Should your foundation prioritize giving with no strings attached?

by: Kyle Anderson
September 19, 2022
Oriental puppets hanging from a tree by puppet strings

Private foundations can provide support to nonprofits in the form of restricted grants or unrestricted grants. Restricted grants are made for specific projects and can only be used for that purpose; they cannot be used for other expenses of the nonprofit. For example, a foundation could provide a restricted grant that can only be used for installing new playground equipment at a community center. By contrast, unrestricted grants can be used to support the nonprofit’s mission in general. Unrestricted grants can be applied toward overhead costs like staff salaries, rent, utilities, and office equipment. Although these expenses are not glamorous, they do keep the nonprofit running. It is fair to say that unrestricted grants support all the programs a nonprofit operates.

Many private foundations, especially the larger foundations, have a tendency to provide restricted grants for a large portion of their grantmaking. Do nonprofit leaders appreciate receiving restricted grants? While in general all nonprofit leaders are pleased to receive any support, a study by the Center for Effective Philanthropy (CEP) found that nonprofit leaders have a clear preference for receiving general operating support in the form of unrestricted grants. The report shows a significant disconnect between the needs of nonprofit leaders and the actions of grantmaking foundations. You can read the full report here.

Nonprofit leaders value unrestricted grants because they believe they are in the best position to make decisions on how to wisely and effectively spend the money. In contrast, nonprofit leaders believe that restricted grants sometimes sustain projects that aren’t optimized for effectiveness. For example, a certain grantmaker might wish to help a troubled neighborhood by providing funding specifically allocated to bike lanes. This might sound wonderful, but is it really what the community needs the most? Perhaps the neighborhood would benefit more from a food pantry or a mentoring program. Seeing bike lanes on the streets might make the grantmaker feel satisfied, but it is easy to imagine that the impact might be suboptimal when compared to other compelling projects. 

Furthermore, nonprofits can get bogged down in the reporting that comes with restricted grants. Each restricted grant often requires that the nonprofit must report back to the foundation on the progress of the specific project. Think of a private company providing individual reports on different aspects of the business to each shareholder—does this sound efficient? With unrestricted funding, the reporting burden is greatly reduced. Instead of burning daylight to create unique reports for each grantmaker, the nonprofit can simply produce a summary of their activities (e.g., an annual report) that can be provided to all stakeholders. This greatly reduces the accounting and compliance costs of the organization. 

So why do many grantmakers continue to restrict their grants if the nonprofits themselves have a clear preference for unrestricted resources? The primary reasons seem to boil down to desire for control and lack of trust. Many grantmakers like the feeling of control knowing exactly where grant money will go and whether it will be deployed on the frontlines. Some grantmakers feel that if they keep tight reigns on a project, there is less chance that the money will be wasted. But if a nonprofit is not trustworthy in general, why should a grantmaker expect that the organization can do a good job with a specific project? If a nonprofit partner has a strong track record of success, a good reputation, and a clear mission in line with that of the grantmaker, then there is little reason to worry that resources will be squandered. 

Rather than micromanaging their grantees, private foundations should focus on the big picture looking for well-run organizations that share the same charitable mission. It makes sense that nonprofits with boots on the ground are usually in the best position to identify the most urgent needs and to understand what actions can make a real difference.

We here at CPA KPA support the practice of providing unrestricted grants whenever possible. The key is trust. If a private foundation doesn’t have trust in a certain nonprofit then it should put in the time and effort to find more reliable partners. If a private foundation does have confidence in its partners, then it should customarily provide unrestricted grants. 

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