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Sept. 20, 2010, noon

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.

POSTED     Sept. 20, 2010, noon
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