Transcript: Multi-year Unrestricted Funding
Shaady Salehi: Welcome everyone. This webinar is part of a partnership between the Trust-Based Philanthropy Project and Philanthropy California, which includes the Alliance of Northern California Grantmakers, Southern California Grantmakers, and San Diego Grantmakers. This is the first in a series of seven webinars digging into each of the six principles of trust-based philanthropy and how to make the case for this approach. I'm going to hand it over to the chair of the steering committee of the Trust-Based Philanthropy Project, Pia Infante, to give us an introduction to what trust-based philanthropy is all about.
Pia Infante: Hi everyone. It’s so good to see you all. You know, the principles of trust-based philanthropy aren’t meant to be prescriptive, like a set of grammar rules. They really come from and speak to a broader set of values. We’ve always understood them as the behavioral manifestation, the tip of the iceberg, of culture and systems-level shifts in power. At the Whitman Institute we listened to many, many nonprofit and movement partners, who gave us marching orders that we needed to get philanthropy to take up a different approach, a different way of inhabiting the role of funder and donor. So that’s where trust-based philanthropy starts from: an understanding of the structural changes that we need both inside of individual institutions and in our greater social, political, and economic structures. The principles are focused on the relationship between funders and grantees—but that’s the just the first level where change needs to happen. We need to see power balanced in the relationship between foundation staff and boards, between nonprofit staff and the communities they serve, and so on. Trust-based principles are guideposts for a trust-based ecosystem.
Someone wrote in the chat box that there’s no better time for trust-based philanthropy, and that's absolutely true. Over the years, trust-based funders have continually listened to communities, partnered in a spirit of service and humility, and reimagined their role beyond being gatekeepers of social change. Yet many foundations would say, this could never work for us—we’re too large, we’re too small, we can’t give unrestricted funds because we’re strategic and want to have specific impact, and so on. In this moment of urgency, we’re seeing those reservations evaporate for many funders. There’s the clarity that what nonprofits really need right now is a different kind of relationship with funders, one that’s more like a partnership, where the funder is like, hey, we're in it with you. We get that we may have given you a grant to run a youth development program, but right now maybe it's much more important to help families get health insurance, so we support your pivoting to meet community needs. All of a sudden more funders have wanted to be responsive and understand community needs. And it’s important to say that we don't see trust-based philanthropy as emergency response funding—it's for the long haul. I'm challenging the sector to imagine it as the norm.
Shaady Salehi: Thank you Pia. You know, we are in this moment, as Pia mentioned, where there's a lot of quick action to bring more flexibility to nonprofits, including a shift towards unrestricted funding. So I’m going to bring in Phil, CEO of the Robert Sterling Clark Foundation in New York--how is your team supporting partners in this critical moment?
Phil Li: Thank you Shaady, and hi everyone. Two weeks ago we did quick calls with all of our grantees, just to see how things were going. We heard a lot of anxiety about funding, staffing, and frontline workers’ susceptibility to COVID. As many others, we were trying to figure out how to respond quickly. Based on what we heard from grantees, staff outlined what our response should look like, and over the course of the weekend I worked on it with our executive committee. Sunday night, we went to the full board with our proposals, and Monday morning we had their approval to move forward. The entire process took less than two weeks. We were able to work that way because of the ecosystem of trust, as Pia mentioned, that exists among our grantees, staff, and board. Certainly, there were some concerns about what this moment means for our endowment and long-term strategy. But our priority was supporting our partners and communities in this moment.
So, we decided to honor all the grant commitments we’ve previously made, as I’m sure many are doing. Since we already give general operating or unrestricted funding, we didn't need to do any work in unrestricting or changing grant agreements. We also started a new policy called Plus One, which means adding one year of funding to every existing grant. So if you were a grantee who's multi-year funding expired or got completed in 2019, we would automatically add another year so that you would have coverage for 2020 and didn't need to worry about applying. And if you were already midstream, we would add one more year to the end of your term. What we're trying to do is think about the mid to longer term and let people know that we are continuing to stand by them in a moment where many of them were very nervous about funding. We are also providing Zoom subscriptions to all of our grantees as well as holding regular open office hours for them. Of course, we are also figuring out how to collaborate with other initiatives in New York, rather than just working in isolation.
