Supporting Innovation Not Stagnation

Posted on by Nina Stack, President, Council of New Jersey Grantmakers

Several years ago, a toxic trend began to take hold where giving to nonprofits was concerned. Unfortunately that trend continues today. What this means, especially in the era of the Great Recession, is that excellent organizations that are making a real difference in lives and communities are stymied. And honestly, no corporate executive would tell you it is an appropriate way to run a business. What is it?

Project Only funding.

Perhaps it took root as more donors began to give but didn’t understand what it takes to run an effective nonprofit. Or maybe it was in response to some bad or incompetent apples running nonprofits. I’m not sure. The result, sadly, is that a large number of donors and foundations began to insist that their donations and grants only go to specific projects or programs out of a fear their funding wouldn’t have impact. More and more we saw that no money was to be directed toward management or general operations. This means no money for rent, electric bills, audits, or key staff implementing the core mission activities that may not be directly involved with the special project. It also means no support for exploration or innovation – think corporate R&D. Rather, you can think of it as the “nonprofit starvation cycle” a phrase coined by the folks at Bridgespan.

A few years ago I saw the futility of this approach firsthand during a workshop on how to read a potential grantee’s audit.  Audits are expensive. For a New Jersey organization with a budget between $800K and $1 million, a good audit will cost at least $8,000. If the group gets a lot of government funding it could be far more. The workshop presenter talked about the importance of a solid audit for all donors doing their due diligence. During the workshop, a foundation program officer was complaining about the poor quality of the audits they receive from grantees.  A few minutes later that same program officer spoke proudly about how the foundation only provides project support and does not allow any of its funding to be used toward indirect costs or general operating. That means zip for the audit costs. I pointed out the correlation between the two and suggested perhaps the foundation might want to start allocating at least some of a project grant to be used toward the organization’s indirect costs.

So, how much of a nonprofit’s budget should be spent on management, general operations and fundraising? The truth is that it depends on the organization.  Regardless of what anyone will tell you, there is no set guide or percentage. There can’t possibly be. Even some of the charity “watchdogs” have acknowledged the limitations of trying to assign percentage ratios to an overall organization’s total budget.

Charity Lookup

And now here in New Jersey we have Charity Lookup – a new “smart phone app” released by the New Jersey Division of Consumer Affairs a few weeks ago. If you haven’t checked out this new resource I encourage you to do so. The app is tied to the financial reports that nonprofits of a certain size must file annually with NJ Charities Registration. These aren’t detailed reports, especially when compared to reviewing an organization’s full IRS Form 990 on, but it does let you know if the organization is current in its reporting to the State of NJ. This is an important signal for any donor. If the nonprofit is not current, donors will want to get a full explanation before funding.

But, as our colleague at the Center for Non-profits pointed out in its statement after the release: “the app reflects the Division’s continued bias that all administrative, fundraising and overhead expenses are somehow inherently ‘bad’ and in no way contribute to a charity’s good work.”

Where Watchdogs Fall Short

You see, what the app doesn’t do is help a donor understand the impact the nonprofit is having and its success in meeting its mission. This is the recurring challenge with all the watchdog sites that we have. Charity Navigator, Guidestar, Wise Giving Alliance—they all provide information that is helpful in understanding the validity of a charity BUT that data are just part of a much larger puzzle. None of them illustrates whether an organization is achieving the outcomes it seeks. None of them shows how the group is doing in pursuing its core mission activity. A few have announced that they are working to incorporate some element of impact more fully into their metrics. Unfortunately, many of these efforts are either lacking in specifics or are very much in their infancy.

Even more frustrating, despite implicitly acknowledging the shortcomings of doing so, some of these sites continue to propagate the idea that effectiveness is determined by the percentage of money spent on programs versus management or fundraising.  In fact, Charity Navigator just released its annual list of cities with the “highest performing” nonprofits based on their criteria of budget allocation and transparency of financials. One has to ask: how can you determine a high performing nonprofit when the only criteria being considered are the budget allocations and how much financial information is posted on the organization’s website? Shouldn’t performance and effectiveness be tied to how many students are ready for college or the workforce? Or how more people now have access to healthy food? How about audiences that experience an acclaimed performance that inspires?

