Charles K. Coe (Author)
Publication date: 01/01/2007
Governmental and Nonprofit Financial Management
Charles K. Coe
About the Author
Charles K. Coe is professor in the Department of Public Administration in the School of Public and International Affairs, North Carolina State University. He began his public service in 1963 in the U.S. Navy. Upon graduation from Dartmouth College, he worked as an administrative assistant to the Mayor of Atlanta from 1967–68 as a VISTA volunteer. After receiving an M.P.A. at the University of Michigan, he worked in Grand Rapids, Michigan, as an administrative assistant to the city manager and budget officer from 1969–75. He then moved to Carl Vinson Institute of Government, University of Georgia, where he assisted local governments in Georgia from 1975–83 and earned a Doctorate in Public Administration. Since 1983 he has taught at North Carolina State University. Dr. Coe is the author of Public Financial Management (Prentice-Hall) and The Purchasing and Materials Management Handbook (Sheshunoff). His research on public budgeting, financial management, and productivity has appeared in Public Administration Review, State and Local Government Review, Public Performance and Management Review, and Public Budgeting & Finance.
Introduction to Public and Nonprofit Financial Management
This chapter examines the differences and similarities between governmental financial management and nonprofit financial management.
Financial management occurs over three fiscal years. In fiscal year 20X0 organizations budget for the upcoming fiscal year, 20X1. After the fiscal year begins, the budget is executed. Management carries out the governing board’s policy directives. Financial managers ensure that funds are well spent in the amounts and accounts budgeted, account for transactions, invest cash, purchase goods and services, manage inventories, borrow monies for short-term financing and long-term capital projects, and manage risks to persons and properties by means of safety management and insurance coverage. Finally, after the fiscal year ends, local governments and nonprofits engage the services of an independent certified public accountant (CPA) to conduct a financial audit.
NONPROFIT AND LOCAL GOVERNMENT PROFESSIONALISM
Large state, local, and nonprofit organizations typically have sound financial management systems staffed by professionals. However, small governments and nonprofits have small and relatively unsophisticated financial management systems. In 2002, according to the U.S. Census, there were 87,849 local governments, composed of 3,034 counties, 19,431 municipalities, 16,506 townships, 13,522 school districts, and 35,356 special districts. Most of the local governments were small: 53 percent of the counties and 94 percent of the municipalities had populations of fewer than 25,000. Indeed, 49 percent of the municipalities had populations of fewer than 1,000.
Similarly, nonprofits are mostly small. For instance, of 1.3 million public charities, 73 percent have budgets of less than $500,000 and only 4 percent have budgets of over $10 million. Small local units of government are usually more professional than their similarly sized nonprofit counterparts for five reasons. First, state laws regulate the financial management practices of local governments, specifying eligible investment instruments, conditions under which debt can be issued, and accounting and budgeting practices and requiring an annual post audit by an independent CPA. Nonprofits are not subject to statewide regulations.
Second, city and county managers typically have more professional preparation than nonprofit directors in like-sized organizations. Such managers commonly have master of public administration (MPA) degrees. In contrast, few universities offer either a master’s degree or undergraduate education expressly in nonprofit management.
Third, local government officials belong to statewide professional associations that provide training, technical assistance, and peer support. City and county managers belong to such associations, as do virtually all municipal and county department heads. No such affiliations are available to nonprofit managers.
Fourth, cities and counties belong to associations that lobby both state and federal governments, provide technical assistance, gather and disseminate useful information, and issue useful technical publications. Though statewide associations of nonprofits exist in most states, they do not offer the same range of services and support.
Fifth, cities and counties often belong to regional councils of government (COGs). COGs are especially important to small local units that have few, or no, planning staff. The staff of COGs develop master plans for both local units and the region.
FINANCIAL MANAGEMENT IN LOCAL GOVERNMENTS AND NONPROFITS
Both local governments and nonprofits perform all the financial management functions, but to different degrees and in different ways. This section discusses these distinctions with respect to each function. The remaining chapters of the book examine each of these areas in more detail.
