Nonprofit Revenue Portfolios and Exposure to Business Cycle Risk

Public sector organizations frequently face increased demand for their services during economic downturns at the same time that their revenues decline. This problem is particularly acute for nonprofit organizations, who cannot rely on involuntary taxation in the same manner that governments can. In this paper, we document the business cycle risk that nonprofit organizations are exposed to, paying particular attention to the extent that various types of nonprofit revenue covary with economic conditions. We find that aggregate donation revenue is procyclical while program revenue is counter-cyclical. Furthermore, nonprofits that expand their share of revenues from donations will cause their revenue portfolio to become more procyclical, while those that expand their share of revenues from program revenue will experience the opposite. The results highlight a previously unexamined source of risk for nonprofits and emphasize the need for reserve policies that are attentive to organizations’ exposure to economic conditions.