Shaady: Wonderful, thanks Phil. I'd like to introduce our third speaker, Claire Knowlton, who is the Director of Advisory Services at the Nonprofit Finance Fund. She also leads the Full Cost Project. Claire, could you share your perspective on why unrestricted funding is so important?
Claire Knowlton: Absolutely. That's a great question. I want to answer that by talking about how unrestricted support builds organizations’ financial sustainability. Often when we talk about the value of unrestricted support, we talk about day-to-day expenses. We talk about unmet infrastructure needs, like overhead or indirect costs that aren't being covered. And while that conversation is definitely important and valid, it is also limited. NFF’s Full Cost Framework tries to expand the scope of this conversation to really name and claim everything it takes to run an effective, impactful nonprofit organization for the long term.
There is a whole range of costs that live outside of this false dichotomy of direct and indirect costs. One that is really relevant right now is working capital, which is unrestricted cash on an organization's balance sheet to manage cash flow and manage delays in payment without interruption to normal operations. And the second is reserves, which is also unrestricted cash on the balance sheet. But the purpose is to help survive a bad year, to take advantage of new opportunities, or to make changes in the face of changing conditions. Right now, we are seeing in real time how organizations that lack adequate unrestricted cash on the balance sheet are struggling to respond to this crisis and are in real danger of suspending operations all together.
NFF has been serving nonprofits in this crisis, and we have some findings that are preliminary, but telling. So I offer them here with trust. Our early results are showing that in California, 70% of respondents have already lost earned revenue. 56% of respondents have already lost contributed revenue, and 2/3 of respondents have said that this crisis is already a threat to their ability to exist long-term. Others have said they are expecting that it could become a threat later in 2020, but right now 2/3 are saying this could potentially shut them down. And while this crisis feels like it's been going on forever, we should remind ourselves that it's actually only been a matter of weeks. They've been really, really bad weeks, but it's been weeks--not months, not years. And already 2/3 of respondents in California are saying this could close our doors.
So why is the nonprofit sector so perpetually financially fragile? Why is it that most organizations don't have adequate working capital? Don't have adequate reserves? It is because they have no way to build them.
The accounting mechanism by which organizations build working capital or reserves is unrestricted operating surpluses, which means that unrestricted revenues are greater than expenses for the year. So that unrestricted surplus is what builds an organization's balance sheet health. It's what turns into unrestricted net assets on the balance sheet. Unrestricted surpluses accumulate over years to become a more robust organizational safety net. And this should make some intuitive sense, right? If in your personal life, you imagine that a financial advisor came to you and said, “Hey, here's the secret to building financial stability for your family: I want you to take your paycheck. I want you to take everything you earn. I want you to spend it down to zero. There should be nothing left in the bank account at the end of the month.” We would all laugh that person out of the room! But that is exactly how our restricted grant contracts are structured for nonprofits: “Spend every penny. You aren't allowed to generate any sort of a surplus. And in fact, if you find efficiencies, if you are able to deliver what you promised at a lower price, well… we'll take that money saved back.”
So this is the value of unrestricted funding that we don't talk about enough. We all say we want resilient, effective organizations that can weather the storm, that can keep delivering on their mission for the long haul. But the predominant funding structure of restricted grants is fundamentally misaligned with that goal.
Every few years, NFF surveys thousands of nonprofits across the country for our state of the nonprofit sector survey. In our last survey, which was in 2018 before this crisis, we asked nonprofit leaders to name their top three operational or financial challenges. They were: 1) achieving longterm financial sustainability, 2) raising funds that cover full cost and 3) raising unrestricted revenue—which are all symptoms of this same problem with restricted funding structures! And what’s more, year after year, these are the same top three challenges that consistently show up. This is what nonprofit leaders are trying to tell us.
