Opinion: There’s an even better way for MacKenzie Scott to give her money away

SeaChange has never received funding from MacKenzie Scott though we know several nonprofits that have, including a few who engaged us to help them think through how best to use the money. While we have seen first-hand the transformational power of her generosity, the BDT debacle is a reminder that large, unexpected, unrestricted gifts also entail risks. I have a modest proposal for how she could help mitigate these risks and thereby have even more impact.

Scott’s grant recipients should ask themselves three questions: What will we spend the money on? Over what period of time? What will we do once it is gone? In our experience, nonprofits can find it useful to divide the money into four buckets: 

1. Immediate spend: one-time things to spend on right now, like an emergency repair to the roof, replacement of creaky technology, bills that have not been paid or overdue debt.
2. Ongoing operations: Money that will used to grow the program (or at least maintain it at a level greater than would otherwise be the case) for a defined period of time.
3. Emergency reserves: Money that (God willing) will never be spent but will be reserved to tide things over for a while if things get tough because of late payments, the unexpected non-renewal of a major grant, or some other unexpected problem.
4. Quasi endowment: Money to support operations in perpetuity with annual draws equal to the expected inflation-adjusted earnings.

There is no single answer to how much should be in each bucket since nonprofits differ greatly in their needs, opportunities and tolerance for risk though most end up between the extremes of “Running with the big dogs (nos. 1 and 2),”  and “Staying on the porch  (nos. 3 and 4).” 

The wonderful thing about Scott’s money is that it is unrestricted, which most nonprofits rightly believe is far better than traditional restricted funding. However, evidence from behavioral economics and psychology suggests that the need to choose (how to spend the money) imposes several costs on nonprofits:

The first is the emotional cost of deciding what to do with the money given the uncertainty under which nonprofits operate and the meaningful differences of opinion that often exist among board members or between board and staff.

The second is the cost of making bad choices. Many of us would be uncomfortable making high-stakes decisions in areas (for example, medicine) where we don’t have the requisite skills. While nonprofit governance is not brain surgery, some boards lack the expertise to choose wisely or suffer from well-documented cognitive biases like over-valuing short-term gratification, etc.

The third is the cost associated with “weakness of the will”. Nonprofits have no legal ability to self-impose binding commitments. No amount of wise board-level deliberation about how to spend the money will be immune from less-considered decisions in the future. All unrestricted grants stay de facto unrestricted, forever.

Given these costs, I suspect that some nonprofits take the easy way out by not thinking hard enough about how to use the money. Or they develop solid plans that are later jettisoned in moments of weakness, bad governance, or when times get tough.

Scott would help mitigate these risks by making restrictable grants requiring that nonprofits self-impose binding restrictions on how they can use the money. The nonprofit would receive a letter notifying them of the impending grant requiring them to allocate the funds – pursuant to a board resolution – into four buckets: immediate spending, program growth, emergency reserves, and endowment. (For example, a nonprofit choosing to keep the funds fully unrestricted would put 100% under the “Unrestricted” and 0% everywhere else.) The completed form would generate a grant letter instantiating as funder-imposed the nonprofit-chosen restrictions.

Restrictable grants would reduce the risk of bad choices by making 100% unrestricted a considered choice rather than a passive default. They would remove the need for willpower since funder-imposed restrictions are inviolable. They would be consistent with Scott’s nonprofit-friendly, trust-based approach by giving nonprofits even more freedom (i.e. the freedom to self-restrict.)  If thoughtfully communicated these binding restrictions might also reduce the risk that Scott’s large and otherwise immediately available gift would crowd out other funders. 

That nonprofits might benefit from restrictions on how they can use one-time windfalls of otherwise unrestricted money is consistent in spirit with charitable law. For example, Section 510/511 of the New York Non-for-Profit Corporation Law may require, among other things, that a nonprofit receiving significant unrestricted funds from the sale of an illiquid asset hold them in escrow pending the development of a strategic plan approved by the board or distribute them as an endowment subject to a maximum spend of 7% of per year.

Finally, though it may be heresy to admit, SeaChange benefits from receiving a blend of restricted and unrestricted grants. While unrestricted grants provide a welcome degree of flexibility, the restricted grants help to keep us disciplined programmatically and financially. Would SeaChange reject an unrestricted (i.e. unrestrictable) windfall from Mackenzie Scott? Of course not! But we would be better off with a restrictable grant. Other nonprofits would be as well.