Back to Basics: More charities are seeking – and getting – operating support

Original Source

By Elizabeth Schwinn

When Earl Martin Phalen started Building Educated Leaders for Life, a program that prepares Boston inner-city students for college, he found it easy to persuade foundations to pay for tutors and books. But few would give him money for the other things that would transform his idea into a reality, like classroom space, telephones, and computers.

Plenty of other nonprofit founders have run into the same problem, since $4 out of every $5 that foundations give are earmarked for a charity’s programs, which means they cannot be used to pay for basic operating costs like utilities, rent, supplies, and clerical help.

Mr. Phalen decided not to give up on his pursuit of foundation money, however, and in 16 years his organization has blossomed from a small program into a $31-million-a-year organization that operates in several cities around the country.

The turnaround came after a conversation with the founder of a successful competitor, a for-profit effort that had attracted $40-million from venture-capital investors who placed no restrictions on how the money could be used.

Perhaps, Mr. Phalen figured, foundations would respond if BELL approached them as though they, too, were investors. So he came up with a “business” plan to show grant makers and promised that if they let him use the money for administrative overhead, he would be able to achieve greater efficiency in running the program by cutting the cost of tutoring a child from $3,300 to $2,000 and enabling the organization to help more kids.

“I started to speak more as a business person, and much less as a traditional nonprofit leader,” he says.

Not only did foundations respond to the pitch, but also the size of the typical foundation grant BELL received grew from $25,000 to $100,000.

Focus on Results

BELL is one of a small but growing number of charities that have managed to persuade foundations to provide them with unrestricted grants that can pay for basic operating costs.

To be sure, only a few grant seekers succeed since grant makers are generally reluctant to make unrestricted awards. Many foundation officials and trustees say that they cannot be sure their grants produce results unless the money is tied to a specific program. Others fear that charities will fail to spend unrestricted dollars wisely or will become overly dependent on them.

But a handful of foundations have changed their policies to provide more operating support. After reviewing its grant policies, the Philadelphia Foundation decided last year to allow charities to apply for unrestricted grants and gave away nearly 40 percent of its $4-million grants budget in such awards.

“When you pay the bill in a restaurant, you don’t tell the owner to only spend the money on paying the chef,” says Nancy Burd, former vice president for grant-making services, who recently left the foundation to start her own business. When a foundation tells a nonprofit organization that it can only use a grant for a very specific program, or even part of a program, she adds, “it’s upside down. It’s the opposite of the way the entire rest of the world operates.”

More grant makers might follow the Philadelphia Foundation’s example if charities were aggressive in explaining why they felt they needed operating support, nonprofit consultants and foundation officials say.

Beverly A. Browning, a Buckeye, Ariz., consultant who writes grant proposals for nonprofit groups, says charities should be more willing to turn down grants with multiple restrictions. Too often, she says, such requirements divert the group from its mission and create new expenses.

“Nonprofit groups are turning themselves into pretzels for foundations,” she says. Small charities, in particular, are often in dire need of help with basic expenses, she says. But “they’re afraid to go to funders and tell them, because they’re fearful they’ll never get another dollar.”

Phil Buchanan, president of the Center for Effective Philanthropy, a Cambridge, Mass., group that conducts research for foundations about ways they can do a better job, says grant makers and grant seekers alike “have to resist this notion that any administrative expense is waste, because that’s crazy. Effective organizations invest in their systems and their people.”

Bank of America’s growing willingness to make operating grants is a direct result of charities speaking up about what they needed, says Andrew Plepler, president of the company’s foundation.

Mr. Plepler says local charities that received operating support from the foundation made a deliberate effort to tell trustees of the foundation why the money made a difference.

Most trustees didn’t understand how badly charities needed operating support, he says, but the feedback from grant recipients helped persuade the board to continue making such grants after it first did so in 2004. Since then, the foundation has provided more than $65-million in operating-support grants through its Neighborhood Excellence Initiative, in addition to other operating support it provides through other grant programs.

“Until you talk directly to a nonprofit and hear their story, it’s hard to get your arms around operating support,” Mr. Plepler says. “When nonprofits speak in terms of what it’s like to really run the organization, people get more comfortable with it.”

Remedying Social Problems

Assertiveness is only part of the challenge for grant seekers. Some nonprofit groups that have succeeded in winning operating support say that grant makers want proof that a charity’s work will make a difference in healing social ills.

The Low Income Investment Fund, in San Francisco, which provides loans and other financial assistance to builders who create low-cost housing, child-care centers, schools, and other facilities in poor neighborhoods, has spent significant time and effort gathering such data to show grant makers. Devoting so much attention to getting statistical information has paid off: It has received $5.3-million in unrestricted grants since 2004.

Abbie McBride, the charity’s director of planning, policy, and development, says the fund does not simply record the number of housing units and child-care places that have been created and the number of low-income people served.

“We try to go a little bit beyond that and say, ‘So what? If a kid gets child care, what does that do?'” Ms. McBride says.

