INDIANAPOLIS—Foundations are more likely to support nonprofits' overhead costs than is commonly believed, according to a new study released today by the Center on Philanthropy at Indiana University and the Aspen Institute's Nonprofit Sector and Philanthropy Program, which funded the study.
The study, Paying for Overhead, found that a surprisingly large majority of foundations (69 percent) support nonprofits' overhead expenses, such as rent, administrative staff, accounting systems, or strategic planning. Nearly half make grants for general operating support and almost one-third award unrestricted grants.
Nonetheless, the study of foundations and educational and human services nonprofits found that two-thirds of the nonprofits surveyed said they lack adequate funding for their overhead. And 75 percent reported that they do not rely on foundation funding to pay for such core operations.
"The issue of how much support foundations should provide for nonprofit overhead expenses is one of the most important in the nonprofit field today," said Alan Abramson, director of the Aspen Institute's Nonprofit Sector and Philanthropy Program. "The debate over foundation funding policies is longstanding and heated, and this study sheds important new light on the subject."
"This study helps illuminate the complex relationship between nonprofits and foundations," added Patrick M. Rooney, director of research for the Center on Philanthropy. "When nonprofits reported inadequate overhead funding, the most frequently cited reason, given by 53 percent of those surveyed, was that foundations pay for programs but not overhead expenses. Yet our study found that foundations are willing to pay for overhead.
"We believe the tension lies in the short-term nature of much foundation funding and nonprofits' resulting hesitancy to use foundation funding for recurring expenses such as overhead," Rooney said.
Case studies of human services and educational nonprofits indicate that instead of foundation funding, nonprofits tended to purposefully pursue more diversified funding streams to cover overhead because they perceived foundation funding to be temporary and they preferred more predictable, self-generated revenue. Nonprofit executives expressed frustration with the short duration of foundation funding, stating that most foundations want to support start-up costs for innovative programs but do not want to provide long-term funding. These leaders tended to use foundation funding to enhance programs or to cover periodic expenses such as capacity building or board training.
The findings reflect longstanding tensions in the nonprofit sector. On the one hand is the desire of many foundations to incubate new solutions, coupled with concern that providing long-term and/or general operating support may harm nonprofits by creating dependence on foundation funding. On the other hand are concerns that foundation overhead funding that is too little or too brief may harm nonprofits by risking inefficiency or reduced effectiveness.
"This study demonstrates the need for better communication between nonprofits and foundations about these issues," said Eugene R. Tempel, executive director of the Center on Philanthropy. "Nonprofits should more fully explore foundations' willingness to fund administrative costs. And given the short duration of much foundation funding, nonprofits and foundations together should also consider ways that foundations may be able to help nonprofits identify and develop other sustainable sources of overhead support."
The study also found that when human services organizations received a high proportion of their budget from foundations, they were statistically more likely to report inadequate overhead funding. The cause of inadequate funding for overhead is less certain and may be influenced by nonprofits' decision making as well as the availability of resources.
Other key findings include:
- When asked about the foundation's general attitude toward funding nonprofit overhead, nearly half of foundations surveyed reported that administrative funding builds nonprofits' capacity and helps to meet the needs of constituents.
- Large foundations (those that grant more than $6.5 million annually) and those that fund nonprofits locally were statistically more likely than smaller foundations or those that grant nationwide to fund nonprofits' overhead expenses.
- Only 18 percent of foundations have written policies about funding administrative costs; 35 percent have policies about making operating grants. Of those with policies, fewer than 10 percent have analyzed their impact on nonprofits' operations or programs or have ever changed those policies.
- Twenty-eight percent of nonprofits reporting inadequate overhead said the cause was external pressure to keep those expenses low, while 20 percent said it was because the nonprofit had other fundraising priorities.
- Larger human service or educational organizations were statistically more likely than small ones to have adequate or more than adequate overhead funding and their infrastructure was more likely to be in good or excellent condition.
- Nonprofits reporting adequate overhead funding were more likely to report receiving little or none of their revenue from foundations.
This study was funded by the Aspen Institute's Nonprofit Sector and Philanthropy Program and is based on a survey of 3,500 foundations, 6,000 educational or human services organizations, and six case study organizations. A working paper for this report is available at
www.philanthropy.iupui.edu/Research or at the Aspen program's Web site,
www.nonprofitresearch.org.
The Aspen Institute's Nonprofit Sector and Philanthropy Program seeks to improve the operation of the nonprofit sector and philanthropy through research and dialogue focused on public policy, management, and other issues affecting the nonprofit sector. The program is part of the Aspen Institute, an international nonprofit organization headquartered in Washington, D.C., that is dedicated to fostering enlightened leadership and open-minded dialogue.
The Center on Philanthropy at Indiana University, a part of the Indiana University School of Liberal Arts at Indiana University-Purdue University Indianapolis, is a leading academic center dedicated to increasing the understanding of philanthropy, improving its practice, and enhancing participation in philanthropy through research, teaching, public service and public affairs programs in philanthropy, fundraising, and management of nonprofit organizations.
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