In my last post, I profiled Paul Brest’s new annual letter about the merits, or lack thereof, of general operating support grants. In the weeks before the annual report was released, Paul emailed a copy of the essay to a group of people who work in philanthropy. Paul Shoemaker of Social Venture Partners replied with extensive comments and a debate ensued between Shoemaker and Brest.
With the permission and encouragement of both Pauls, I’m republishing an excerpt of the debate below. Just to be clear, any emails sent to me are strictly off the record unless permission is requested. Brest’s email was a private email among a group of people. I republish it here only after Paul B. suggested the idea and Paul S. gave his permission.
Please see yesterday’s post for the “medical school example” referred to below. Note that Shoemaker does not write in all caps because he is yelling at Brest, but to distinguish their remarks during inline comments within the emails (although Shoemaker does love using all caps, emoticons and bold, italicized text in most of his emails!).
Paul Shoemaker: In the scenario, e.g., where the funder is interested in cancer research within a medical school, who else then funds the overall school’s “overhead,” administrative, etc. expenses?
Paul Brest: That’s just what overhead rates are for. In the case of universities the overhead rates are well defined.
Paul S: “OVERHEAD” RATES, IMHO, ARE LARGELY A FALLACY. NO ONE HAS ANY DEFINTION OF OVERHEAD THAT IS REMOTELY CONSISTENT. AND ONE PERSON’S OVERHEAD IS ANOTHER PERSON’S INVESTMENT IN HUMAN CAPITAL. EVEN IF SUCH RATES WERE DEFINABLE, HOLDING A NON-PROFIT TO X RATE, PRE-DEFINED, IS ARTIFICALLY CONSTRAINING AND LESSENS THE NON-PROFIT’S ABILITY TO ADJUST ITS SPENDING BASED ON CURRENT CONDITIONS AND OPPORTUNITIES. I JUST DON’T THINK OVERHEAD RATES ARE A VALID, USABLE, TRULY DEFINABLE THING.
Paul S: I know the analogy never translates 100%, but one thing I constantly recycle in my mind is some entity – VC, bank, individual investor, etc. – putting money into a private sector company but telling them they can only use the money for X, but not Y. How does that company ever build a whole, fully-functioning company, even if only some of their investors attach such requirements?
Paul B: The nonprofit and business sectors aren’t identical. If I were to use a business analog, though, a project grant is more like purchasing services than investing in the company.
Paul S: THEY ARE CERTAINLY FAR FROM IDENTICAL, I AGREE. BUT EVEN WHEN I AM PURCHASING GOODS OR SERVICES FROM A FOR-PROFIT COMPANY, I CANNOT THEN TELL THAT COMPANY HOW TO SUBSEQUENTLY AND SPECIFICALLY USE THOSE FUNDS (E.G. USE MY MONEY FOR R&D, BUT NOT SALES & MARKETING). AND IF THE FOR-PROFIT WORLD DID WORK THAT WAY, IT WOULD BE SIGNIFICATLY LESS SCALABLE AND EFFECTIVE THAN IT IS TODAY (AND NO, I DON’T THINK CAPITALISM / FREE MARKETS ARE “PERFECT” BY ANY MEANS J). THE FUNDAMENTAL PROBLEM WITH ANY KIND OF RESTRICTIONS ON FUNDING ARE HOW MUCH THEY HANDICAP AND CONVOLUTE THE NON-PROFIT’S ABILITY TO OPTMIZE ITS OWN SPENDING TO ACHIEVE ITS GOALS AND SOCIAL OUTCOMES.
Paul B: And now a question for you. If you made, say, a $1000 GOS [general operating support] grant to a university the chances are that about a penny would go to cancer research. So what should someone who wants to support a university’s cancer research program do?
Paul S: THE WAY I WOULD HOPE THE WORLD WOULD WORK IS THAT A NON-PROFIT / UNIVERSITY, ETC WOULD BE VERY CLEAR ABOUT THEIR GOALS, WHAT THEY INVEST IN, HOW THEY WILL USE THEIR FUNDS, ETC. AND THEN A FUNDER WOULD MAKE GOS / UNRESTRICTED GRANTS BASED ON THAT INFORMATION. IF ALL FUNDERS BEHAVED IN THAT WAY, THEN ULTIMATELY MY GOALS FOR CANCER RESEARCH WOULD BE MET.