To answer that question, the charity looked at several studies of the benefits of preschool education to determine whether receiving early-childhood education lessens the chance that a youngster will need remedial education or get involved in illegal activity.

“At a minimum, a dollar spent on early childhood learning will save $4 down the road,” Ms. McBride says. “Now, we can say to a funder, We’ve done this many spaces, and the societal savings is this many dollars in downstream costs.”

The Low Income Investment Fund’s “track record of proven accomplishment” first persuaded the F.B. Heron Foundation in New York to begin providing unrestricted support to the organization 15 years ago, says John Weiler, a senior program officer at the foundation.

The Heron foundation continues to provide unrestricted funds to the charity – even though in recent years it has started programs the foundation doesn’t typically support, like charter schools – because the Low Income Investment Fund has been able to show the foundation how the move benefits needy youngsters.

“We don’t support charter schools directly, but we recognize that that’s part of what it takes to have a strong community,” Mr. Weiler says.

Overhauling Operations

Foundations and other grant makers that award operating support often require charities to prove they are well managed. Foundation officials say they do this to be sure that money won’t be wasted.

Youth Villages, a Memphis charity that serves troubled children and their families, six years ago received a $6-million operating-support grant from the Edna McConnell Clark Foundation, after the grant maker examined the charity’s finances and administrative systems.

Patrick Lawler, chief executive of Youth Villages, says that for much of the 28 years he has been at the organization, the charity would not have been able to qualify for a grant from the Edna McConnell Clark Foundation. When Mr. Lawler joined Youth Villages, it received $150,000 a year in government grants, and he and his colleagues held bake sales, car washes, and other small-scale fund-raising efforts to make ends meet.

To improve the organization, he put together a patchwork of short-term grants, some restricted and some not, that enabled the group not only to build new facilities and create a research division that tracks how effective its programs are but also to improve its board and add human-resources and accounting departments.

Those were the things that made the difference to the Edna McConnell Clark Foundation, he says.

“Unless you have a good bookkeeping system and accounting system and have good human resources and know where the money’s being spent, it doesn’t matter what kind of a program you’ve got,” he says.

Other nonprofit organizations find that the work involved in getting operating support begins after they get the grant money, not before.

Nina Auerbach, chief executive of Child Care Resources, a Seattle charity that in five years has received more than $150,000 in unrestricted support from Social Venture Partners, a coalition of donors, says that to meet the rules for the grant, the group conducts time-consuming self-evaluations. In addition, she and her staff members regularly spend time on phone calls and meetings with officials of Social Venture Partners to keep the organization informed about how the money has been used.

The benefits of the grants outweigh the work involved, she says: Social Venture Partners provided advice and support as the charity’s annual revenue grew from $4.8-million to $7.6-million.

Focus on the Mission

It is difficult for most charities to turn themselves overnight into the models of efficiency that many foundations prefer to support with unrestricted aid. But some groups that are struggling can win operating support by demonstrating that they are doing work a grant maker cares deeply about – and that without an infusion of money, the charity cannot continue to carry out its mission.

The Women’s Community Clinic, a free health clinic in San Francisco, received a three-year, $240,000 grant from the California Wellness Foundation to help cover its costs as it struggled to meet increasing demand for its services.

The foundation decided to provide money for the basic costs of the Women’s Community Clinic to keep it from going bankrupt because it couldn’t sustain operations in the face of increased demand and sagging government support, says Gary Yates, president of the foundation.

“Sustaining the already-frayed safety net is one of the most strategic things a foundation can do for those who lack other access to health care,” he says.

Other grant makers sometimes provide operating support to help a struggling charity through a rocky time. But they are unlikely to make a second or third such grant unless the charity overcomes its problems.

The Highbridge Community Life Center, in New York, obtained a $150,000 grant for operating support nine years ago from the Clark Foundation, a small New York grant maker that has no connection to the Edna McConnell Clark Foundation. But the money came with a warning, says Edward Phelan, who recently retired as the charity’s executive director.

Charles Hamilton, the foundation’s executive director, told Mr. Phelan that the organization needed to shape up – by taking steps like improving its board, adopting a succession plan, or improving its management in other ways – or it wouldn’t get another dime.

Recalls Mr. Phelan: “He said, ‘Tell me how your organization is going to be different for having received this $150,000. No BS, Ed. At the end of the year, we’re going to decide whether to continue giving you money on the basis of what is different about your organization.'”

By tackling the problems Mr. Hamilton cited, Mr. Phelan got operating support the following year – and in the seven after that. He made his board more active in raising money. He also developed partnerships with other local charities, enabling him to portray Highbridge as a one-stop shop for Bronx residents who needed help. Last year’s grant enabled Highbridge to plan for Mr. Phelan’s successor, but he also used some of the money to renovate the interior of the charity’s building, a former church. And he was able to cover expenses while the charity waited for state or city reimbursement for its programs.

There is “nothing like” operating support, says Mr. Phelan: “It gives you some leeway. The organization comes out a better, healthier, more competitive organization.”