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Dec. 5, 2011, 10:30 a.m.

For nonprofits, government money is appealing, but might not help the bottom line

More money from the government usually comes with less money from everywhere else. But a lot of that reality is under nonprofits’ control.

Last year, I wrote about an interesting study with implications for the new generation of nonprofit news organizations — and for those who’d like to see governments more involved in funding journalism.

Analyzing years of data from nonprofits, the study found that nonprofits who received government grants didn’t end up reaping the full benefit of those dollars — because increased giving from governments correlated with a decrease in giving by private donors, a phenomenon known as crowding out.

For every $1,000 given through a government grant, nonprofits reduced their investment in other forms of fundraising by an average of $137. That, in turn, meant an average drop of $772 in gifts from private donors. In other words, that $1,000 check from the government netted only $410, on average, because grant recipients reduced how much they tried to raise money through other means.

Well, the authors of that study, UCSD’s Jim Andreoni and McMaster’s Abigail Payne, are back out today with another study that tries to understand nonprofit fundraising behavior. This time they look at data from Canadian nonprofits, which lets them crunch the numbers in ways unavailable to them in the United States. And they found that crowding out was even bigger than in their study — that government grants led to, nearly dollar for dollar, reduced revenue from elsewhere.

Go read the full paper if you’re interested in the details, but here are a few of the highlights.

Government grants encourage individual donors to give

For individual donors — whether wealthy philanthropists or small-scale givers — it can be a challenge to determine the worthiness of a nonprofit. Andreoni’s research, in particular, has focused on the signals that nonprofits send to try to establish that worthiness. This study finds that a government grant seems to serve as a signal to individuals that a nonprofit deserves their patronage. As Andreoni and Payne put it:

Individuals, who are likely the least well informed of the finances or effectiveness of a charity, use the grants as a signal of quality and are thus encouraged to give by government grants…

…the government grants have a small effect of crowding-in individual donors, which is consistent with a view that individuals are either unaware of changes in government grants, or are using them as signals of the quality of the charity.

Government grants discourage giving by foundations

Andreoni and Payne find that other charities or foundations — think the Canadian equivalents of Carnegie, Knight, Ford, or smaller community foundations — move in the opposite direction, perhaps seeing government money as a good reason to shift funding elsewhere.

Unlike private donors, these institutional donors are likely to be quite well informed about the quality and finances of charities. But as with private donors, there are costs of attracting institutional gifts, such as making applications and accounting for expenses. In contrast to private donors, government grants are less likely to provide any signaling value to institutional donors, and more likely to make the donor institution feel their marginal impact has been reduced, leading to lower giving and more crowding out.

The biggest variable: how much fundraising effort changes

These largest driver of these changes in nonprofit revenue is not the behavior of individual donors or foundations. It’s the behavior of the nonprofit organization itself. Andreoni and Payne’s research has consistently found that nonprofits respond to a government grant by reducing their investment in fundraising — even though fundraising nets a return of about $5 for every $1 spent. The study notes that’s consistent with the idea that “charities find [fundraising] a necessary but unpleasant activity.”

In other words, when a grant comes in, they’re often happy to use that as a reason to reduce other fundraising efforts — which can make the government grant a substitute for old money rather than new money.

This new study finds that nonprofits receiving government grants, for instance, has significantly reduced revenue from galas and other special fundraising events — a reduction of $540 for every $1,000 in government money.

In all, the Canadian data finds that a government grant ends up being a wash: “Each $1,000 in grants reduces revenue from other sources by about $1,000.” But most of that reduced revenue — 77 percent — is due to reduced fundraising effort by the nonprofit, not the result of changed behavior by individual or foundation donors.

In other words, that decline is mostly within nonprofits’ control. For nonprofit news organizations, the key takeaway may be precisely that: Be aware that a new big pile of money might tempt you to scale back other fundraising. Evaluate those efforts independently, not just on how empty or full your coffers might be at the moment — particularly if your aim is to grow, not just to tread water.

Photo by Howard Lake used under a Creative Commons license.

POSTED     Dec. 5, 2011, 10:30 a.m.
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