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A warning to nonprofit news organizations: Government funding may not boost the bottom line much

At a time when some Americans are talking about increasing government support for journalism, here’s an interesting new study that adds a useful data point to the discussion: When governments provide financial support to nonprofit organizations, 73 percent of the extra money is counterbalanced by a decline in support from private donors. In other words, the value of government money received is decreased by a reduction in funds from elsewhere.

The paper is by Jim Andreoni of UC San Diego and A. Abigail Payne of Canada’s McMaster University, and it examines over 8,000 nonprofit organizations. The idea that government funding reduces private giving is not new, but this paper attempts to figure out why — and how — the trade-off occurs. Is it because private donors think that government grants eliminate their own need to give — the idea that they “already gave at the office” through their tax dollars? Or is it because getting government money causes nonprofits to relax, to reduce how aggressively they pursue outside money through fundraising?

Andreoni and Payne come down squarely on the side of the latter — it’s primarily nonprofits’ own reduction of their own fundraising efforts that lead to less outside support, not any change of heart by donors. When the government gives, nonprofits take that as an opportunity to cut back on fundraising, even though fundraising is highly cost-effective; the paper finds an average $5 return in gifts for every $1 spent on raising money. Reducing fundraising may save some cash in the short term, but it doesn’t appear to be a smart strategy.

If charity managers find fund-raising a “necessary evil,” or fear it may hurt their evaluation from charity watchdog groups, then a government grant will allow them to redirect efforts from fund-raising to providing charitable services. This means that after getting a grant, charities may simply cut back fund-raising.

The paper finds that for every $1,000 given through a government grant, nonprofits reduce their spending on fundraising by an average of $137. But that decrease leads to a drop of $772 in donor gifts. (The paper found that, contrary to the fears of some, government grants encourage outside donors to give instead of discouraging them — but the impact is small, only about $45 per $1,000 in government grants.)

In other words, adding it all together, $1,000 in government money only nets out to $410 in the end, on average.

The study didn’t look specifically at nonprofits engaged in journalism, and it’s difficult to apply its findings directly to the ongoing debate over government support for news. Check out the full paper for much more detail. But if I were in charge of a nonprofit news organization, here’s what I’d take away from Andreoni and Payne:

Government help is not a cure-all. Even setting aside the very legitimate arguments over the wisdom or ethics of government support for news, it doesn’t appear to be quite the financial boon some are foreseeing, at least for nonprofit organizations more broadly.

Fundraising is worth investing in. Andreoni and Payne say it’s surprising to economists that $1 spent on fundraising could lead to $5 in revenue, but it’s a robust finding that lines up with what the industry reports internally. They also point out that not every nonprofit approaches fundraising with the same sort of enthusiasm (the “necessarily evil”); those who find the task distasteful will pay for it in the pocketbook.

Success in one source of revenue can’t lead to the abandonment of others. The smartest nonprofit news organizations are busy trying to build a multi-pronged model for financial sustainability — often blending advertising, sponsorship, small individual donors, money from big foundations, content-sharing alliances, and more. Over-reliance on any one source is dangerous; just ask the publisher of a major metro newspaper about classified advertising circa 1995.

Photo by Thomas Hawk used under a Creative Commons license.

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Mark Coddington    Aug. 22, 2014
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  • Frymaster

    I think there’s a primary flaw in the logic here, unless the control for all factors.

    This survey presumes an unlimited amount of resources to devote to fundraising and / or it looks at the government grant application process as fundamentally different from fund raising.

    Both would be wrong. A more plausible conclusion is that non-profits see government grants as a more efficient funding source with far clearer rules and expectations than private donors, including the corporate giving base. Thus, they put their limited resources against this better market than the weaker one.

    Also, the study abstract does not define a time period. The last two years have been exceptionally difficult for raising private funds. In particular, more private donation is going to “capacity building” groups that then dole out much smaller portions to “end user organizations”. Thus the smaller organizations have fewer private sources open to direct donations.

    Again, government grants seem like the best approach, so that’s where the efforts go.

  • Joshua Benton

    Hi Frymaster: The study looks at nonprofit data from 1985 to 2002. I take your point, but I don’t think it’s accurate to say it assumes an unlimited fundraising capacity. The $1-to-$5 number is based on real world data, not an abstraction.

    I do think, though, that you’re right that it assumes — or, more accurately, my interpretation of it assumes — that nonprofits view more revenue as a good thing. If a nonprofit doesn’t want to grow and is happy being (say) a $2 million/yr operation, then a government grant of the right size could make getting to $2 million easier (or more pleasant) than a fundraising strategy would. If you’re happy to view govt money as a replacement for other revenues, then sure, the tradeoff could work for you.

    But I think what’s interesting about this study is that it shows that there is such a tradeoff — that a $2 million government grant does not tend to increase the bottom line by $2 million. It tends to increase the bottom line by around $820K, based on the actual actions of thousands of nonprofits in response to such a windfall. To me, that’s useful in helping nonprofits guide their own responses to such a situation.

  • Josh Stearns

    Thanks for pointing out this study Josh – I need to read the entire piece before making too many assertions, but one issue that your post raised for me is the question of how the government funds were distributed.

    For example, how might these findings change based on the structure of the government funding. Government funding can come from Congress through appropriations (meaning you need to fight for it every year), a one time line item or earmark, or from a grant application or even competitive bidding at a government agency. I would be curious how these different distribution methods impact nonprofit’s own investment in development staff/time.

    National Public Radio, for example, has been able to balance government funding with a continued investment in fundraising.

  • Joshua Benton

    Josh S., you’re right that any one individual outlet could manage the grant-reaction process differently. But to play devil’s advocate, we don’t know how NPR’s fundraising might look different if (say) its government support went away tomorrow. It might respond by substantially increasing its other fundraising efforts in such a way that led to a net gain. We don’t know. I just think it’s interesting that the most common reaction to a government grant is to cut back on other fundraising.

    To your other point, yes, the structure of funding would definitely be important. I’d think a sotto voce tax subsidy (of the sort the 501c3 model allows) would be different than a Knight News Challenge-style competition, which would be different from an across-the-board subsidy for all journalism, etc.

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