The Curse of Line-Item Budgets: Tracking Pennies Instead of Outcomes

This post on the importance of flexible funding and the restrictiveness of line-item grant budgets originally appeared on the blog in June 2018. It is reposted here as part of our Rewind blog series.

For more content related to this topic, stay tuned later this month when CEP will be releasing new research on foundations’ provision of multiyear general operating support (GOS). CEP will also be hosting a webinar on October 27 delving into this new data and highlighting the approaches of two foundations that intentionally provide more multiyear GOS grants than typical. You can register for the webinar here.

Reading the recent CEP resource about the five things nonprofits want donors to know, there was one thing in particular that most struck a chord with me as a nonprofit executive: flexible funding.

Over the past 14 years, I’ve run Rising Tide Capital, a nonprofit organization in New Jersey focused on creating economic opportunity for low-income families and communities through entrepreneurship. We’ve been fortunate to grow the organization significantly over the years, based largely on the willingness of our funding partners to provide flexible financial support. I can think of few issues that have more directly contributed to the success of our organization than this. Effectively, it boils down to one issue: line-item grant budgets.

I completely understand why line-item grant budgets exist historically, and why they probably need to continue in certain circumstances. But I feel they do far more harm than most people outside the nonprofit world realize. If you’ve ever seen the episode of The Office where the branch realizes they have a few thousand dollars in unspent funds that they will lose from next year’s budget if they don’t figure out a way to spend it by the end of the day (and the branch then divides into warring camps over buying new office chairs versus a new photocopier), you may get the point.

When applied to the nonprofit context, it’s not that organizations find themselves forced to spend money wastefully (far from it!), but rather that the structure of financial management in the nonprofit world often requires paying attention to the wrong kinds of numbers. A leadership team that is focused on efficiency and effectiveness is what everyone should want, but many grantmaking processes unintentionally result in a focus on compliance instead. And once the entrepreneurial spirit is squeezed out of a culture in favor of compliance, it’s hard to get it back in, so this can have long-term consequences.

I can attest to this from experience. Over the years, our team has cumulatively spent thousands of hours making sure that our expenses are correctly mapped to the dozens of semi-overlapping grant budgets that we are trying to manage at any given time. What does this look like? It means timesheets that take hours for staff to fill in because they need to correctly (and fully) spend their time according to the way that various grants were written. It also means hours of time collating receipts and making sure that we are correctly dividing the most recent office supplies invoice across multiple funders and making sure not to accidentally double charge the same box of pens to two funders.

To do this, we have developed an Excel spreadsheet we fondly call “The Patchwork Quilt” that attempts to map our expenditures across more than 50 grant budgets. We use this to flag problems and estimate what kind of budgetary “real estate” we can offer in upcoming grants. A budget is an important part of telling a story, but its administrative complexity increases exponentially the more accurate it becomes. I can assure you, the brainpower spent on this task is operating at a net loss when it comes to our mission and impact.

Here is where the irony comes in. From our experience, many program officers are not fully aware of this issue. It comes up in the realm of auditors and CFOs, long after a grant has been awarded and far away from the world of program design and evaluation. For a program officer, a project budget often has more to do with understanding the project than ensuring compliance.

However, once established, a grant budget is effectively the law for a nonprofit organization. From an auditor’s perspective, no changes are possible without explicit approval from the funder. This may not be the intention, but everything boils down to the wording of the grant award letter. Unfortunately, while these documents serve as the fundamental record for auditors, they are often an administrative afterthought for grantors — a template mostly comprising boilerplate language that gets customized for each project.

The good news is that there is a simple solution to this problem. Much of the conversation around flexible funding in the recent past has focused on reasonable indirect cost allowances, dispelling “the overhead myth,” and the perennial hope for more general operating support. But for our organization, we’ve found that this flexibility has simply come through grant award letters with strict deliverables and reporting requirements — and no restricted line-item budgets.

The real issue in this conversation is accountability. By focusing on deliverables, a grant award letter can place performance at the center of a funding relationship. In working with our auditors, we’ve found that there are ways to add language into the grant award letter that can ensure maximum flexibility while maintaining a formal “purpose restriction” that ensures accountability and fidelity. As a consequence, much of our grant support is not technically general operating support, but it operates nearly exactly like it.

Practically speaking, this means that our grant proposals typically identify a number of very specific, often quantitative or tangible, project deliverables associated with the grant, against which we report our progress at regular intervals. Instead of a standard line-item budget for the grant request, we include our organizational budget. Doing this has enabled us to focus our attention on establishing goals, strategies, and targets with our funding partners — and ensuring that expenses are flowing towards the most effective and efficient path towards those ends.

As reasonable as this sounds, as a long-time COO I can understand the risks involved in making changes to a standardized model. For that reason, I am deeply grateful for the creativity, courage, and trust our program officers have extended over the years in this area. We are where we are today because of them. This kind of trust between funder and nonprofit needs to be earned over multiple years of successful performance, but if you ask any nonprofit executive, they’ll say the most impactful funding relationships undoubtedly take on this kind of emphasis.

CEP’s new resource for donors calls for generous gifts as well as flexible ones. While of course the size of support makes a huge difference, I’ve found as a nonprofit leader that the flexibility of funding has been more important than any other grant characteristic over the long term. In a professionalized industry of strategic planning and outcome tracking, it’s time to go beyond not only the overhead myth, but also beyond the distorting type of managerial training wheels that line-item grant budgets represent.

Alex Forrester is the co-founder and chief strategy and innovation officer of Rising Tide Capital, a nonprofit organization committed to economic opportunity for low-income families and communities through entrepreneurship. Follow Rising Tide Capital on Twitter at @RisingTideOrg.