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The myth of double-dipping, and the destructiveness of restricted funding


The_myth_of_double-dipping_and_the_destructiveness_of_restricted_funding.jpgI’ve written before about double-dipping being one of the worst accusations you can leverage against a nonprofit. It makes for an effective insult: “Your ED is so dumb, he went on eHarmony hoping to meet a logic model.” “Oh yeah? Well your org is so unethical, it reported that one funder paid for some food for a community gathering, but then also told another funder that they paid for the same food!” (#nonprofitinsults, in case you’re bored and want to start a new trend on Twitter)

I don’t want to keep harping on this subject, but it deserves to be harped on from time to time. Last week, I had a meeting with my team to talk about our finances. Specifically, we are spinning off into our own 501c3, and some of our funders want information on how the money they gave us has been spent before we transition. For the next hour, we dove into it, and I want to capture the gist of the conversation here, mainly because I think it will make an excellent scene when I begin working on “Nonprofit: The Musical” in earnest.

Me: OK, so two of our funds are restrictive. Some just want a report on how we spent their money. And some are general operating.

Team member 1: Yes. One foundation, for example, does not want any funds at all to go to admin staff.

Me: That’s the same one that does not want us to spend more than $1,000 on food for community events, and more than $500 in travel expenses

Team member 2: It looks like we reported to one foundation that we spent some of their funds on our Program Director’s salary, but we also reported some of that to another foundation.

Team member 1: So it looks like we’re double-dipping.

Team member 2: WE ARE DOOMED! DOOMED! FROM THE DEPTHS OF DESPAIR, WE CRY OUT TO YOU, O ACCOUNTING GODS!

Me: Calm down. We are not double-dipping. We still need to raise more money before we reach our goals.  

Team member 1: We are working with a financial consultant to adjust our numbers; we can refile our reports. You’ll need to talk to program officers to explain to them that because we are a start-up, under the fiscal sponsorship of another organization, we are still developing our financial systems, and that’s why we need to refile our report.

Team member 2: We need to revise our budget, and make it horizontal, to break out who is paying for what.

Team member 1: Good idea. ABC Foundation won’t pay for existing staff, only new ones. And they don’t want us to spend more than 10% of their funds on admin.

Me: Right, and this is the one that also wants a breakdown of each line item and how much of their money we spent.

Team member 1: Yeah, but they have different line-item categories, so we’re going to need to combine some categories and separate out others in order to translate from our budget to theirs.

Team member 2: This may be why there’s been some confusion. Our biggest expense is salaries for our fellows. Most foundations think this is a program expense, but one considers that a personnel expense, and does not want to fund staffing.

Me: XYZ is most flexible, so we should allocate expenses to the most restricted grants first, then allocate some of the balance to XYZ.

Team member 1: We’re going to need to spend some time developing a matrix of which funder is paying for what, and revise our projections based on those restrictions.

Me: Sure, but the foundations have different timelines, so we have to take that into consideration. Our fiscal year ends in June, but many foundations are on a calendar year. XYZ ends in December. ABC’s fiscal year ends in October, so they only want report on what their money paid for up until October.

Team member 2: Doomed…

The_myth_of_double-dipping_and_the_destructiveness_of_restricted_funding_2.jpgThe meeting went on. If this were Nonprofit, The Musical, we would break into a rousing jazz number called “Funding Sodoku.” Sample lyrics: We don’t want to get screwed/so we play funding Sodoku/It is such an lengthy trip!/(But do you want to double-dip?!)/ No that would make us very blue!/And what’s why we play funding Sodoku (I’m still working on it) This would then be followed by a mournful solo ballad sung by the ED called “Please Have Mercy On Our Time and Sanity.” 

Look, I am not against financial transparency and accountability. But restricted funding has nothing to do with transparency and accountability. Quite the opposite: it has become a destructive force in our sector:

It wastes time

Hundreds of thousands of hours each year are wasted by nonprofits figuring out which funder is paying for what. Here, again, I present the Baker’s Dilemma. If you have a few minutes, print it out and try to solve the puzzle. How much time did it take you? It’s a relatively simple puzzle, so some people can do it in five minutes, others take longer. Extrapolate the time you spent on this puzzle to the millions of nonprofit professionals across the sector and we can start to see the extent of time wasted. Sadly, actual nonprofit funding Sodoku is way more complicated than this puzzle.

