The MacArthur Foundation will nearly double the amount it pays to cover overhead costs for most of its grantees beginning next year, a move that stems from a pledge made in September by the Chicago grant maker and four other foundations to help the defray the costs of things like human resources, fundraising, and accounting.
The increase is in response to long-running frustration among nonprofits that many foundations fail to consider essential expenses of running an organization when they award a grant. The Ford, Hewlett, Open Society, and Packard foundations in September joined MacArthur in a commitment to change their grant-making practices.
Under former President Julia Stasch, MacArthur studied the need for a new policy. The increased earmark for indirect costs is being overseen by her successor, John Palfrey.
Palfrey on Monday wrote in a blog post that he hoped the group of foundations would lead to “destigmatize and correct misconceptions” about overhead expenses.
“Basic expenses are not only necessary to carry out the work but to grow and increase the work,” of nonprofits. For years MacArthur’s practice has been to budget 15 percent of each grant to cover such costs. Next year it will provide 29 percent. The increase will not extend to grantees that receive general operating support, grants to endowments, or grants to large, well-established organizations for the support of a separately managed center.
For instance a grant to a think tank would not be eligible to claim indirect costs if the money was designated for a specific policy center located within the institution.
The increase will affect 80 percent of MacArthur’s grants.
MacArthur, which makes more than $320 million in grants each year, devised the plan after a study of about 136,000 organizations’ Form 990 Internal Revenue Service filings. Two consulting firms the foundation hired rated nonprofits based on their liquid unrestricted net assets, measuring how many months each organization could pay its bills.
Those in the top quartile generally listed indirect expenses, such as administrative, technology, and fundraising, of about 29 percent of their budget.
Setting the Benchmark
MacArthur’s new policy, which will be applied to domestic and international grantees, is designed to reflect what financially stable organizations do in practice, said Valerie Chang, the managing director of programs.
“We believe stronger organizations will have the ability to carry out their work more effectively,” she said.
But, she cautioned, the added support for indirect costs alone won’t guarantee the financial health of a grantee. Chang said the foundation will continue to ask grantees if the change meets their needs.
A 2017 report by Bridgespan found that 42 percent of nonprofits that received grants from at least two of the nation’s 15 largest foundations had less than three months’ worth of cash on hand.
Grant-Making Budget
MacArthur said the increase in indirect-cost support would not result in an increase in its overall grant-making budget, raising the likelihood that grants will be reduced in size or the number of grants will shrink.
The foundation isn’t making a “blanket adjustment” that requires program officers to reduce the size of grants or cull grantees from the list of organizations MacArthur supports, said Chantell Johnson, MacArthur’s managing director of evaluation. “I think it’s going to be much more nuanced and complicated than that,” she said. The first rule, she added, will be to “do no harm and do what’s best for the grantee.”
MacArthur’s new policy defines project costs as those that apply only to a specific project, that the nonprofit would not incur if the project did not exist. Shared costs, according to the new policy, are those that can be spread across several programs. An example of a shared cost is one that pays a portion of a nonprofit’s rent or utilities if those expenses are directly tied to the completion of the project.
The foundation’s 29 percent earmark for “indirect-cost recovery” goes to expenses that are not included in specific or shared project cost categories but that are necessary for an organization to run smoothly, including money for fundraising, tech support, bank fees, board meetings, and human resources.
By providing a definition of each of those budgeting categories, MacArthur hopes to push nonprofits toward accepting a standard definition of overhead support. That won’t happen right away, Chang said, but in the meantime, the definitions and increased budget could help MacArthur’s grantees ask for the level of support they truly need.
“There were times when organizations weren’t quite clear how to think about their expenses and what constituted an indirect cost for them,” she said.
Chang also said that many nonprofits felt they couldn’t be forthcoming about their indirect costs because they felt pressure to demonstrate low overhead.
Varying Approaches
Each of the five grant makers that committed to helping grantees contend with the true cost of running their operations views their response as a process rather than a quick fix.
At Ford, more grants are given to cover general operations. Three years ago, 36 percent of grants went to general support; today that figure is 71 percent. For project grants, Ford has raised indirect-cost allocations from 10 percent of the grant to at least 20 percent.
Ford and the Open Society foundations are supporting an effort to develop standard methods to account for indirect costs. Open Society two years ago doubled the minimum it allocates to indirect costs to 20 percent and will go above that on a case-by-case basis, according to Thomas Hilbink, director of the philanthropy’s grant making support group.
The Packard Foundation said it continues to participate in the collaborative with the other foundations to learn more about the issue. According to Linda Baker, the foundation’s director of organizational effectiveness, Packard next year will update its grant-proposal guidelines to state that it does not have a cap on indirect costs (except for grants made to universities).
The California grant maker will also increase training for its staff on the matter and encourage grantees to include the full costs of their proposal so indirect costs can be properly identified.
Most Hewlett grants provide for general operating support, according to an August internet post co-authored by Larry Kramer, the foundation’s president. Project grants don’t provide for a set level of indirect costs. Rather, that amount is negotiated between the foundation staff and the grantee. (The Hewlett Foundation is a financial supporter of the Chronicle of Philanthropy.)
Last year Hewlett added a question about indirect costs in a survey for its Grantee Perception Report, which is conducted by the Center for Effective Philanthropy. More than one-third of Hewlett’s grantees said their project grant didn’t cover indirect costs, and 11 percent said the grant didn’t even cover all specific, direct costs.
According to Kramer, a predetermined formula to cover overhead fails to address the complex universe of grantee activity. Instead, Hewlett would like to work with grantees to determine the true cost of their operations. The foundation will ask grantees about indirect costs again for this year’s Grantee Perception Report and plans to give its staff guidance early next year on how to meet grantees’ financial needs.
Alex Daniels covers foundations, donor-advised funds, fundraising research, and tax issues for the Chronicle. He recently wrote about a $100 million grant from the Lego Foundation for play-based educational programs; the distribution of $1 billion to four research institutions ; and grant making that gives grantees more power in decision-making. Email Alex or follow him on Twitter .
