Will philanthropy's flexible funding outlast the pandemic?

SAN FRANCISCO — The presidents of five leading foundations plan to increase rather than decrease their spending during the period of economic hardship brought on by COVID-19, they announced last week.

The foundations were motivated by concerns over the impact that the pandemic has had on their grantees and the people they serve, said Ford Foundation President Darren Walker, who spearheaded the effort, which also includes the John D. and Catherine T. MacArthur Foundation, the W.K. Kellogg Foundation, The Andrew W. Mellon Foundation, and the Doris Duke Charitable Foundation.

The announcement builds on a number of recent pushes to reduce the burden that funders put on grantees. Foundations have ramped up general operating support to help the nonprofits in their portfolios navigate these uncertain times, whether that means pivoting to respond to the pandemic or preparing as best they can for an uncertain future. The question is whether these commitments to increase funds, provide more flexibility, and limit asks of nonprofits will become part of the new normal — or whether funders will return to business as usual.

The joint commitment to increase payouts is among a series of efforts that the Ford Foundation has led to influence the field of philanthropy.

In March, the Ford Foundation created a pledge asking funders to adjust the way they do their grant-making and learn from these emergency practices to make more fundamental changes in the future.

“We do have to realize that the model of philanthropy that over-indexes for project support is one that does need to change,” Walker told Devex on Thursday during a press briefing, where he shared the foundation’s plans to issue bonds, use borrowed funds, and take on debt to double its annual grant-making from $550 million to nearly $1 billion over the next two years.

Already, over 760 organizations have signed on to the Ford Foundation’s March pledge. By doing so, these funders committed to removing restrictions on current grants, making new grants as flexible as possible, and minimizing their asks of nonprofits as they work to respond to the pandemic, among other things. What remains to be seen is whether donors truly will, as the pledge states, adjust their practices for the long term and support these nonprofits through more stable times.

“While funders should absolutely make immediate changes in response to COVID-19, we must also realize that this is an opportunity to innovate and fundamentally change the way we support our grantee partners,” Hilary Pennington, executive vice president of programs at the Ford Foundation, told Devex via email. “Now that the COVID-19 crisis has prompted many philanthropies to change the way they support, communicate with, and fund their grantees, we must work hard to ensure this transformation lasts for the long-term.”

Improving resilience

Walker said he hoped the unrestricted funding that foundations are providing in response to the coronavirus will demonstrate the benefit of paying for overhead, which is the focus of another campaign by Ford and four other leading funders: MacArthur, the William and Flora Hewlett Foundation, The David and Lucile Packard Foundation, and the Open Society Foundations.

“To help our grantees be strong and resilient and durable so that they can survive and even thrive during shocks, they’re going to need more general operating support, and we can’t go back on that commitment after this crisis subsides,” Walker said.

In addition to ramping up its grant-making, the Ford Foundation is boosting its efforts to understand the financial health of its grantees, Pennington told Devex, emphasizing the need to “stay ahead of the curve in making necessary changes or securing additional resources during this extraordinary time.”

Three-quarters of nonprofits have cash reserves for six months or less, according to a 2018 survey on the state of the nonprofit sector from the Nonprofit Finance Fund. These issues of nonprofit financial stability predated the pandemic, but nonprofits that put all of their resources toward day-to-day operations prior to the crisis now see the importance of building up their reserves.

Emily Bancroft, president of VillageReach — an organization focused on improving health systems — faced a major challenge as she tried to rework her budget in response to COVID-19.

She was concerned that VillageReach would run out of money and called every one of her donors to ask what flexibility they could offer so the organization could provide support to its partners in sub-Saharan Africa.

VillageReach had preexisting commitments, with dollars that were tied to those deliverables, and the organization was so reliant on heavily restricted dollars that it had almost no cash reserves.

“It was already an organizational goal and focus of mine to increase our flexibility where possible,” Bancroft said. “This has just reinforced the importance of that for me.”

Committing to long-term changes

In the weeks and months ahead, funders with a preference for short-term, project-based grants may begin to understand the value of multiyear, flexible funding, particularly when a crisis hits.

Dana Hovig, who heads the global health and development program at the Hewlett Foundation, told Devex he is hopeful that more donors and grantees will understand the impact of flexible funding after seeing its benefits during the pandemic.

Moving forward, he said that both funders and implementers have a responsibility to make sure nonprofits are more resilient to future shocks.

“Donors certainly carry much of the burden. We need to pay for the full cost of projects. We need to ask questions about and care about the financial viability of the organizations we partner with — and not just today’s impact,” he said.

“But I do think that nonprofit leadership also has to weigh that difficult balance between spending for today’s impact and saving for a rainy day. Rainy day funds and unrestricted net assets are necessary for future economic shocks, for innovations, or for when funders don't pay the full cost of projects,” he added.

There are approximately 100,000 private foundations based in the U.S., and their combined assets total nearly $1 trillion, according to data from Candid’s Foundation Center. Because they tend to invest their endowments, their distributions typically decrease during stock market downturns. But funders should give more — not less — when nonprofits need their funds most, several foundation leaders said during the press briefing.

“During this moment, what seems especially important is that resources are not frozen when they are so urgently needed,” said Elizabeth Alexander, president of the Mellon Foundation.

While the Hewlett Foundation has not increased its payouts in response to COVID-19, many of its grantees have pivoted to respond to the crisis, which they can do in part because they have unrestricted funding.

Still, earmarked funds will always have a place in philanthropy, according to Hovig.

"Organizations rightly focus most of the time on solving today's problems,” he said, adding that general operating support tends to go toward those priorities. “But sometimes you might want to take on a project to solve a very specific problem together or a problem you believe may emerge in the future."

Hovig noted that unrestricted funding is a reflection of trust and strategic alignment between a funder and an implementer.

“I hope that the things we do during this period will persist past this crisis,” said John Palfrey, president of the MacArthur Foundation.

He said funders are learning how to remove some of the administrative and bureaucratic hurdles that can distract nonprofits from serving communities. Grant-makers are realizing that “we don’t need to put some of these restrictions that we’ve put on grantees in the past,” he added.