The nonprofit sector is diverse and has a significant presence in the U.S. economy. Of the estimated 1.8 million tax-exempt organizations in fiscal year 2007, about 63 percent were public charities or foundations that benefited the broad public interest, and were referred to as 501(c)(3) organizations, and about 8 percent were social welfare organizations. Nonprofit organizations provide services in a wide variety of sectors, including policy areas such as health care, education, and human services. Approximately three-quarters of the revenues of 501(c)(3) entities that filed IRS Form 990 in 2005 were from entities within two subsectors. Public charities within the health subsector reported about $672.1 billion, or approximately 59 percent of the revenues reported, and nonprofit organizations within the education subsector reported about $188.2 billion, or approximately 16 percent. While the majority of nonprofit organizations individually have relatively small operating budgets, as a whole the nonprofit sector has a significant presence in the U.S. economy, according to researchers of the nonprofit sector. In 2005, nonprofit organizations that submitted Form 990 to the Internal Revenue Service (IRS) held an estimated $3.4 trillion in total assets and received $1.6 trillion in revenues. As we reported in 2007, in addition to representing a significant portion of the U.S. economy, the sector grew substantially from May 2000 to May 2006. Specifically, researchers indicated that the number of registered public charities, a large subset of all nonprofit organizations, grew over 30 percent from about 646,000 to about 851,000, although organizations that have gone out of existence may have been included in those numbers. In 2005, we reported that the nonprofit sector accounted for over 9.6 million employees in 2002, which was about 9 percent of the civilian workforce. As we have previously reported, the federal government is increasingly partnering with nonprofit organizations because nonprofits bring many strengths, such as flexibility to respond to needs and access to those needing services. Federal agency officials we spoke with reported that they may target nonprofit organizations when authorized by program regulations or when nonprofit organizations are the best source of a particular service, but they generally do not focus on the profit-making status of partners when distributing funding. For example, the Department of Labor is authorized by law to provide grants to public and nonprofit private organizations as part of its Senior Community Service Employment Program. Further, while the Department of Housing and Urban Development does not specifically target Emergency Shelter Grant Program funding to nonprofit organizations, a large portion of this funding reaches nonprofits because these organizations play a prominent role in delivering emergency shelter services for the homeless. The federal government uses a variety of funding mechanisms to achieve national priorities through partnerships with nonfederal parties such as nonprofit organizations. Federal grants and cooperative agreements are forms of assistance authorized by statute in which a federal agency transfers something of value, such as money or property, to a party for a purpose, undertaking, or activity of the grantee that the government has chosen to assist. Federal contracts are mutually binding legal relationships obligating the seller, in this case the nonprofit entity, to furnish the supplies or services, and the buyer, in this case the government, to pay for them. The federal government typically uses contracts (rather than grants) as a mechanism when the principle purpose of the funded activity is to provide something for the direct benefit of the federal government. For example, contracts can be used to procure independent evaluations of programs, to conduct research for agency missions, or to buy information technology services for an agency. Federal credit and insurance programs, which include direct loans and loan guarantees, provide an alternative to direct spending and can fill market gaps when private lending and insurance companies cannot meet economic demands. Tax expenditures are reductions in tax liabilities that result from preferential provisions, such as exclusions, credits, and deductions. They result in revenue forgone by the federal government and create incentives for certain behaviors, such as making charitable donations to nonprofit organizations. Fee-for-service, or voucher-type, mechanisms provide funding to organizations through the ultimate recipient of services. For example, under a fee-for-service mechanism, physicians may receive payments for each service provided (such as an office visit). Several cross-governmental databases provide information on federal funding through the mechanisms described above. The Federal Assistance Award Data System (FAADS) provides financial data on grants and other forms of assistance that are made by the federal government, whereas the Federal Procurement Data System—Next Generation (FPDS-NG) collects federal procurement data. OMB is responsible for USAspending.gov, a Web site mandated by the Federal Funding Accountability and Transparency Act of 2006 (FFATA) that establishes a single searchable location for financial information on grants, contracts, credit, and fee-for- service payments. Also, the IRS Form 990 provides detailed financial information on tax-exempt entities with annual gross receipts greater than $25,000. In addition, the Federal Audit Clearinghouse provides information on nonprofit organizations and other nonfederal entities that spend more than $500,000 a year in federal awards. Treasury’s Office of Tax Analysis lists tax expenditures and estimates