Private funders should fund full project costs too

There is an opportunity that is being overlooked as we identify and discuss the strains on the human services sector that led to the downfall of FEGS. As we challenge government to fund the full costs of the services they hand off to nonprofits, we should also challenge private grantmakers to fund the full cost of the nonprofit programs they sponsor.

When foundations, corporations and individual philanthropists sponsor projects that nonprofits implement, they should allow more of the granted money to cover administrative as well as direct expenses. Underfunded project grants starve nonprofits just as effectively as underfunded government contracts.

Let’s recall that these project grants help private funders move the needle on the causes they care about the most, and help them achieve their most targeted, socially responsible agenda items – from building financial skills among low-income youth in a certain geographic area to innovating new forms of therapy for individuals with special needs. They help nonprofits, who have the best understanding of the clients they serve, respond to the most pressing needs of their communities and design and implement programs that are often more targeted, informed, ground-breaking and sometimes riskier than those that government will fund.

However, costs like building an endowment, paying competitive salaries, capital improvements and equipment purchases – often disparaged and labeled “overhead” or “indirect costs” – are not sufficiently supported within government contracts or project grants, even though they are essential to an organization’s sustainability and ability to achieve its promised outcomes.

Development directors at nonprofits also increasingly struggle to find general operating dollars. You often hear that general operating dollars are not “sexy,” because a foundation wants their name affiliated with direct outcomes like increasing graduation rates by x percent or feeding a certain number of homeless individuals annually. Helping to fund the salary of the HR associate who makes sure the part-time college counselor gets paid for the hours she works, or helping an office upgrade its technology to run the software that helps track outcomes on homeless individuals is not as appealing. But there has got to be some marketable appeal to making the kinds of investments that help guarantee that a homeless shelter or after-school program will be around to support its community in an effective and meaningful way for the foreseeable future.

Nonprofits are just as concerned about being sustainable as funders are. Many have explored or are exploring ways to incorporate additional revenue streams – because no one wants to run themselves out of business. Nor do nonprofits expect that one funder should be asked to support all of their administrative costs; that would be too risky for all parties involved. But some programs will not survive unless the organizations that run them are supported more deeply. We must encourage funders to allow nonprofits to submit a line for indirect costs in every project budget and avoid the practice of limiting that line to 10 percent of program expenses. Nonprofits, who are juggling numerous contracts and grants across myriad programs, know best which structural gaps need to be supported, and at what amount, in order to best provide program services. They must be freed to negotiate an indirect cost rate in their project budgets that is realistic and inclusive of all real expenses, including overhead and administrative costs. Funders also need to be encouraged to offer more general operating grants providing the flexible dollars that can be used to shore up an organization’s stability, which sometimes includes helping to fill the gaps left by underfunded government contracts.

Moving forward

The movement to support the full cost of projects is currently experiencing a bit of a renaissance in philanthropic circles. Foundations are increasingly distancing themselves from relying on the “overhead ratio” – which glamorizes statements like: “Ninety cents of every dollar goes directly towards programs” – as the measure of a nonprofit’s success. Private funders are recognizing that a nonprofit’s ability to operate cheaply does not equate to its ability to operate well. More grantmakers are also recognizing that an organization that exists on 10 cents of every dollar may not have what it needs to produce impactful programming and maintain itself.

Just this month, the PIMCO Foundation in California decided to increase its allowable overhead rate to 25 percent. In New York, no less a philanthropic power than the Ford Foundation’s President Darren Walker declared: “Our policy of 10 percent overhead on project grants in no way allows for covering the actual costs to administer a project. And to be honest, we’ve known it.” They promptly doubled their allowable indirect cost rate from 10 to 20 percent.

Unfortunately, nonprofit workers have been shouldering the burden of the “overhead myth” for years. Passionate, committed individuals sacrifice their and their family’s fiscal stability so that nonprofits can celebrate their low overhead. Those who can no longer afford the sacrifice move to other jobs, leaving their clients in the lurch.

In a report on the fiscal instability prevalent in the sector, the Human Services Council’s writes (italics mine): “The budget shortfalls created by chronic underfunding are unlikely to be filled by private funders, as only 8.3 percent of the average provider’s revenue comes from private foundations or donors, and many of these also set their indirect cost rates as low as 10 percent to 15 percent, if they provide any indirect funding.”

It’s time for that to change. In fact, private funders should be even more willing than government agencies to support overhead expenses for the projects they support. The more involved, often personal relationships they develop with their grantees puts them in an even better position to trust – and verify – that a nonprofit’s overhead or indirect budget lines are not hiding places for scandalous largesse or nefarious activities.

Currently the “solutions” discussion has focused on encouraging nonprofits to say no to underfunded contracts, manage their finances better, hold government accountable for unfunded mandates, be clear about the full cost of programs and advocate for the value of their presence when the parameters of an RFP – from funding levels to targeted outcomes – are being defined. All valid steps. But if the nonprofit sector is in as dire straits as the HSC report declares it to be (which I, for one, don’t doubt) then this is a time for all philanthropic hands on deck.

What with a minimum wage increase potentially hiking up the cost of overhead, charitable giving by individuals stuck at two percent of GDP for more than four decades and the expectation by government agencies that nonprofits turn to private funders to supplement what their contracts do not provide, it’s all the more imperative that we press private funders to loosen their purse strings and direct more project funding to supporting nonprofit capacity building efforts and general operations.