to finance unftinded transfers to sub-national governments; lack of control over sub-national spending; and soft budget constraints at the sub-national level, with im- PubUc Budgeting & Finance / Spring 1999 FIGURE 1 I •(5 m c E i/e rn o O c 0) O 1 1 0.5 0 • ( -0.5 -1 -1.5 -2 - -2.5 - -3 - Sub-national Government Size and Full Sample • • • • • * • • • » • • 5 10 15 20 ^ — * * ^ ^ / • Sub-national Government Size Fiscal 25 • • Position- 30 35 • de Mello / Intergovernmental Fiscal Relations: Coordination Failures and Fiscal Outcomes 11 FIGURE 2 O c ro ro cn c a> I (3 TO c o 2 0 ( -2 -4 - 0 -8 10 - 1 2 - Sub-national Government Size and Central Government Fiscal Position-Full Sample • } 1 1 A 1 1 1 \% •IO 15 20 - 25 • • • • • • • ^ ^ • • • • : • • • - • Sub-national Government Size 1 -H 30 * 35 1 T m -2 F -3 c o -4 S O -5 ro ^ -6 -8 Sub-national Government Size and Central Government Fiscal Position- Developing Country Sample Sub-national Government Size 20 12 Public Budgeting & Finance / Spring 1999 plicit bailouts to troubled government-owned financial institutions and sub-national governments. Also, because monetary policy is carried out by the central government, inflationary finance can be regarded as a tax levied by the center. As a result, an increase in the central governments deficit due to failures in intergovernmental fiscal relations can be collected by a rise in explicit taxes (financed by the center and not shared with sub-national governments), and a rise in the inflation tax. Third, the rate of money creation may be a good proxy for the interest rate, and hence the actual cost of financing fiscal imbalances and servicing the national debt. Finally, money creation may be an indicator of financial deepening: if domestic capital markets are shallow, the government may have few non-inflationary options to avoid lax monetary policy and finance fiscal imbalances. 2. GDP growth (Ay ). The rate of growth of the economy provides an indication of the cyclicality of flscal policy; fiscal imbalances tend to be smaller in periods of expansion as a result of increased revenues. On the other hand, GDP growth may also provide an indicator of volatility, and hence the ability of the government to cushion adverse domestic or external shock by increasing public spending counter-cyclically. 3. Terms of trade (77). Openness to foreign trade has become a standard control variable in government size equations.^ However, when the dependent variable is fiscal outcomes, rather than government spending as a share of GDP, international relative prices may be a better control variable.22 This is because tax and non-tax revenues may accrue to the government as a result of an improvement in the terms of trade. Quasi-fiscal revenues also accrue to the government as a result of an improve- ment in the terms of trade due to favourable exchange rate movements, particularly when government revenues are denominated in foreign currency and expenditures/ liabilities are denominated in domestic currency. This is the case of natural resource- exporting countries, for instance. 4. Age dependency ratio (Dep). The age dependency ratio proxies for the long-run social security liabilities of the public sector: the larger the dependent population relative to the total working-age population, the greater the demand for public sector welfare provision (primary education, health care, pensions, etc.), and the long-run welfare-related liabilities of the public sector. The basic structure of the regression model is as follows: (1) di, = ao + a\Gif -1- In equation (1), i indexes the countries in the panel, t denotes time, d^ is the central governments balance (budget deficit as a share of GDP), and e,, is an error term. Theory suggests that «] > 0 (due to intergovernmental coordination failures in gen- eral), a2 > 0 (due to moral hazards in decentralised policy making), 03 > 0 (due to common pool problems), 04 >< 0 (negative if deficits are monetised; and positive, if the variable captures debt-servicing costs), as < 0 (if fiscal policy is counter-cycli- cal), a6 < 0 (due to quasi-fiscal revenues), a, > 0 (due to the accumulation of welfare- related long-term liabilities). de Mello / Intergovernmental Fiscal Relations: Coordination Failures and Fiscal Outcomes 13 EVIDENCE All equations are estimated for a panel of thirty countries for which basic fiscal indicators are presented in Tables 1 and 2. The variables in the panel are constructed for five-year averages in the period 1970-95 to smooth out transitory fluctuations in the data. Preliminary descriptive statistics are provided in Tables Al and A2 in the Appendix. The use of panel analysis serves the purpose of combining the time series and the cross-sectional dimensions of the decentralization process, rather than simply exploring one of these two aspects separately. Because fiscal decentralization has evolved in different countries at different paces, particularly in developing countries, the time series dimension of the data deserves special attention. Crosssectional varia- tions in the data are more relevant in the case of more mature, established federations, particularly in the developed world, in which intergovemmental fiscal relations and budgetary institutions have changed less markedly over time. The results of the estimations are reported in Tables 3 to 5. For the full sample of thirty countries, the parameter estimates reported in Table 3 are in general correctly signed, of reasonable magnitudes, and robust to different model specifications. The preliminary findings reported in Models 1 and 2 provide prima facie evidence that fiscal outcomes are likely to be affected by coordination failures due to common pool and moral hazard problems, as hypothesised in previous sections.23 In Model 3, an interaction term was included in the regression to measure the combined impact of sub-national dependency and spending shares. In this case, the finding suggests that sub-national dependency has a more detrimental impact on fiscal outcomes when sub-national govemments are large …