Nonprofits  November 3, 2023

McPherson: The donors’ dilemma: impact and/or infrastructure

End-of-year donations, required minimum distributions, and “’tis the season to give” are just around the corner. Options to make a financial contribution are coming to a mailbox near you. This time of year reminds us what issues are relevant to us, what missions we feel passionate about and what problems we want to help solve.

There is an ongoing conversation in the world of nonprofits about restricted and unrestricted donations. Restricted donations come with a caveat that the donor will only allow the nonprofit to spend their money on a specific program or within a specific fund. By contrast, unrestricted funds may be used for any legal purpose appropriate to the organization. 

The question of whether to restrict donations or not comes down to, “Do we value only the impact or the people who create the impact?” As a donor, you choose what impact is important to you, but institutions and donors are beginning to understand that you need the people to make the impact possible.

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In an open letter to donors, CEOs of three leading charity evaluators ask those making charitable contributions to consider the whole picture, “People and communities served by charities don’t need low overhead, they need high performance.”

They argue that many charities should spend more on overhead. “Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).”

Strong organizational infrastructure avoids what is known as “The Nonprofit Starvation Cycle.” This idea comes from a foundational article in the Stanford Social Innovation Review written in 2009. Almost 15 years later, it is still a resource for educating both nonprofits and donors about how they might reframe from the idea that restricting donations to programming alone makes the program more impactful.

The environment of restricted funds, as reported by Carter Consulting, is one where “funders have unrealistic expectations, nonprofits feel pressure to conform, and nonprofits neglect infrastructure and misrepresent data.”

Typical consequences of “program-only donations are limited or no staff,  and limited ability to manage or monitor finances and programs. Limited IT and training results in increased hours spent on software that doesn’t integrate well, crashes, or…it takes longer to manually manipulate the data than it does to get useful information. Low staff wages or lack of investment in staff results in high turnover and more costs to hire new people and get them up to speed. There is a joke in the nonprofit sector about constantly doing ‘other duties as assigned.” The accidental techie. The staff who doesn’t like numbers but plays a bookkeeper at the office. A lack of appropriate resources is inefficient.

To deal with the inadequate funding for administration, organizations resort to the strategies of make-do, and do without that diminishes organizational effectiveness. Even if you are an all-volunteer organization, at the very least, someone has to have a computer and internet access to do the bookkeeping and file taxes. Every nonprofit has overhead expenses.

“Programming only” is a challenging trend present in grants as well; in the last 20 years, funders have generally expected a proposal with no more than 15% of the award going to operating costs. This is important! Many nonprofits show at least 1/3 of their income coming from grants. Some argue that granting organizations should know better than anyone that it takes people and not just dollars to make things happen.

The Ford Foundation awards over 1 billion dollars in grants each year. They recognize the destruction of the Nonprofit Starvation Cycle and announced,  “Effective January 1, 2023, the Ford Foundation will raise its minimum indirect cost (IDC) rate applicable to eligible project grants from 20% to 25% — or to an even higher rate, under certain circumstances. This increase will allow us to fully cover indirect costs on the vast majority of our project grants and ensure that our grantees have the flexibility and support to cover the true cost of their work.”

Let us share a real-life example of the Nonprofit Starvation Cycle: EPNRC applied for a grant to put on a six-part Board Training series. The total budget was $3,000: presenter fee of $2,400, marketing $360, and supplies $240. Notice that there is not even staff time included in this budget. We were awarded $1,650. We then had to raise another $850 just to pay the presenter.

Yes, you may dictate that $100 of your donation goes to programs. The reality is that it takes roughly $40 to pay for the program, $40 for the staff time and $20 for other overhead. Please consider unrestricted donations. 

Let us all continue to go forth and amplify goodwill. Align yourselves with missions that match your passion. Find the nonprofits you trust to handle your gift responsibly and give willingly.

Comments and questions related to this article and nonprofit management may be sent to info@epnonprofit.org.

Karen McPherson is outreach director at the Estes Park Nonprofit Resource Center.

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