I WOULD NOT BE ABLE TO SAY MY $1,000 LED TO X, BUT THE ULTIMATE PURPOSE FOR MY $1,000 WOULD BE MET. AND IF I LATER LEARNED THAT THE UNIVERSITY WAS NOT INVESTING IN THAT RESEARCH EFFECTVELY, I WOULD DECIDE TO DISCONTINUE FUNDING (UNLESS THERE IS SOME OTHER “PRODUCT” THAT I STILL VALUED). MAKING MY GRANT FOR CANCER RESEARCH A “PROJECT GRANT” DOES NOT, ON THE WHOLE, MAKE MY GRANT ANY MORE EFFECTIVE WHILE IT DOES RESTRICT / CONSTRAIN THE ORGANIZATION’S ABILITY TO BUILD A FULLY-FUNCTIONING ORGANIZATION.
Paul B: [referencing the medical school example] A grant to Stanford Medical School is not GOS under the IRS definition; only an unrestricted grant to Stanford University as a whole is. Stanford will allocate a GOS grant among millions of activities based on what it sees as the needs of the time: teaching Italian, particle physics research, the women’s lacrosse team, the law school, overseas campuses, you name it. Even if Stanford had the best cancer research center in the world, the institute would only receive a trivial part of a GOS grant to the University, given these other needs. If a donor particularly interested in cancer research could only give GOS, he or she would wisely seek an institution that only does cancer research so all of the funds would go for that purpose.
The way Stanford keeps its core operations functioning, even when most grants are restricted, is by charging overhead costs. With respect to government grants, overhead is defined extremely precisely by OMB Circular A-21 and the rates are negotiated with universities. (There’s a similar circular for nonprofits other than universities.) Individual donors and foundations try, usually successfully, to circumvent the overhead rates. Well, shame on us! I tried to get IS [Independent Sector] interested in the overhead problem some years ago, but it never caught on. It would be great if organizations like SVP [Social Venture Partners] and GEO [Grantmakers for Effective Organizations] got interested. They’d certainly have my support.
Paul S: OK, within a monolithic / huge institution, especially public, like a university, I see some of your logic for non-unrestricted support. Yes, an unrestricted grant in such a scenario has the potential to be spread across a great range of potential purposes. I will say that, taken to the extreme, if EVERY funder to a university ONLY funded their piece of research, etc. they wanted to focus on, we would be back to the same fundamental problem of “who will sufficiently fund the administration, infrastructure” then?”
But on institutions of significant complexity / diversity of work AND scale, I can see some logic, Paul. I am almost ready to say I’d be willing to live with the downsides you correctly describe in return for the upsides of completely unrestricted funding (with explicit organizational, published goals and institutional accountability). I also confess I’m too ignorant about funding streams for large public educational institutions
I will say that “With respect to government grants, overhead is defined extremely precisely by OMB Circular A-21” is an expression that, prima facia, seems doomed to inaccuracy, inaccuracy, severe rigidity, and a lack of understanding that will lead to all kinds of debilitating handicaps and restrictions. Same goes for “a similar circular for nonprofits.” And if in fact, they often successfully circumvent the overhead rates, and we all know they do, then what a ridiculous waste of time and resources in the first place.
For 98% of non-profits. I’ll stand my ground J (and I know you’d stand with me on much of that). I will also add that so many of these discussions about GOS / unrestricted vs. project-specific grant focus on the negatives and risks of unrestricted grants and not enough on the significant positives and benefits. Much less staff resource wasted, much greater flexibility in resource allocation / optimization, trust placed in the hands of non-profits who are closer to the real work, ability to fill in gaps in infrastructure, etc. There are more. And the ultimate purpose for unrestricted funding is it is a significant advantage of helping a non-profit build a much stronger, sustainable and salable organization.
Paul, when you say “I tried to get IS interested in the overhead problem some years ago, but it never caught on. It would be great if organizations like SVP and GEO got interested. They’d certainly have my support” I was vaguely aware of that, but I’d love to hear more and in fact, maybe we are ready to take that on collectively