One last data point I will share is that less than half of nonprofit leaders include working capital or reserves in their budget plan for the year. And that really makes sense, right? Nonprofits are struggling to just get their day-to-day expenses covered. It’s hard enough to break even, let alone to think about generating a surplus in order to build working capital in those reserves.
If we can make unrestricted funding the norm rather than the exception, we can change this picture. We can build a more resilient nonprofit sector that is ready to face the next crisis.
Pia: Thank you so much Claire. That was so insightful. It really speaks to why this is not an emergency funding approach, and is necessary to take nonprofits out of a starvation cycle. Regardless of what terminology we use—general operating, unrestricted, full cost funding, operating funding, etc.—I think what’s most important is the intention underneath the tools. These are all grantmaking tools, they can and have been used in ways that are trust-based and ways that are less so. I’ve heard of nonprofits that have received “general operating support” with so many stipulations that it doesn’t actually feel like unrestricted funding. On the other hand, if there is a project that is fiscally sponsored by a larger entity, legally you are required to make a “restricted grant” to that specific project, but it can still be flexible once the project receives the grant. We don’t want to get caught up in the name of the tool—rather, focus on the motivation underneath it, and the ways in which it can be used to embody trust. I want to bring in legal expert Jean Tom, who has been such an ally for me in exploring these structural questions.
Jean Tom: Thank you Pia, and hi everyone. I'm an attorney that represents foundations and nonprofits, and many of my clients have been adopting trust-based philanthropy principles. One common question I get is: what are the legal requirements that might get in the way of trust-based philanthropy? And the short answer is, there aren’t really many. If you are making grants to 501c3 organizations, you can absolutely make general operating or unrestricted grants. And in terms of reporting, it’s really up to you. You do have to do the due diligence on your end to make sure the organization is a legitimate 501c3. But beyond that, you really can loosen the reigns—and auditors affirm that as well.
And in terms of shifting from restricted to unrestricted grants—a common question in this moment especially—it is entirely within your power to update grant agreements. Any restrictions are ones that you as the grantor have placed upon them. Under California state law it is entirely permissible for the grantor to amend and lift and modify those restrictions. It just takes an amendment to your grant agreement. It can be as simple as a single sheet of paper where you say, essentially, that any prior project restrictions have been lifted, and this is now a general operating support or unrestricted grant.
The fiscal sponsor point is of course more nuanced—if you're granting to a fiscal sponsor that is your 501c3, if you're saying that it is an unrestricted grant to the fiscal sponsor, that means the fiscal sponsor can use it for any number of their fiscally sponsored projects. So like Pia was saying, what’s most important is how you’re using a tool and the intention behind it. Within the project grant that you make to the fiscal sponsor, you can say that the use of the funds is unrestricted.
Shaady: Thank you so much, Jean and Pia. I want to bring Phil from Robert Sterling Clark back on the line. Phil, when you stepped in as President & CEO of RSCF about four years ago, you made a deliberate effort to shift all grants to multi-year unrestricted. Can you share how you went about that process?
Philip Li: Sure. There were two things that informed my thinking. The first half of my career was actually in finance and on Wall Street. I was a bond trader, and the way that we assessed organizations we made loans to was very holistic: its strategy, leadership, available resources, mission, etc. That informed the way I look at nonprofits—as a whole, rather than thinking about particular projects or programs in silos. After my time in finance, I was an ED of a nonprofit in New York. I was a grant seeker, and so I had my own experience navigating the hoops and obstacles of the funding process. There were times I wanted to pull my own hair out, having to fill out all these different budget templates.
So when I came to RSCF, my understanding was that once we had done the due diligence and the vetting and decided to support an organization, we had to understand that they know best how to deploy those resources to get their work done. That was the way we wanted to partner and be of service. I really spent some time with our board discussing this approach—some came from the nonprofit world, and others came from industries like finance where holistic analysis was also key. Ultimately, as in institution we decided to do all of our grantmaking as general operating support.
