I hope this report by CEP will encourage more dialogue about the relationship of type and size of support. But I hope it is with a more nuanced approach that brings mission accomplishment—for both grantee and grantor—more fully into the discussion.

- Robert E. Eckardt, Senior Vice President for Programs and Evaluation, The Cleveland Foundation

The D7 area includes four neighborhoods, with about 5500 households, and about 17,400 residents. Our area has been an immigrant gateway in the City of St.Paul for over 150 years, and consequently has fairly constant issues relating to language and cultural barriers, as well as a high concentration of poverty (approximately 35% of our households) and the highest concentration of children in the City (almost half of our population is under the age of 20). Currently our demographics include about 40% Southeast Asian, 25% Caucasian, 23% African-American, 10% Latino, and 3% “other.”

D7’s annual revenue & expenses in 2006 were about $175,000. Of this amount, close to 55% came in the form of various contracts with the City, and about 40% came in the form of foundation grants. The other 5% came through a mix of individual donations, small corporate gifts, and higher education institutions (to support paid internships with our organization).

Of the foundation grant monies we received in 2006, about 53% were for general operations (from one foundation), and the other 47% were for various program efforts (from five foundations). In terms of our overall finances, foundations’ general operations grants supported about 21% of our total year’s expenses, and foundations’ program grants supported about 19% of our total year’s expenses.

In response to why foundations continue to provide a high number of relatively small, short-term grants, one can identify two primary concerns that may be influencing the decisions of trustees at foundations. On the one hand, there are issues with regard to how well the trustees can trust the grantees to use and track the foundation’s dollars wisely. This uncertainty with regard to trust easily leads to the perceived need to focus resources on very specific, quickly measurable outcomes in order to communicate the desire for accountability from the grantee. Unfortunately this kind of measurement often reflects more a measuring of activity rather than a measuring of meaningful outcomes, because few deep outcomes are actually achieved in a year’s time. On the other hand, there is a desire to spread resources broadly in order to provide opportunity to access those resources to many organizations, as well as to diversify where the grant funds are allocated to minimize the risks associated with trusting larger percentages of grant funds to fewer entities. There is also the dynamic of trustees coming to the table with their own preferences for who or what to fund, and the need to incorporate those preferences into the grantmaking process.

In terms of deciding on what type of support, programmatic or operational, to provide, foundations need to understand both the direct and indirect ways the grant funds will impact the outcomes the foundation is trying to achieve. There are instances in which program support is given to get a program started, and to get the bugs worked out of the program, but once the program is ready to be institutionalized at the grantee level, the program support is no longer available – even though the funder has identified that the program is achieving the desired outcomes and is valuable to continue. From the grantee’s perspective, this is really a head-scratcher. Why did the foundation support the program through the development phase without having any plan for how the program could be continued? Simply identifying that that is the task of the grantee is unacceptable because it is very difficult to find funders interested in funding existing programs. This cutting loose of viable programs puts the onus on the grantee to “reinvent” the program for a new funder – and possibly to choose to let the organization’s mission creep a little to do it.

Focusing energies on optimal alignment of foundation and grantee goals seems to be a worthwhile endeavor. Perhaps there is a need for a new paradigm that allows for “emerging relationship” grants, “deepening relationship” grants, and “established relationship” grants to be made. The emerging category would consist of primarily small, short-term program grants and would provide an opportunity for the foundation and the grantee to get know each other and to build trust. The deepening category would provide for increases in grant sizes and/or durations, as well as additional funds made available to assist the grantee with organizational development needs. The established category would be for on-going larger grants to grantees who have worked with a foundation to establish a relationship characterized by accountability, integrity, and trust. Obviously, all of these categories would be impacted by turnover and strategic changes to mission and program at both the foundation and the grantee levels. However, a paradigm along these lines might provide a good strategy for protecting against mission-creep, and honestly adhering to the achievement of common goals over time. Money is only one asset that a foundation has at its disposal to invest. It also has time and heart.

D7 has appreciated being included in this study. Thanks for asking!

- Kristen Kidder, Executive Director, The Thomas-Dale District 7 Planning Council

Let me start with a few important notes – my comments are not meant to indicate that Social Ventures Partners (SVP) has been perfect on this issue because we haven’t. Nor is it to suggest that accountability and outcomes aren’t important because they absolutely are. So that you know where I am coming from, SVP is a network of engaged donors that brings together nonprofits and philanthropists to learn from each other and build capacity for positive community impact. Partners from diverse backgrounds pool their financial contributions and skills to provide more resources to nonprofits and produce greater results. Partners currently support programs in K-12, early childhood, out-of-school time and environment. We are now over 240 Partners, each contributing $5,500 annually to fund and work with over 20 children's, education and environment organizations. www.svpseattle.org. Several years ago, we made the decision that all of our grants would be 100% unrestricted funding.