their cost, as reported by OMB in the President’s Budget submission. Federal agencies partnering with nonprofit organizations use several different funding mechanisms, and relationships between nonprofit organizations and federal agencies vary. The type of funding mechanism used determines the level of federal influence over nonprofit selection and oversight of performance. Nonprofit organizations sometimes work directly with federal agencies as grantees and contractors, in a relatively straightforward relationship. Our analysis of the 2006 data on federal funding to nonprofit organizations indicated that grants were provided to nonprofits directly under about 700 different programs. Types of activities funded through direct grants to nonprofit organizations included social services and research. For example: The National Institutes of Health provide grants for extramural research to accomplish its mission related to public health needs. About 84 percent of its budget in fiscal year 2007 supported extramural research by researchers at various entities, including nonprofit higher- education institutions, research institutes, and hospitals. The Administration for Children and Families in the Department of Health and Human Services provides Head Start grants to nonprofit as well as for-profit entities. Public and private nonprofit and for-profit agencies can receive direct grants to provide educational, health, nutritional, and other services to low-income children and families. The Senior Community Service Employment Program, funded by the Department of Labor’s Employment and Training Administration, provides grants to nonprofit organizations to provide subsidized, part- time work-based training to older workers through employment in the community service sector. Under this program, nonprofit organizations can also be the beneficiary of this subsidized labor. Federal agencies also contract directly with nonprofit organizations to provide goods or services for the direct benefit of the federal government. Contracts are tracked in FPDS-NG, which we found to be somewhat unreliable in categorizing entities as nonprofit, although suitable for providing some order of magnitude. (See results of our reliability analysis in app. II.) It showed that of the federal contracts provided to nonprofit organizations in fiscal year 2006, about two-thirds were awarded by the Department of Energy and the Department of Defense and about one-tenth by the Department of Health and Human Services. Even so, the percentage of dollars contracted to nonprofit organizations within these agencies is relatively small. For example, nonprofit contracts constituted only 1 percent of the Department of Defense’s total 2006 contract dollars, while about 10 percent of the Department of Health and Human Services’ contract dollars were awarded to nonprofit organizations. Some programs contract with nonprofit organizations to help administer programs. For example, the Centers for Medicare & Medicaid Services contract with quality-improvement organizations, which can be nonprofit organizations, to monitor provider performance. Nonprofit organizations also receive grants indirectly through other levels of government, or as subgrantees of other grantees, and are sometimes subcontractors to other federal contractors. Some federal programs are set up as large grants to states, with the expectation that they will then be further disbursed for local program implementation, and nonprofit organizations are sometimes used for further service delivery. For example: The Department of Health and Human Services’ Administration for Children and Families oversees the Social Services Block Grant, providing funds to states to furnish social services to residents. Depending on the state, nonprofit organizations compete with other organizations for these funds to provide a wide range of social services, which can include daycare, protective services, adoption, case management, health-related services, and transportation. Similarly, the U.S. Department of Agriculture’s Food and Nutrition Service provides grants to state agencies under its Child and Adult Care Food Program. States reimburse institutions and organizations that provide nutritious meals and snacks to eligible children and adults enrolled for care at participating child and adult day care homes and centers, emergency shelters, and after-school care programs. Both the sites providing the nutrition service and the organizations that manage site operations, keep records, and submit claims are sometimes nonprofit organizations. Nonprofit organizations can also be subcontractors to other federal contractors. For example, a nonprofit university performing research under a federal contract could subcontract with another nonprofit university to complete a portion of the research where its researchers have a particular specialty. Federal funds also reach nonprofit organizations through other more complex routes, such as through reimbursement for fees that they charge their clients. The Medicare program is a significant example of such a program. Individuals aged 65 and older as well as certain disabled individuals seek health care at various facilities, some of which are nonprofit hospitals, nursing facilities, and managed care organizations. The facility is then paid by the Medicare program. Other programs involving direct payments for services in which nonprofit organizations can be recipients include voucher programs. These allow the beneficiary of a program to choose the source of services, while the services are paid by the program. The Pell Grant program, for example, operates under this principle. It provides need-based grants to low-income students to promote access to postsecondary education.