Shaady: Thank you, Phil. One question coming up in the chat box is: how do you measure impact with unrestricted grants? We get this question a lot. Let’s start with you Phil.
Phil: I also get this question a lot! At RSCF, we take a trust-based lens to ask each of our grantees: What does success look like for you and how do you assess yourself? How do you know when you've been successful in delivering what it is that you do to your communities? Those questions become a springboard into conversations on impact. We have a tool we call CHAT (Check-In Analysis Tool), which is a verbal report through which we ask these questions. It provides us an opportunity for conversation. We try to embody our role as a learning organization, to get curious about the work grantees do and how they incorporate their lessons into their work. Additionally, our grants are just one portion of many grants that fund their work. So that’s an invitation to think about our impact in a different way—we’re just one piece in the puzzle.
Every three years, we also do a flexible funding impact survey. We are trying to gauge and understand what the impact of flexible funding has been on grantees’ way of working, and whether that's been changing over time. It comes from our interest in making the case to the field for increased flexible funding for grantees.
And we also broaden the impact conversation to see how we’re doing as funders. Do grantees trust us? Is there a way in which they're sharing information that they might not otherwise?
Pia Infante: I think the answer to this question depends on your definition of impact. At the Whitman Institute, we are curious about the health and wellness of the people in the organization and the organization’s health and long-term resilience. We’re pretty modest about the idea of what our foundation's impact could be at a grander social, political, economic scale. Not only because of the size of our portfolio but also because attribution is tough to claim, right? Especially in movement and advocacy work, which is what we fund. We also often ask our grantees just how they're doing. Often in the impact or strategy conversation, we don't talk about impact on human beings. And we care about people..
Shaady Salehi: Thank you Pia. Another question we often hear is, does unrestricted funding create greater risk that foundation dollars will be misspent? I'm going to toss this one to Claire Knowlton to start us off.
Claire Knowlton: Sure. It's a question I get a lot, and the short answer is no, it does not increase risk. In fact, it reduces risk in a lot of ways. I think it's really interesting, um, to take these questions and flip them by applying them to temporarily restricted funding. How do you measure impact for temporarily restricted grants? What is the risk of funds being misspent with restricted grants? How do you know that they are properly spent? I think our answers there are often a little bit weaker than we might assume. We've sort of assumed that the way that we measure impact for restricted grants is good, but we've confused dollar inputs as proxies for impact and results. We’ve assumed that restricted grantmaking gives us an ideal way of knowing that funds are well spent…when it doesn't.
So I want to kind of talk about some of the assumptions underlying this question. One is that restricted funds are optimal. They certainly are not. There are often much more meaningful and constructive ways that funds could be spent in an organization then is allowed by a restricted grant. It's important to remember that our grant cycles often mean that organizations are working against an approved budget that might be a year old, and that things have changed, prices have changed, and most organizations are going to avoid the trouble and the perceived reputational risk associated with going for a budget modification. So certainly in NFF’s work, we see a lot of spaces where organizations could better spend their restricted money, but because of the structures and restrictions in place, they just say, well, I don't want to leave this money on the table, so I'm going to buy way more of these supplies than I need right now, because I don't want to let the money go to waste, or I don't want to let the money get diverted from my community.
Another assumption hidden under this question is that foundation program officers somehow have better information than nonprofit leaders about how to spend the money effectively. And that restriction allows us as the foundation to assert that control over how spending happens. And of course that’s not the case. We all believe that those who are closest to the problem are closest to the solution. We all know that the nonprofit leaders have better data, in real time, to guide their spending decisions. So really, restricted funds carry with them the risk that funds are spent ineffectively, because the decisions are being made by people who have less information i.e. us, the foundation.
