Op/Ed: When Funding Feeds Starvation

Ed. Note: infoDOCKET would like to thank Sandi Caldrone for contributing the op/ed shared below.

When Funding Feeds Starvation
by Sandi Caldrone
Assistant Professor, University Library Research Data Librarian
University of Illinois Urbana-Champaign
caldron2@illinois.edu

In a misguided quest for efficiency, the NIH recently announced it was limiting indirect costs to 15 percent of grant award funds. A federal judge temporarily blocked the order, but the NIH has not withdrawn it. They even tried to justify the policy change by referencing similar limitations imposed by private foundations. The NIH notice, correctly, points out that many private foundations do not fund indirect costs, and many of the largest foundations cap indirect costs at 10-15 percent. Yet, “universities readily accept grants from these foundations.” Well, case closed, 15 percent must be fair if universities willingly accept it from other funding sources (she wrote, sarcastically). I have worked in academic libraries for about a decade, but before that I spent just as much time in nonprofit fundraising and administration, and I know firsthand that inadequate funding for indirect costs can cause inefficiency.

From 2007 to 2016, I worked at a small human services nonprofit providing children’s programming. We had a healthy mix of funding from government grants, private foundations, corporations, and individual donors. Almost all of our funders, across all of these groups, restricted their gifts to direct costs. Most of these gifts were restricted to one year at most and might be renewed on an annual basis but with no guarantee of continued support. By restricting funds to a particular project, funders felt they were making a more direct impact on  the children we served. By providing short-term funds, they intended to hold nonprofits accountable and reward those that could demonstrate immediate impact, perfectly reasonable and even virtuous motives.

At the same time, funders were enamored with low indirect cost rates, even funders who didn’t fund indirect costs. Indirect cost rates were a key evaluation metric, and low rates became a stand-in for efficiency and fiscal responsibility. This fixation on keeping indirect costs low led to the Nonprofit Starvation Cycle, which is as unhealthy as it sounds. Funders rewarded low indirect costs with project-restricted funds, administrative functions atrophied from lack of funding, programs suffered from poor administration, and nonprofits reinforced this vicious cycle by under-reporting their indirect costs because it was the only way to attract support. The Nonprofit Starvation Cycle made nonprofits less stable and efficient over the long term.

Focusing funding on project-based, direct costs didn’t just starve individual nonprofits; it created unnecessary costs across the whole sector. It takes time, energy and resources to spin up a new project, especially if it involves hiring and training staff. Similar resources are needed to responsibly sunset a project that doesn’t have the funding to continue. Yet, funders’ preference for supporting specific projects, especially new projects, forced nonprofits into an expensive and exhausting loop of starts and stops. Some nonprofits would avoid this hamster wheel by pursuing large, multi-year government grants, but that had its own dangers. Application and administration requirements were so onerous they basically forced organizations to focus all their energy on one funding source. If they lost that funding, nothing could possibly replace it, and the program might have to fold altogether. What would happen then? Vital services would disappear, or a new funding recipient would step in, incurring its own start-up costs, all in the pursuit of impact and efficiency.

It’s not hard to see the corollaries with academic research funding, especially now that the current administration seems poised to trigger a starvation cycle. The only good news is that since nonprofits have been through this before, we can learn from their experiences. Something really interesting happened with nonprofit funding during the pandemic. Seeing the need for flexibility in uncertain times, nonprofit funders shifted towards awarding more unrestricted grants that organizations could use however they saw fit. The results, as discussed by a panel of nonprofit leaders, are fascinating. By easing spending restrictions, funders empowered nonprofits to focus more on long-term projects, respond more quickly to changing circumstances, and even look inward and make real progress on diversity and inclusion. As one nonprofit leader put it, when their indirect costs were severely restricted, “This was an organization that wasn’t focused on a core strategy. It was an organization that was doing a lot of good work, but it was a collection of work, like a mosaic there was no ability to execute a vision.” An organization without vision can’t improve efficiency.

Adequate funding for indirect costs in the nonprofit sector not only made space for vision, it also changed the relationship between awardees and program officers. It helped build trust, making their interactions more candid and collaborative. Nonprofit service providers know from experience that, at best, slashing overhead stymies vision, stifles innovation, and creates instability that leads to unnecessary costs. At worst, it triggers a vicious and costly starvation cycle.

See Also: Read a 2022 Interview with Sandi Caldrone (via DCN)

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