Invest in Infrastructure

Every corporate leader will tell you that investment in the business’ infrastructure is essential and even critical to achieving the business’ core goals. That is no different whether the business is tax-exempt or a for profit corporation. For a nonprofit that means investing in its core mission. It is time to focus on the outcomes rather than arbitrary spending percentages that rarely have any correlation to the quality and impact of the work.

Nina Stack is President of the Council of New Jersey Grantmakers, the statewide association of more than 120 funding organizations working in New Jersey. She also serves as Chair of the Forum of Regional Association of Grantmakers, a 33-member network serving more than 4,000 foundations, corporations and other donors across the country.

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7 Responses to Supporting Innovation Not Stagnation

  1. Nicole says:

    Thank you so much for this article. I have been struggling to get my non-profit off the ground for three years. My co-director and I have worked on a volunteer basis, continuing to create and administer programs and projects and raise all of our own money for rent and bills through events and fundraising, but never seem to get our footing on admin expenses through grants. Thank you for highlighting this issue within the non-profit world and for offering NJ non-profits the opportunity to apply for General Operating Support funding through your foundation. A great article!

  2. This is a fabulous post that is full of truth. Thank you, Nina, for sharing your thoughts on this very important subject. While project support is important, equally important, or moreso, is support of the organization’s infrastructure and long-term planning.

    Thanks, again.

    Cephas Bowles
    Newark Public Radio, Inc.

  3. Thank you for being so honest. I applaud this very truthful posting! How true it is that General Operating Support is what we(not for profits) truly need from funders to be creatively fulfilling our Missions and expanding upon the ways we go about doing so BUT as pointed out in this post, it has been clear the past several years…funders/donors want to fund NEW projects and programming not the day to day operations that make you what you are. I often think of it like a painting….they don’t want to pay for the supplies to paint the painting, ie canvas, oils and turpentine or a salary to the artist… But will pay for the frame or it could be thought of as a person, they don’t want to pay for the healthy food a person needs to eat to be well or a basic set of clothes but would gladly pay for some nice gold jewelry. Maybe these comparisons are not spot on, as new projects and programs often are innovative and simply amazingly successful and we are very thankful to the funders/donors for the project support they give…but the fact remains GOS expenses are the support structure that makes them happen. The logic can become baffling and discouraging. This topic was brought up at the NJ Association of Museums Conference on Monday with the concern that it is causing not for profits/Museums to stray from their missions they are so passionate about in search of needed funds. The questions remain: How can this trend begin to change? And to be proactive…Is there anything a not for profit can do to help stop and maybe even help reverse this trend?

    Catherine Clark
    Monmouth Museum
    Sent from iPhone

  4. Thank you, Nina, for sending this strong message that so many funders of all stripes need to hear! There are too few of them that truly understand the need for and value of general operating support. Ever more narrowly focused program support leads many non-profits down the perilous path of “chasing the money” by developing programs that fit funding criteria first and mission a distant second. In their desperation, they end up spending precious staff hours developing and managing new programs in order to squeeze a few drops of extra income out of them at best, deceiving themselves and their funders at worst. Your message is one that needs to be widely shared.

  5. Nina, This is a well argued and passionate post. We at Grantmakers for Effective Organizations couldn’t agree more! Hopefully with a collective effort, we can reverse the trend of funding that doesn’t support the appropriate overhead and administrative costs that all organizations so desperately need. Thanks for adding your voice to the effort.
    Kathleen Enright
    President and CEO

  6. […] June, Nina Stack of the Council of New Jersey Grantmakers wrote a blog post (“Supporting Innovation, Not Stagnation“) urging the philanthropic sector to understand the need and impact of general operating […]

  7. […] have basically required charities to discourage donors from giving unrestricted gifts. If you read my last post on the Dodge Blog, you know this is a big issue as far as I’m concerned. Unrestricted money is […]

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