In an unusual move, five of America’s wealthiest foundations have joined forces to do more to help grantees pay for rent, decent wages, technology, and other overhead.
In making their announcement today, the foundation leaders said they were embarking on a major campaign to encourage all other grant makers to join them to help cover essential operating costs.
The heads of Ford, Hewlett, MacArthur, Open Society, and Packard said they had spent two years studying the challenges faced by nonprofits and learned that many of the organizations they supported — including large, prominent, household-name organizations — face major deficits because of stingy policies that provide just a sliver of the money they need to operate and run projects.
Julia Stasch, who last week stepped down as head of the John D. and Catherine T. MacArthur Foundation, said the presidents hoped that by setting an example — and getting others to join — they would “destigmatize” overhead expenses “and make sure everybody understands that they are an essential cost not only of doing business but of growing a business and making investments in infrastructure and increasing impact.”
Most important, she said, “the more that foundations pay constructive attention to this issue, the stronger the social sector as a whole will be.”
Changing the way foundation money is distributed to focus on overhead will be a long and uphill battle.
Among the foundations making the announcement, grants cover just half of a typical grantee’s overhead costs, on average. In addition, a 2017 Bridgespan analysis of 274 nonprofits that received grants from two or more of the 15 largest U.S. foundations revealed that 42 percent had less than three months’ worth of cash on hand.
Doing more to cover overhead could lead to significant new spending by the foundations or fewer but bigger grants. The presidents said they don’t yet know how much it will cost to carry out their efforts so they haven’t yet decided how they will fit them into their annual grant-making budgets.
The five foundations involved in today’s announcement hold combined assets of $45.8 billion, or 5.3 percent of the assets held by all of the more than 86,200 foundations in the United States.
The effort is fundamentally good news that some of America’s most powerful grant makers are focusing on fixing the problem of underfunding nonprofit overhead, said Jacob Harold, the executive vice president of Candid, a group recently formed by the merger of GuideStar and the Foundation Center.
“It is a reflection of an increasing awareness among larger funders that there are details to their practices that have immense consequences for grantees and their work,” said Harold, who used to oversaw effective-philanthropy grants at the Hewlett Foundation. “What might seem like a minor policy decision, when it’s replicated over a number of years, does change the dynamics of the marketplace.”
‘We Kid Ourselves’
Darren Walker, who leads the Ford Foundation, said the presidents started meeting in the fall of 2016 and have been getting together both in person and on conference calls to weigh the strengths and weaknesses of their foundations’ different approaches to supporting grantees’ administrative, overhead, and project costs.
Unlike many other foundations, which don’t provide any overhead subsidies, most of the five were providing such dollars but realized it was not enough.
“We funders like to think that we are fair in our funding in terms of administrative costs, overhead, etc., when in fact we kid ourselves,” said Walker. “We’re not being honest with ourselves if we think that [paying] 10 percent of overhead actually covers the true administration of our project grants.”
The five foundation CEOs explored how their institutions could lead the way in providing charities with grants that include funding for needs other than those directly related to a specific program. They selected Bridgespan, a nonprofit consulting group, to advise them because it had been studying the persistent underfunding of grantees for at least a decade. (A 2009 report famously dubbed the issue the “starvation cycle.”)
Bridgespan helped the presidents analyze their grant-making practices by studying a group of the five foundations’ grantees.
(The foundations also asked Bridgespan to produce a 16-page supplement that appears in the September issue of the Chronicle unrelated to this article, which was reported and written independently by the Chronicle’s newsroom.)
The five leaders didn’t come away from their research and deliberations with an agreement on a common approach to helping nonprofits shoulder their overhead costs, said Michael Etzel, a partner at Bridgespan who worked with the foundation executives.
“There is not one crisply articulated single solution here,” said Etzel. “Each of the foundations is proceeding in a slightly different way in terms of how it’s considering implementing changes to its practice.”
That comes as no surprise, he said, given that foundations have different grant-making calendars, grant-renewal cycles, and internal processes that are built into the ways they choose grantees and award money.
