Towards a New Framework for Nonprofit Financing

I’ve been reading and thinking a lot about the state of the nonprofit sector during the past couple of months. And I’m obviously not alone; the creation of the Obama Administration’s Social Innovation Fund, among other developments, has sparked some widespread soul-searching among nonprofit leaders (both providers and donors) about the future of the sector and necessary reforms.

This report, produced out of a gathering convened by the Alliance for Children and Families, Deloitte LLP, and the Hillside Family of Agencies (large nonprofit in NY, like $180 million annual budget large) earlier this spring, echoes a lot of that thinking. There were some very good pieces included in it, and it seems that, given the relationships that many participants have with congressional and administration policymakers, the group might have some momentum to enact some of their proposed changes. Still, I was very glad that they included pictures of the participants convening (in the historic Rockefeller family estate, no less!), because it was glaringly, painfully, offensively obvious that the effort is not representative of the overall nonprofit sector, which to me should color (NO PUN INTENDED) any discussion of their conclusions.

In the pictures, there were absolutely no people of color, and very few women. Going by the attendees’ names, I’d generously say that no more than 5 of the 21 participants were women. If we’re going to have a high-level meeting about the future of nonprofit financing and try to break out of the patterns of how things have been done during the previous decades to imagine a new day, shouldn’t it be a diverse group having that conversation? Um, yes.

Okay, then, what did these mostly male, middle-aged white people conclude about what needs to change in nonprofit financing? 🙂

First, what I liked the most: the group seemed to emphasize that the future of nonprofit human services MUST include significant, even increased, funding support from the federal government. They didn’t have any of this ‘work smarter, public/private, new economy’ stuff that so many of these conversations have substituted for the difficult political work of getting government to do its job and take care of the American people. Yay!

The report has three main themes: reform the ‘dollar in, dollar out’ method of government financing; encourage integration and break down programmatic silos; and innovate new mechanisms to promote the long-term financial stability of productive organizations within the nonprofit sector. Much of the last point parallels the discussion in Uncharitable, although this group came up with a few different approaches to the same stated problem. Here, they propose a human services investment bank to support mergers and acquisitions and venture capital and to finance new programs, but they recommend that the loans would be repaid, so to speak, by outcome performance, not in cash through enhanced fundraising efforts (as Pallotta proposes). They also suggest that this bank could function to underwrite lending directly to social service clients (sort of like a Fannie Mae for social services).

Many of the recommendations to address the first two areas, though, seemed to be inadequately developed in terms of strategies to overcome the primarily political nature of resistance to change. Yes, I can agree that the government’s current method of cost-reimbursement contracting is ill suited to long-term planning, innovation, and capacity-building. I can empathize with nonprofit executives who struggle to meet multiple, often conflicting requirements for reporting to different granting entities. I see the shortsightedness of taking whatever money we can get from the government and then cutting other programs to fill the gaps, without ever making the necessary capital investments (in technology, infrastructure, physical space, staff training) to take our organizations ‘to the next level’. I get it that pooled government funds and paying organizations for performance and reforming the rules of nonprofit accounting to allow for separation of capital budgets and cash flow would free nonprofit organizations from many of the constraints that currently compromise their long-term efficacy while encouraging innovative replication of promising interventions. I like the idea of ‘super waivers’, to open contracting and increase the transparency of the funding process (even as I fear, a bit, anything with ‘waiver’ in it, since that’s often a euphemism for something that exchanges a bit more flexibility for rather dramatic cuts in funding).

But what I don’t really see is a strategy for how we would begin to get there. There’s little discussion about the need for better outcomes data in order to judge the performance for which nonprofits are theoretically going to be paid. There’s even less analysis of the ideology behind the devolution which has contributed mightily to the fragmentation of the sector. And, while it seems that they plan to address the issue of vested constituencies for each ‘silo’, I don’t see a plan for how you corral these interests into a movement for change.

We didn’t get to the state in which we find ourselves by accident. And it really isn’t because we think it’s the greatest situation that we perpetuate it. Articulating the problems and pointing out what would be better does not, unfortunately, lead us neatly to a new reality. What we need, even more than technical know-how and lists of great suggestions, is the political power to bring about a transformation in the way that the nonprofit human service sector is viewed…not as charity but as a core part of our social contract and an investment in our collective future.

And that gets me back to my first critique. I don’t see how you build a movement without bringing in more of the essential voices that comprise today’s, and, perhaps more importantly, tomorrow’s, society. I applaud many of these ideas, and I concur with the dire assessment of the status quo. And I hope that this is another pebble dropping in the pond, until it spills over and we achieve the kinds of fundamental reforms that would make the nonprofit sector a real player in human progress.

I hate to be cynical, but I’m just not sure that the revolution starts in Rockefeller’s living room.

Financing Human Services Report

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