The authors identify the key organizational and environmental characteristics that influence the effectiveness and efficiency of publicly funded service organizations. In a study of 40 community mental health centers (CMHCs), they used fulfillment of community needs as a measure of effectiveness and utilization of various services as a measure of efficiency. The results indicate that client educational status, state facility utilization, minority population, personnel expense, management type, and board composition affect need fulfillment. The study also illuminates the relationship between efficiency and effectiveness of publicly funded service organizations. The findings suggest that the allocation of resources to these organizations from local, state, and federal governments tends to be based on the extent of unmet needs for services. That is, the less the publicly funded service organization meets community needs, the more government funds are allocated to meet the needs. If the unmet needs that stimulate higher levels of funding actually reflect inefficiency, the inverse relationship between effectiveness and efficiency suggests that the government's resource allocation may not be based on performance, but may in fact be rewarding inefficiency. The findings suggest that legitimacy does not enhance efficiency and that legitimacy and efficiency may be entirely independent, which is consistent with institutional theory. The study results will be of practical use to community leaders, taxpayers, consumer advocates, regulatory agencies, and managers of community mental health organizations. [ABSTRACT FROM AUTHOR]