Exploring Solutions
With such distinctions in mind, the five leaders set out to explore multiple solutions. The result was a menu of six grant-making approaches designed to be adaptable to accommodate the varied ways foundations and nonprofits work together yet provide enough standardization that the process will be transparent.
Among all six options, which include paying a flat fee that covers operating costs or money earmarked for growth, such as building new facilities, the overarching goal is to ensure all grants cover a nonprofit’s actual costs and avoid harming a grantee’s financial health, Etzel said.
Above all else, that is good news for grantees, said Phil Buchanan, who leads the Center for Effective Philanthropy, an organization that surveys foundation grantees to learn what they think about the approaches taken by specific grant makers.
He said the increased focus on awarding more unrestricted grants is an important development because such grants give nonprofits badly needed flexibility to carry out their missions.
“What nonprofit leaders really want is multiyear significant general operating support that they can use to further their organization’s objectives, and it doesn’t make sense that it’s so difficult to get that kind of funding,” said Buchanan.
Experimentation Phase
All five foundations plan to try different approaches over the coming months.
Hewlett has started out by announcing a new grant policy last month, which Larry Kramer, the foundation’s president, said outlines only general plans for the types of funding Hewlett will provide.
While about 70 percent of Hewlett’s grants are unrestricted, Kramer said his staff is fleshing out how it will proceed. (The Hewlett Foundation is a financial supporter of the Chronicle of Philanthropy.)
“One of the nice things about having multiple programs is we do a lot of natural experiments internally, watching what they do and staying in constant conversation with them,” said Kramer. “We’ll experiment with different consultants on how to help both our staff and grantees learn what they need to know; we want to do a lot of experimentation for a while and see how to do this well.”
Walker said while Ford doubled the share of overhead funding, it provided its grantees from 10 percent to 20 percent in 2015 and later started a new effort to provide a total of $1 billion in general operating support over five years to about 300 grantees fighting inequality. But, he added, much more needs to be done. He said he will consult with his colleagues with the goal of putting a plan in place next year.
How Inadequate Grants Can Lead to Nonprofits’ Financial Woes
An analysis of 274 nonprofits that received grants from two or more of the 15 largest U.S. foundations found that 42 percent had less than three months’ worth of cash on hand.
Talking to Grantees
At MacArthur, Stasch said it will be up to her successor, John Palfrey, to decide how the foundation will develop its grant-making practices. She said there is much to consider, including whether increasing the amount of more flexible grants will affect the total number of grants MacArthur can make.
Stasch said she hopes an increased emphasis on directing more grant money to overhead costs won’t deter foundations from making project-based grants. She said the foundation presidents talked about potential issues associated with giving the impression that the only way to fix the problem of underfunding is to simply make all grants unrestricted.
Stasch said an overhead grant is not going to help when, for example, a foundation wants to support a university or a think-tank researcher’s project. The foundation may want to contribute to that researcher’s body of work but may not want to pay part of the university’s or think tank’s overhead costs.
Positive Consequences
Philanthropy experts say the effort led by the five presidents is a crucial development given the expenses charities must shoulder when carrying out their missions. The long-term outcome of the effort could also help grantees in other ways by changing how all grant makers, not just foundations, think about charitable support.
Kathleen Enright, chief executive of the Council on Foundations, an organization that represents grant makers, said she hopes the new effort will influence individual and corporate donors as well as other foundations. She said many philanthropists and businesses have mostly shied away from such support as some watchdog groups have suggested many charities’ overhead costs were excessive.
Enright said she also hopes this effort will eventually influence government grant makers to commit to giving to help charities pay a bigger share of overhead costs. For that to happen, though, she said foundations and individuals donors must be first in the effort to embrace giving to cover charities’ essential operating costs.
For giving behavior to truly change among all types of donors, Enright says, nonprofit leaders must start stressing publicly and vigorously that successful nonprofits can stay financially healthy only when they have donors who are flexible in their giving.
“We in the nonprofit sector who are fundraising need to change our approach,” she said. “The more sophisticated that donors get, the more likely they are to understand what it takes to run a strong, healthy nonprofit organization and that only funding programs is not helping to achieve that end.”