And finally, if this question is actually asking about the few bad actors that exist in the sector who are willing to commit fraud and take resources away from the most vulnerable…those people will have no problem lying on your restricted grant reporting budget about how they spent the money. So restricted funding doesn’t give any added protection from the very rare bad actors.
Shaady: Thank you Claire. Another question we get is: how do you remain open to new prospective grantees if all your money is tied up in multi-year commitments?
Pia Infante: This goes back to the fact that these principles are not a set of rigid rules. It’s about the underlying values. At Whitman, we deal with this question by having funds for emergencies. Historically we’ve set aside an annual fund that has often been used as a rapid response fund or to address emerging trends and issues that are concerning. This year we’ve been using those funds to increase grants to current partners, because of the urgency of this moment.
Philip Li: At RSCF, we stagger all of our grants so there's always some group that is rolling off at any point in time. And I also want to remind everyone that unless w're spending 100% of our dollars on grantmaking, which is highly unusual, the 5% payout limit most of us follow is actually a number that foundations have set for themselves. There is no law that says we can't exceed that. Just know that we have the capacity to spend more if we choose to. Especially in a moment like this. I think sometimes we forget that.
Shaady Salehi: Thank you, Phil. Another common question we hear is, how do you just jump into a multi-year relationship with a brand new grantee? What are some trust-based ways to build multi-year relationships without being all-in from the get-go?
Philip Li: RSCF has an open application process. Any organization that thinks they match our funding interest is free to apply. After due diligence, we make a one year grant. It's really kind of a getting to know you grant, for them to get to know us as well as to see if we're good partners for them. Presuming that everything goes well, grants after that year are multiyear. This gives us a chance to get to know each other better and make sure that it’s a good match for both sides.
Pia Infante: I agree. We are proactive funders. We try to get to know folks as well as we can without taking up too much of their time. We go to live experiences, we try to get out from behind the laptop. Relationships deepen over time, and it takes time to build trust. So it might make sense to give a year or two of annual funding to test out that relationship. We really look for leaders who are collaborative. We ourselves are a co-executive directorship at Whitman. We look for humility and partnership as big qualities of the kind of leaders we're looking for. And sometimes you don't know how people really roll until you've been rolling with them. So you could start with shorter term, multi-year grants--even going from one to three years might be really helpful.
I've also heard foundations often say to me, we've been funding them for 10 or 15 years. Then I ask, just out of curiosity, Oh, so then they don't have to reapply every year. And they say, no, they do. So funding people for a decade and yet making them reapply every year…that seems just like unnecessary work on everyone's part if trust already exists. And again, all of this has to be adaptive to your context. It’s about the intention, there is no one approach that will fit every funder’s situation.
Claire Knowlton: In Nonprofit Finance Fund’s experience, the due diligence needed when you are making unrestricted grants is actually significantly less. Because what restricted grants carry with them is a risk of causing harm to the organization, right? They're paying for a certain set of costs, not all organizational costs. And so there's a need to understand the financial health of that organization in a really detailed way. How will your money be playing with other money in the space? Does the organization have the capacity to track and report effectively? Are they able to raise money to fill in the gaps around your money? Those questions just aren't there with unrestricted grantmaking. And so you can really focus your financial due diligence on understanding the needs of the organization and how added financial strength and security is going to help their broader work. You get to focus in on what really matters, which is simply how does this lead to results for the communities that we care about.
Shaady Salehi: Thank you Claire. Another question from the chat is: What does a trust-based approach mean for the role of program officers and grant managers, if there’s less oversight happening? How can we re-envision those roles?
Pia Infante: This goes back to the trust-based ecosystem that we were talking about. We need new ways of understanding what the role of a foundation or a program officer is if we’re moving away from the role of a gatekeeper whose job it is to scrutinize. I think the role becomes much more about learning from grantees, and sharing that learning to inform the foundation’s thinking across the organization. Maybe up to their trustees. Um, we can learn more about what it takes like, right.
