Should your foundation prioritize giving with no strings attached?

Family foundations play a crucial role in supporting nonprofits through two types of grants: restricted and unrestricted. Restricted grants are earmarked for specific projects, strictly limited to their designated purpose. For instance, a foundation might award a restricted grant to install new playground equipment at a community center, ensuring the funds are solely used for that purpose. On the other hand, unrestricted grants offer general support for a nonprofit's mission. They can be applied towards overhead costs such as staff salaries, rent, utilities, and office equipment. Although these expenses may not carry the same allure as project-specific initiatives, they are undeniably crucial for maintaining the nonprofit's day-to-day operations. While the concept of restricted grants may initially capture attention with their project-specific focus, it is ultimately the unrestricted grants that serve as the lifeblood, nourishing and sustaining the entirety of a nonprofit's various programs.

While many family foundations, especially larger ones, tend to allocate a significant portion of their grants as restricted funds, the question arises: do nonprofit leaders appreciate receiving restricted grants? While nonprofit leaders generally express gratitude for any form of support, a study by the Center for Effective Philanthropy (CEP) reveals their clear preference for general operating support in the form of unrestricted grants. This study highlights a significant disparity between the needs of nonprofit leaders and the practices of grantmaking foundations. You can findthe full report here.

Nonprofit leaders value unrestricted grants because they believe they are best positioned to make wise and effective decisions regarding the utilization of funds. Conversely, they argue that restricted grants sometimes sustain projects that may not be optimized for maximum effectiveness. For example, a grantmaker may choose to fund bike lanes in a troubled neighborhood, intending to enhance the area. While this might seem beneficial, is it truly what the community needs most? Perhaps a food pantry or a mentoring program would provide greater benefits. While bike lanes might satisfy the grantmaker, it is easy to envision their impact being suboptimal compared to other compelling projects.

Moreover, nonprofits often find themselves burdened with reporting obligations tied to restricted grants. Each restricted grant typically requires the nonprofit to provide progress reports to the foundation on the specific project. This reporting process can be compared to a private company providing individual reports on various aspects of the business to each shareholder—hardly an efficient practice. Unrestricted funding significantly reduces this reporting burden, allowing the nonprofit to produce a comprehensive summary of their activities, such as an annual report, that can be shared with all stakeholders. This streamlined approach substantially reduces the organization's accounting and compliance costs.

So, why do many grantmakers persist in restricting their grants when nonprofits clearly express a preference for unrestricted resources? The primary reasons seem to revolve around a desire for control and a lack of trust. Grantmakers often find comfort in maintaining control over where the grant money goes and how it is deployed on the frontlines. Some believe that tight reins on a project minimize the chances of funds being wasted. However, if a nonprofit lacks overall trustworthiness, why should a grantmaker expect them to do a good job in managing a specific project? If a nonprofit partner possesses a proven track record of success, a solid reputation, and a clear mission aligned with that of the grantmaker, there is little reason to worry about resource mismanagement.

Rather than micromanaging their grantees, private foundations should adopt a broader perspective. They should seek out well-run organizations that share their charitable mission. It makes sense that nonprofits, with their boots on the ground, are usually best positioned to identify the most pressing needs and determine effective actions that can truly make a difference.

At CPA KPA, we wholeheartedly endorse the practice of providing unrestricted grants whenever possible. The key lies in trust. If a private foundation lacks trust in a particular nonprofit, it should invest time and effort in finding more reliable partners. Conversely, if a private foundation possesses confidence in its partners, it should routinely offer unrestricted grants as a matter of course.

Seeking expert guidance? We're here to help!

At CPA KPA, we're passionate about magnifying the positive impact of family foundations. Feel free to reach out to us anytime at 888-402-1780 for a complimentary and obligation-free conversation. You can also conveniently submit your questions and inquiries through our contact page. Let's connect today and explore how we can help your foundation have a lasting and meaningful impact!