It distracts from the actual work

Right before the conversation above, my team had a great conversation regarding RVC’s role in supporting communities of color to be more civically engaged. What was our role? Who else is doing the work? How do we mobilize our first cohort of amazing emerging nonprofit leaders of color? It was an exciting conversation. For the past year and a half, we have been in this start-up mode, squirreling away free used furniture, hiring people, and developing systems. It was nice to be reminded of the big picture, that the reason why my organization was founded, and why we’ve been working so hard, was to find and support leaders of color who will engage communities of color to help change inequitable systems and policies. Everyone was energized, and we made plans to continue this conversation and make this the theme at our next Quarterly Community Gathering. This was why all of us got drawn to this work, and also what compels foundations and donors want us to focus on.

It hampers nonprofits’ ability to adapt, and it prevents innovation

Restricted funds force us to become psychics guessing on and committing to programmatic and operational elements months before they actually happen. But things do not always work out even for the best plans. There are myriad factors at play, including other funders. One time, the entire state of Washington lost funding from No Child Left Behind, which devastated and closed many effective programs statewide (and some ineffective ones, too, which was good). If it weren’t for flexible general operating funds, my org too would have had to close a program that to this day continues to serve hundreds of low-income kids. And innovation cannot happen if people are not allowed the flexibility to adapt to changing circumstances. 

It burns people out

In my career, I’ve had days when I worked 12 or 16 hours. One time, I worked from 9am until midnight, and actually got locked into my office building. I had to break out through a window that faced a busy street, praying I wouldn’t get caught by the police. I didn’t mind, because I was on fire work-wise that day. The more I do this work, the more evidence I gather that the work we do is not what burns people out. It is the constant having to justify our work that burns people out. Spending an entire Saturday at a retreat to determine our goals and actions, or providing services to our community members, is not as exhausting as three hours trying to figure out, among other things, how much of $892 we spent on supplies was paid for by the XZY foundation, whose fiscal year ends in March, and who does not want more than 15% of their funds to go to supplies.

It is inequitable

Restricting funding is not just annoying, it runs counter to many values that we hold as a sector, especially the value of Equity. Funding Sudoku may be easier for larger nonprofits that have Finance Directors or CFOs, but for most of us, we don’t have full-time people devoted to this area of work. Many organizations that are led by communities of color, LGBTQ, disabled, or rural communities tend to be smaller, and the burden of financial management is greater on these organizations. Add that to the fact that many funders refuse to pay for, or limit what can be spent on, accounting and other admin expenses, and it becomes a logistical nightmare.  

I know with Wounded Warrior in the news, what nonprofits spend our funds on, as well as what percentage go to overhead, are once again in question. This is a topic for another post, but yet again one bad apple spoils it for the rest of us. The article mentions Semper Fi Fund’s 8% overhead, a contrast to WWP’s ludicrous wastefulness. But 8% is a ridiculous, dangerous, and unrealistically low percentage for overhead.

The distrust, suspicion, and micromanagement of how nonprofits spend our funds need to end. Trust me, most of us are not flying first-class anywhere or staying at 5-star hotels; heck, if I get my own bathroom at my $80 AirBnB room when I travel for work, I’m ecstatic. Here are some hard truths that funders who restrict funds may need to come to terms with:

You are supporting everything

We don’t have separate accounts for just your funds. Your money goes into one bank account, like water into one bucket, from which we nourish the beautiful flowers of justice. It’s all mixed. Accounting can tell you that yes, the 3 ounces of water you gave supported just the tulips of programming and not the disgusting weeds of admin and fundraising, but come on, since the water is all mixed together, every plant got a bit of your funding. Yup, you’re totally paying for part of the wine we bought wholesale for the donor reception.

The report we give you are illusions

We sometimes use arcane financial magic, adding a wing of bat and an eye of newt, and hundreds of hours, to make all the numbers align, but it is all an illusion made to make you feel better. As stated above, you’re paying for a part of everything. What we report to you is just whatever makes the rest of the numbers balance out, in relations to the other dozens of restrictions.