There are four general flaws in the current perspectives of funders about operating vs. program support –

1) Definitions – at the ground floor is the fundamental inability for anyone to clearly, consistently, accurately define and therefore measure what exactly constitutes “operating expenses” or “overhead” or “administration” or whatever you call it. There are no FASB or IRS standards, the way various nonprofits define and report is widely disparate, and we know empirically that a segment of nonprofits simply doesn’t report any expenses as “overhead” on their 990’s at all.

When I discussed this whole issue with the Director of one of our local nonprofit investees, she said simply “we have grown large enough and have enough experience that we know how to position grants and move funds around to avoid calling most of our expenses overhead.” She is, by the way, an effective and respected Director. The larger and more savvy the non profit, the more they are able and know how to play a “shell game” with their grant funding. If you can’t define the category in the first place, why do we fund that way it at all?

2) Focus – Our funding is one of the most significant influences on the behavior and priorities of nonprofit organizations. By putting such a priority on overhead / operational spending as a criterion for success, we are telling our grantees to focus on the means, not the ends. If we told them that their outcomes were the priority, then they would focus more on that. Further, a CEO is quoted in CEP’s report as saying, “Unrestricted support is more comfortable on the grantee, but less demanding … it is unusual to find a grantee that naturally collects this data in a meaningful way.” A large reason they don’t is because we tell them to focus on expenses, not results.

3) Accountability – Related to focus is the issue of ultimate accountability. There has to be accountability, but to what? Again from the report, a CEO says, “only through the provision of program support can foundations responsibly track the use of grant dollars – and connect their funding to the achievement of specific goals.” Another CEO suggests that “program support … provides more clarity … in terms of performance and impact.” The irony in those statements is that by using operating / overhead expense to measure effectiveness, we are not connecting funding to goals or impact at all! The only way to responsibly track our grant dollars is to ask the grantee to assess the ultimate impact and outcomes of their work, i.e. the ends, not the means. Program / overhead spending is trackable (with the caveat of #1 above), but it tells us little about impact.

There is another irony at work here for anyone that has worked in the private sector or at a funder. When an investor buys stock in a publicly traded company, they don’t get to tell that company where or how to spend that money and if they did, it would be disastrous. And does anyone external to a foundation Staff and Board tell us how to spend our funds and on what? The difference, of course, is that there is no single measure like profit in the nonprofit world, but that doesn’t change the fundamental point that funder-designated grantmaking puts nonprofits at many significant disadvantages in terms of optimally allocating its resources.

4) Mission Fit – “We are giving operating support to organizations when their core mission is important to us in achieving our goal,” one CEO says. There is no argument with that statement, but the question would be, what grantees do any of us ever fund that are not core to our mission or that aren’t aligned with our goals? I don’t know of any funder that has so much money that it can now fund nonprofits that are not aligned its goals. Further, there is also a comment that “concerns about grantee dependence,” as another CEO put it, lead to program support. It’s not clear why operating vs. program funding would make any nonprofit more or less dependent. In fact, if one argues that operating funding allows a nonprofit to better build its capacity, it should make nonprofits less dependent.

As I said above, no one, including SVP, can claim piety about its funding practices. My intent here is to provoke and invite dialogue. The points above don’t even address the positives of unrestricted funding for nonprofits and those benefits are significant – more flexibility, improved responsiveness to current community conditions, less accounting work, higher priority on outcomes and impact, etc. And further, there are many other facets of the funder-grantee relationship that need to be examined – term of the grants, size, degree of reporting requirements, etc.

It seems to me that where the “rubber hits the road” here is in the foundation board room when the staff walks in and the trustees say “what did we get for our money?” It’s a fair and good question. Unfortunately, in our need to have an answer to that question, we are focusing on the wrong things and in turn focusing our grantees on the wrong things. We are asking the right question, but getting the wrong answers.

- Paul Shoemaker, Executive Director, Social Venture Partners Seattle

I found the most compelling part of the report to be Figure 7, which charts grantee ratings of impact on their organization against the type/size/duration of the grant relationship. The top six places are occupied by different size/duration combinations of core support grants; the top restricted grant combination is in seventh place. Almost every combination of core support ranks substantially above every comparable combination for restricted grants. My conclusion from this data was different from CEP’s; it seemed to me that core support is preferred by grantees, although size and duration of grants clearly also matter to them. Hence, “necessary, but not sufficient.”

CEP’s analysis of its grantee database also revealed another helpful statistic that explains an important dimension of how core support builds stronger grantees—on average, grantees find each restricted grant 50% more costly to administer than each core support grant. As foundations consider how (or whether) to support the overhead of grantees, we should also consider how the type of support we provide may affect this indirect rate.

Kudos to CEP for a timely, insightful and provocative report!

- John Weiler, Senior Program Officer, The F. B. Heron Foundation

John Weiler is the author of “Core Support.”