The accounting practices of both governments and nonprofits are regulated by national accounting standards, but the standards differ. The Financial Accounting Standards Board (FASB) prescribes the accounting standards for nonprofits. The Governmental Accounting Standards Board (GASB) sets the standards for state and local governments. A fundamental difference in the standards is fund accounting. GASB requires that the governmental accounting system be organized around the basic accounting concept of a fund—a self-balancing set of accounts segregated to carry out specific activities. FASB, in contrast, does not require fund accounting.
A second fundamental difference is how local governments and nonprofits account for indirect, administrative costs. Nonprofits typically receive funding from different agencies, such as state and local governments, the federal government, foundations, private donations, and community organizations. These organizations, understandably, prefer that as much of the funds as possible be directly spent on client services, not general administration. Thus, nonprofits must justify to funding agencies the amount spent on indirect costs. Typically, a nonprofit’s external independent auditor must approve in writing the method used to allocate indirect costs. Governments, in contrast, are under no such obligation.
Finally, some states specify the chart of accounts that local units must use to account for transactions, but nonprofits are not subject to requirements regarding statewide accounts or procedures.
As stated earlier, many states require that their local units adopt an annual budget and set the date by which the budget must be adopted by the governing board. Few local governments, however, have a program-performance budgeting (PPB) system that reports expenditures by program and performance metrics. In contrast, a higher percentage of nonprofits have the more professional PPB system. Most nonprofits typically operate multiple programs, funded by multiple sources. As with indirect costs, funding agencies want reassurance that their grants or donations will be spent on the intended program. Moreover, they want to see what they are getting for their money; that is, how much service is being provided and how well.
Governments and nonprofits follow virtually the same purchasing practices. The principal difference is that states heavily regulate some local government purchasing procedures. Among the practices that states regulate are the preparation of specifications, minority goals, advertising of the letting of contracts, withdrawal of bids, acceptance of bids and proposals, project scheduling, and contract execution. By comparison, nonprofits are not subject to such regulation. Another distinction is that governments statutorily set bid limits, which are limits on purchases over which competitive bids must be sought. Nonprofits less frequently set such limits for themselves.
The fundamental difference between governments and nonprofits is that nonprofits may invest in any instrument, no matter how risky. States limit local governments to investment instruments that have little or no risk of loss of principal. For instance, local units cannot typically invest in equities (stocks). Most nonprofits typically have limited funds to invest and likewise avoid more risky investment options. However, nonprofits with larger reserves can and do invest in stocks, in which case they usually engage the services of an investment adviser.
Governments are legally able to issue tax-exempt bonds. Usually, only large local units issue bonds; smaller units, needing smaller amounts or not having a credit rating, borrow from banks. Nonprofits, of course, may not issue bonds. If they need funds to build or improve facilities, they borrow from banks, as would a private company or individual.
Local governments, regardless of size, have considerable public and employee liability risk exposure. For instance, they all have police, fire, public works, and recreation departments and jails. Moreover, counties, and some cities, have social service departments that provide services with considerable risk exposure, such as foster care and care to the disabled and to senior citizens. Some nonprofits likewise have considerable exposure, especially those that provide human services and services to youth. Other nonprofits have little public liability risk; for them, risk management is of little concern.
Most states require that local units, regardless of size, engage a CPA to conduct an independent financial audit of their accounting transactions at the end of the fiscal year. Not subjected to such a mandate, small nonprofits often avoid an audit, by either having a board member examine the books or engaging an auditor to undertake an examination less expensive and less detailed than a full audit.
Thus, governmental and nonprofit financial management are very similar with respect to some functions but very different regarding others. Where the differences are major, such as in accounting, this book discusses nonprofit and governmental practices separately. Where they are the same, or very similar, the book blends the discussion but highlights minor differences in practice.
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