Last week, we had office hours with some of our nonprofit partners, and we were just stunned at what they had been able to do in a matter of days. One had already organized 150 groups statewide to align around advocacy and communication strategy. Another had already sent out a mental health survey to their very large staff and were providing immediate access to mental health services for those who needed them. I mean, amazing. So again, we wouldn't know these things. We wouldn't know how people were pivoting and shifting and listening to their communities if we weren't listening and if we were more worried abou what Claire was talking about, about how our dollars were being used in a specific part of the organization.
Shaady Salehi: Thank you Pia. A question in the chat box is what are some ways nonprofits can engage new funders around this approach.
Claire Knowlton: The Full Cost Project is a wonderful way to get funders involved. We will have workshops across the state of California bringing together funders and nonprofits in the same room to learn as peers, to have that really honest dialogue outside of the grant transaction, which is one of the only ways that we actually communicate as funders and nonprofits in this sector and that needs to change.
Another thing that NFF has seen in our work is that funders are really hungry for honesty. Our own granting structures have gotten in the way of that honesty. And so looking for opportunity to share a little more directly about your experience and what you hope you could have from them in a partnership…you can find spaces to try and test that out because you may be surprised to get some really positive reactions.
Shaady Salehi: Thank you Claire. The next question we’re getting from the audience is, to what extent can you really speak of equal, power-balanced relationships, even with unrestricted funding?
Philip Li: The fact that the resources sit with the foundation and there's inherent power that comes with that… that never goes away. As much as we want to flatten it, the truth is that there's always going to be more power implicitly sitting with the funder. Our goal is to make it as equal as we can. You can say whatever you want, but it's in the actions that you take and the ways that you engage and work with people that prove to them that you are showing up in a spirit of true partnership. It takes time, right? To build relationship and earn trust. We’ve found that being vulnerable really helps, showing our own mistakes and uncertainties. On our website, we have a section called Faceplants which chronicles our mistakes to show that we aren’t perfect. Many people think once you trust somebody, you become vulnerable. We would assert that it goes the other way around. By being vulnerable, we help people build more trust with us. And that's just one mechanism. As much as we aim to flatten the power dynamic and be equal partners, I don’t know if that’s ever perfectly attainable.
Pia Infante: Yeah, I think this is a great question because we have to be very cognizant that people might just be telling us what we want to hear. I really appreciate those points about vulnerability. How do you know when you're trusted? We see it when people actually come to us with very real problems, for example, when they can't make payroll, when they feel like they need to quit tomorrow and they’re the ED, when they’re having trouble fundraising or have lost a grant.
And it varies with different partners. With some partners, the bandwidth of trust is very wide and they're so forthcoming about things that nobody usually wants to tell a funder—my major senior staff person just quit, we have sexual abuse allegations going around. People share with us things that normally people do not share with funders. So I think there are ways to see trust, especially if we're really committed to not having relationships be performative. And we really show up in them as ourselves. Like, if you call the Whitman institutes office, you will reach John or I directly.
Shaady: Thank you. I know there are many questions we couldn’t get to because of time, so please feel free to reach out to us at hello@trustbasedphilanthropy.org to continue the conversation. I want to share a few key takeaways to end with:
Trust-based philanthropy is more than its six principles. It’s about culture and values.
Multiyear unrestricted funding is just one component of a holistic, trust-based approach. These principles inform each other and are really meant to be implemented collectively.
Nonprofits need profits! Unrestricted surpluses allow organizations to build long-term financial health. They are created through unrestricted funding.
Unrestricted funding is considerably less risky than restricted funding, because it allows nonprofits to be flexible and responsive.
Steps you can take right now::
Audit your expectations for the year. There’s a lot of uncertainty and unpredictability right now.
If you are predominantly offering restricted grants, consider whether you're willing to unrestrict those dollars in this moment, especially using some of the tips offered by Jean Tom. It's really as simple as adding an amendment to current agreements.
Check out the Full Cost Project! They have a lot of great research and tools.
Check out more webinars in this deep-dive series.