For those of you who haven’t yet heard the term “the real cost” or who could use a little primer on the issue, we believe addressing this hot topic in the social sector is timely and important. The real cost is the concept that we’re not funding the actual cost of the nonprofit work because of misconceptions around overhead and efficiency. Fortunately, several leaders in philanthropy have come forward to engage in this discussion and create meaningful change to support the nonprofit community overall. A summary of some of the more interesting updates includes:
Looking back a few years, a public letter was shared in 2013 and signed by GuideStar, BBB Wise Giving Alliance, and Charity Navigator emphasizing that overhead ratios are not a valuable evaluation tool for nonprofit efficiency, calling it The Overhead Myth. They provided language for nonprofits to utilize to better message to funders the true costs of programs and what better indicators of impact might look like.
More recently, in this Huffington Post article by John Kobara in 2015, Kobara argues that we have a double standard in the social sector and private sector. He compares the markup consumers willingly pay for a cup of coffee to the fact that nearly a quarter of California nonprofits have government contracts that are underfunding the administrative and support services needed to deliver on the programs. Kobara cites this 2015 Urban Institute study highlighting the relationship between nonprofit/government grants.
Following a slew of progressive activity, the Los Angeles County Board adopted a resolution to pay nonprofits the full reimbursement on government contracts. The initiative has been pioneered by California Association of Nonprofits and championed by local leader Fred Ali of the Weingart Foundation who has used his President’s Message platform three times to highlight this critical issue (in December 2013, August 2015, and November 2015). Two formal initiatives have developed – the Real Cost Project which focuses on leveraging the resources of the funding community, and the Nonprofit Overhead Project which works at the local, county, and state level on ensuring implementation of the OMB Uniform Guidance.
In January 2016, the conversation continued with a Nonprofit Quarterly article by Claire Knowlton describing a landscape of understanding, but still insignificant action in supporting nonprofits. Knowlton attempts to design a formula that accounts for real costs like reserves and working capital, and describes a doom loop where nonprofits don’t receive enough funding and funders continually restrict their funding.
In August 2016, the Real Cost Project, in coordination with the three regional grantmaking associations and other funding partners, produced findings of the first phase which include funder recommendations and action steps in this report, an easy to digest summary worth sharing with Board members, funders, trustees, and nonprofit staff.
And with the recent announcement of a collaboration between the three regional grantmaking associations (San Diego Grantmakers, Southern California Grantmakers, Northern California Grantmakers), through the Philanthropy California collaboration, and a commitment to leading a statewide project moving more grantmakers towards funding the full costs of nonprofits, the effort is poised to gain an exponential amount of traction with more voices at the same table.
Why is this still a critical issue? When nonprofits do not receive funding to cover the entire cost of programs and services, the implications ripple throughout the organization. Often nonprofits share that they’ve had to dip into reserves, redirect staff resources to fundraise, or worse, cut staff – all of which unnecessarily burdens already stretched nonprofits and discourages investments in operations and infrastructure such as staff training. With overhead ratios often set arbitrarily by funders, the conversation will need to continue in perpetuity to remind both nonprofits and funders alike of the need to work closely and grow trust to engage in meaningful and frank conversations about the cost of changing our communities for the better.
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