Donations with strings attached create ‘starvation cycle’ for charities

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Eight days into December, the month that typically accounts for a remarkable 30 per cent of Canadians’ annual charitable giving, Lydia Potocnik posted a telling call-to-action on her LinkedIn profile.

“During this giving season,” the head of BMO Private Wealth Canada’s estate planning and philanthropic advisory services wrote, “we continue to help our clients grow the good by encouraging unrestricted gifts to support the most urgent and pressing needs in their community.”

In any other year, the “unrestricted gifts” qualifier might have been absent, Potocnik says. But with nearly a third of Canadian charities reporting that fundraising has dropped below pre-pandemic levels, restricted donations that require reporting and benchmarking guidelines to be met – or that must be dedicated to predetermined programmatic areas – are actually hindering the work of many nonprofits at a time when their work is needed most.

The good news, Potocnik adds, is that wealthy Canadians are stepping up like never before.

Before the start of the 21st century, no Canadian charity had ever received a single donation topping $100 million. In 2022, there were six such gifts, including a record-setting $500-million donation to the Winnipeg Foundation. By combining this kind of unprecedented generosity with a global unrestricted-donation movement taking Canada by storm, the hope is that this country’s nonprofits will be able to do more with more.

Restricted donations drive a ‘starvation cycle’

Ironically, restricted gifts’ longstanding tendency to favour nonprofit programming over administrative and operational costs can take a heavy toll on programming.

Using a sample of arts and culture organizations based in 49 U.S. states, a 2021 study out of the universities of Hawaii and Colorado noted that “donor-imposed financial restrictions hinder nonprofit service delivery,” adding that “this may be due to the relative size of these donations and that they are typically restricted in perpetuity, leaving little flexibility to the organization.”

According to research by philanthropic consultancy the Bridgespan Group, a lack of overhead support has led many nonprofits to operate on a “starvation cycle” whereby they spend too little on overhead and under-report expenditures, all to satisfy funders’ unrealistic expectations about how much it costs to run their operations.

“The effects of such limited overhead investment are felt far beyond the office,” researchers Ann Goggins Gregory and Don Howard note. “Non-functioning computers cannot track program outcomes and show what is working and what is not; poorly trained staff cannot deliver quality services to beneficiaries.”

The rise of trust-based philanthropy

With nonprofits’ overhead and service-delivery costs soaring during the COVID-19 pandemic, decades-long calls for funders to loosen restrictions were heeded in remarkably pervasive fashion.

Of the $11.9 billion donated globally in response to the pandemic in the first six months of 2020, only 3 per cent was unrestricted, according to a study by nonprofit research firm Candid. Over the second half of the year, however, 26 percent of COVID-focused giving was unrestricted.

This near-exponential increase was driven by the viral emergence of trust-based philanthropy, experts say. It’s a charitable approach that enables nonprofits to deploy funding where they see fit and adapt to fast-changing circumstances, by emphasizing unrestricted giving.

This is not to say that donors are expected to blindly trust the charities they support. Quite the opposite, says Kathleen Provost, vice-president of philanthropy and communications for Toronto-based United for Literacy.

“Through education, communication and mutual accountability we build a rapport with donors that develops trust,” she says. “This goes both ways: Charities love engaging with donors because they become partners in a relationship, and funders feel more impactful by learning more about charities’ missions.”

Rather than requiring nonprofits to jump through various reporting hoops to earn unrestricted gifts, trust-based philanthropy focuses more on nonprofits’ missions than on the minutiae of their programs and operations.

Laura Manning, executive director of the Kitchener, Ont.-based Lyle S. Hallman Foundation, says, “We’re really clear that when we’re giving unrestricted money, we’re investing in missions. It’s not about specific programming. It’s not about specific outcomes. We’re saying, ‘We believe the work you do is furthering the agenda that we have for this community, and we want to help you do that.’”

As trust-based philanthropy gains momentum, wealth management firms and family offices are supporting the growing demand for charitable guidance, and expediting the donor-nonprofit relationship-building process, by serving as trusted intermediaries, BMO’s Potocnik says.

“One of our value-added offerings involves gathering information about a particular charitable sector or specific charity for our clients, and coming back to them and saying, ‘This is what this organization really needs, are you interested in supporting it?’” Potocnik says.

DAFs diffuse all-or-nothing decisions

It’s no coincidence that the growth of donor-advised funds (DAFs) has mirrored that of trust-based philanthropy, says John Bromley, founder and CEO of Vancouver-based Charitable Impact. Sponsored by public foundations, DAFs like Charitable Impact allow individuals, families, organizations and businesses to make donations, receive immediate tax receipts and then allocate funding to charities at a later date.

By 2026, Canadian DAFs are projected to be worth around $10 billion, up from $5.7 billion in 2018. Charitable Impact, for its part, has processed donations worth more than $1.4 billion since being founded in 2011.

While wealthy donors have long turned to DAFs as a means of bypassing the administrative work involved in setting up and running private foundations, DAFs have become essential to the more recent rise of trust-based philanthropy, Bromley says. By giving donors as much time as they need to communicate with charities and financial advisors, conduct research and consider feedback to whatever extent they like, and determine which causes best align with their philanthropic values and priorities, DAFs enable donors to gain the knowledge and the confidence to make unrestricted donations and maximize their impact.

“Think of it like learning to ski,” Bromley says. “Before you head up the hill you invest in equipment, a lift pass, maybe some lessons. You make a commitment, in the same way that people commit to being charitable by giving through a DAF and investing in their development as donors. You can start with some easier ideas and decisions, like the charitable version of a bunny hill, and then gradually work your way to the top of the mountain as you gain experience and confidence.”

United for Literacy’s Provost has seen this incremental approach become increasingly popular among wealthy donors.

“They start with relatively small unrestricted gifts, build rapport, build trust, and then gradually commit more and more. It’s a relationship. There’s a first date, and then a second, and then a third, and if all goes well the marriage will come.”

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