There is no such thing as double-dipping

It is a made-up disease that forces a harmful cure in the form of time-wasting and aggravation. This is not to say there are not sucky, irresponsible nonprofits. There certainly are, and they suck, and they end up in the news and make people think all of us are like that. Most of us, though, are scrambling continually for funds. How can we be “double-dipping” on anything when many of us freak out practically every month about making the next payroll? 

The concepts of double-dipping and restricted funds are archaic, destructive, and inequitable. If our sector is to move forward, let’s dispense with them. This does not mean at all that we dispense with accountability and transparency. If anything, it will only improve these areas, since we’ll have more time to focus on better financial management as a whole. Here are my recommendations to funders, please feel free to add others or to disagree:

Provide general operating funds

This is the most effective form of funding, and the most efficient, and also the most equitable. Give nonprofits the flexibility to focus on outcomes and results. If all funders give general operating funds and focus on outcomes, it would save hundreds of thousands of hours that could be put to better use providing services. It may also, honestly, prevent a lot of us from rage-quitting the sector. 

Ask for reports on the organization’s finances as a whole

Most of us are glad to provide financial reports to anyone, and our tax filings are public. We keep receipts and categorize and record every expense. I’d be happy to send you financial reports on my org as a whole every single month. We have to prepare them for our monthly board meetings anyway. It’s when you restrict what your particular funds are used for—“No more than $48 of the funds we give you may be used to buy stamps for your annual appeal”—and then ask for confirmation, that’s when we start tearing out our hair and clawing at our faces. 

Pay for anything you ask for

Financial management is expensive. Some funders want detailed data and yet don’t want to pay for staff time and other related admin expenses. In my experience, financial reviews cost $3,000 to $5,000 each year, and audits usually cost at least $10,000, even for small nonprofits. Who exactly are paying for these, if no one wants to pay for them? If you require something, help pay for it. Same goes for evaluation reports and other requirements.

Don’t make nonprofits return unused funds

Here is a horrifying dilemma: Nonprofits are expected to be efficient with spending, but if we’re too efficient, we may have to return unused funds, even if we achieve the results and outcomes agreed upon. All the while, funders keep pushing for sustainability. How can nonprofits be sustainable if we can’t build up reserves? One year, my previous org had funds left on a grant because we managed to find equipment on sale (yay!). We asked to see if this could be saved up to start next year’s program, and was told no, we either spend it on more supplies, or give it back (boo!). So we bought 25 pads of easel paper (yay?). They were useful, but it would have been a lot more helpful if we were able to save the funds in a reserve.

If you don’t trust an organization and its leaders to use your money wisely, don’t fund them

Just like if you don’t trust a job applicant to do their job effectively, don’t hire them. Otherwise, you hire them on, micromanage them, and it makes for a terrible relationship where everyone is unhappy. If you don’t trust a nonprofit to spend your funds wisely, then don’t fund it. But first, determine if your definition of “wisely” makes sense.

I know everyone means well, and no funders are intentionally trying to make things difficult on us nonprofits, but it’s time we discontinue the inequitable and destructive practice of restricting funding. Let me know your thoughts. I want to end this with a note of sincere appreciation for the funders who provide general operating funds and who ask for holistic financial reports. In the darkness of restricted funding, you are the Light of Earendil the Evenstar, which helped Frodo on his journey to destroy the Ring of Power and save the world from evil. If this were Nonprofit, The Musical, I would break into a song called “Thank You for Watering the Plants of Equity and Justice.”

If you liked this post, you may like “General operating, admin expenses, and why we nonprofits are our own worst enemies,” as well as “Nonprofit funding: Ordering a cake and restricting it too.” And before you suggest individual donations as the panacea, please read “Why individual donations strategies often do not work for communities of color.”

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Vu_Le.jpgThe preceding is a guest post by Vu Le from his blog, Nonprofit with Balls. To read the original post, click here. Vu is a writer, speaker, vegan, Pisces, and the Executive Director of Rainier Valley Corps, a nonprofit in Seattle with the mission of developing and supporting leaders of color to strengthen the capacity of communities-of-color-led nonprofits and foster collaboration between diverse communities to effect systemic change. 

Topics: Fundraising Overhead Myth Point of Vu Grantmaking Restricted Funding Development