Financing Philanthropies

the impact of donors, grants, and governments 

An Overview


Most nonprofit organizations rely on multiple sources of funding including, but not limited to, government grants and contracts, private giving, membership dues, earned income, and special events. Though revenue sources are often diversified to reduce the risk of financial vulnerability, government funding and private donations compose the largest percentage of nonprofit revenue. 


Government Involvement

Government support has long been a fixture of the nonprofit world, from providing grants and contracts to offering tax exempted status. There are three primary reasons why governments may prefer subsidizing nonprofits rather than providing services themselves [1]. First, the government’s share in the cost may be lower; second, the party in power may curry political support; and third, nonprofits can access volunteer labor, further lowering costs. Before the 1980s, this government funding was provided primarily in the form of block grants. However, in the time since, a shift has occurred towards contractual, conditional funding programs. This change has in turn affected not only the structure and functioning of the nonprofits, but also their relationships with the communities they serve.

The importance of formalized, bureaucratic structure for nonprofits in the process of securing government funding is two fold. First of all, submitting applications on proposals for funding requires a significant amount of administrative activities, such as documenting communities' need for services and grant writing. Secondly, data has shown that the most important factor in determining which nonprofits receive government grants and contracts is the organization's degree of bureaucratic tendencies [2]. This may be because nonprofits with greater bureaucratic orientation are more compatible with government funding agencies in terms of work flows, information flows, and other operational systems. The principles of institutionalism and isomorphism explain how nonprofits embrace structures, strategies, practices and processes that have little do with efficiency or performance, solely to accommodate pressures of external evaluation and regulations [3]. A prevalent concern is that nonprofits are devoting attention, resources, and energy to these administrative activities instead of adhering to their core mission. Another criticism relates more to bureaucracy in general: there is debate over whether or not this professionalized structure causes inefficiency. This is certainly something to consider in the discussion of government funding's effect on nonprofit organizations. 

Another consideration in this conversation is how government funding may threaten organization's autonomy. An oft-expressed worry is that nonprofits are being driven by the gaendings of funding governments rather than by their missions. Governments can, for example, implement reporting requirements and specific regulations to impose their own priorities on organizations. A particularly salient issue is what a loss of autonomy means for nonprofits' political expression and activity. It is logical to think that nonprofits follow a simple philosophy, that of don't-bite-the-hand-that-feeds-you resource dependence. Nonprofits that depend on government funding for financial stability and survival may abstain from political activity that contradicts the views of their funders. This, along with a shift towards bureaucracy, can sometimes transform nonprofits to resemble quasi-governmental organizations. 


Funding Sources and "Mission Drift"

The issue of funding sources' influence on nonprofits' community integration is incredibly relevant to our overarching discussion on breadth and depth based philanthropy. Depth-based philanthropy's success is largely dependent on how responsive organizations are to communities' needs. Multiple sources have, however, pointed out that government funding gradually diverts nonprofits from community integration and changes the nature of service and delivery. Contractual funding in general directly disadvantages small nonprofits that are rich in the social capital required for community integration. Instead, this funding typically is allocated to larger nonprofits that are well versed with corporate practices. It has been shown that in larger organizations, there is a prevalent belief that the organization is accountable to the government rather than to the community [4]

The broader term for this phenomenon is mission drift. Mission drift happens when a nonprofit's activities and priorities are decided by funders, so its functions diverge from the original mission. When mission drift occurs, nonprofits' goals become more aligned with government policy, instead of focusing on working with communities to demand more from the government. This results, in the loss of a critical voice and advocate from those working to keep government accountable to underserved communities. The danger of mission drift, however, is not limited to government funding. Private donors can certainly elicit a similar effect. To secure government funding, attention is diverted to administrative activities like grant writing; to secure private donations, the focus becomes cultivating relationships. 

The relationship management approach has become increasingly important to nonprofits' fundraising efforts. This is partly due to the realization that donor lifetime value can be an immense source of revenue. In other words, annual giving donations can become very significant, especially when contributed every year for a donor's lifetime. Many strategies have been identified for cultivating the donor-organization relationship [5]. The tenant of reciprocity, for example, refers to the fundraisers' obligations to acknowledge the donor publicly and find a sincere expression of appreciation. Responsibility in this context means using funds only for the purposes specified at the time of donation. Reporting involves remaining accountable by providing transparent, accurate information to donors. As noble as these pursuits may be, they each have the potential to distract organizations from their primary goals. 



This is not to say these sources of funding have no positives. First of all, they are the most well established and readily available. Secondly, many grants and contracts confer upon recipients a degree of prestige and legitimacy. The crowding-in effect has been observed, where government funds signal to other donors that the organization is worthy and credible [6]. Even the methods in which recipient organizations are selected have advantages. The competitive process increases accountability and incentivizes nonprofits to cut unnecessary costs, work harder, and improve the overall effectiveness of civil society. 

Additionally, some nonprofit leaders do take precautions to ensure that the strings attached are acceptable to stakeholders and that funders do not end up controlling the organization. Studies have shown that the most commonly used evaluation criteria for comparing and contrasting funding sources are: the alignment of the source with the organization's mission, the extent to which the source would catalyze others, and the sustainability of the source [7]. These are only part of the complex set of evaluation criteria leaders use - showing that they truly are selective in which funds they accept. However, this may be a luxury only more established nonprofits can afford.