New OMB Guidance a Significant Step Toward Averting the ‘Starvation Cycle’

May 28, 2014

Breaking the nonprofit starvation cycle is not easy, but exciting progress keeps happening. A great deal of change is needed — the mindset that asks nonprofit organizations to get by with little to no administrative expenses has existed for a long time, and nonprofits are accustomed to scaling back, to making do with as little as possible, and surviving while hanging from their fingertips. Even though some organizations do not survive, that has not changed this entrenched mindset.

Sample Images from ConveningNow, though, changes are happening all over. Donors Forum convened more than 30 foundation CEOs in May to talk about one such change:

The federal Office of Management and Budget has issued guidance stating that at least ten percent of the money given to grantees should pay for their indirect costs. This gives them a chance to pay the real costs needed to generate outstanding, sustainable outcomes. Additionally, leading websites such as Charity Navigator and GuideStar are moving away from using overhead costs as a measure of organizational efficiency. Instead, they are developing ways to measure the outcomes organizations produce.

These are only some of the changes needed. Private philanthropy must make a shift as well, to support real costs with their grants. I've been heartened to see progress in this area too, as foundations travel their own paths to making these changes.

Let's look at three private foundations that have made this shift recently. We'll call them Alpha Foundation, Beta Foundation, and Delta Foundation. Each has made a change recently to increase their support of real costs, but each arrived at that decision through a different process.

For Alpha Foundation, the roots of the realization came from the CEO’s experience in the private sector, which is more skilled at using accounting techniques such as capital depreciation to plan for needed improvements and equipment. The nonprofit sector needs that same sort of planning and budgeting know-how, but it wasn't happening. While the Alpha Foundation had no restrictive “overhead” funding policies, most of the budgets they were presented had little or no overhead included. Recognizing that due to the culture that had built up around overhead funding in the philanthropic field, nonprofits were not likely to initiate the conversation. Program officers were encouraged to inquire and encourage applicants to make sure full costs of programs were included in proposal budgets. The foundation worked with its grantees to help them see the importance of funding programs at a level that can support sustainable organizations.

Beta Foundation took a different path. The key for Beta Foundation was their work in evaluating their grants, looking over the years at what kind of organizations brought about good outcomes. In working on this issue over the years, Beta Foundation kept seeing the importance of strong organization, not just strong programs, as well asthe need to build the capacity of organizations they supported to develop the outcomes they wanted to see. Their move toward supporting costs came organically; they simply saw over the years that such support was necessary to better fulfill their mission. They deliberately eliminated any mention of “overhead” in their application and reporting requirements and trained program staff to raise this issue with grantees.

Delta Foundation's change came about because of a change in leadership. Such times present a great opportunity to reflect not only on what the foundation funds but how it funds. They also extensively listened to their grantees and other stakeholders and learned how vital greater flexibility to allocate grant dollars could help an organization become a stronger, more dynamic part of the communities they support. Delta Foundation changed its policy as a result of these sessions, by eliminating their restrictions they had previously placed on grantees how how their grant dollars must be allocated. The response to this change has been incredibly positive, showing how crucial this kind of support is to nonprofit organizations.

The movement to support real costs is growing, making this an exciting time for the philanthropic and nonprofit sectors. We have a chance to make real change in the way these sectors operate, creating better partnerships and stronger organizations that can bring real outcomes and impact to communities for years to come.

Donors Forum is working on a statement to share with its members about our commitment to advocate for full costs funding in both the public and private sectors. We will also commit to education and training of both funders and nonprofits about the importance of funding to achieve successful outcomes.

Effective nonprofit enterprises are functionally integrated entities, and supporting the full costs of program outcomes requires support of all aspects of the organization.

— Valerie S. Lies, President and CEO, Donors Forum


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