HOME
          
LATEST STORY
A conversation with David Rose, little magazine veteran and publisher of Lapham’s Quarterly
ABOUT                    SUBSCRIBE
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.
SHARE THIS STORY
   
Show comments  
Show tags
 
Join the 15,000 who get the freshest future-of-journalism news in our daily email.
A conversation with David Rose, little magazine veteran and publisher of Lapham’s Quarterly
“I hear the argument, Oh, these poor little magazines with their tiny readerships, if only people appreciated them more. It’s partly true. But the bigger side of that is, well, if only you knew how to read a budget. If only you actually knew anything about publishing.”
The New Inquiry: Not another New York literary magazine
For New Inquiry publisher Rachel Rosenfelt, building cultural significance was easy — building a sustainable business is the hard part.
iOS 8: How 5 news orgs have updated their apps for Apple’s new operating system
ABC, the AP, Breaking News, The Guardian, and The New York Times have all updated apps (or introduced new ones) to take advantage of new features on iOS 8.
What to read next
727
tweets
When it comes to chasing clicks, journalists say one thing but feel pressure to do another
Newsroom ethnographer Angèle Christin studied digital publications in France and the U.S. in order to compare how performance metrics influence culture.
714Wearables could make the “glance” a new subatomic unit of news
“The audience wants to go faster. This can’t be solved with responsive design; it demands an original approach, certainly at the start.”
592Ken Doctor: Guardian Space & Guardian Membership, playing the physical/digital continuum
The Guardian is making its biggest bet on memberships and events by renovating a 30,000 square foot space to host live activities in the heart of London.
These stories are our most popular on Twitter over the past 30 days.
See all our most recent pieces ➚
Encyclo is our encyclopedia of the future of news, chronicling the key players in journalism’s evolution.
Here are a few of the entries you’ll find in Encyclo.   Get the full Encyclo ➚
Corporation for Public Broadcasting
The Batavian
McClatchy
The Ann Arbor Chronicle
The Daily Beast
Newser
Byliner
Forbes
IRE/NICAR
NewsTilt
Arizona Guardian
Newsday