Funder Dialogue: Fred Ali, Weingart Foundation

The following conversation between Antony Bugg-Levine, CEO of Nonprofit Finance Fund, and Fred Ali, President and CEO of Weingart Foundation, originally appeared in PhilanTopic, the blog section of Philanthropy News Digest.

Fred Ali is President and CEO of the Southern California-focused Weingart Foundation, where he is drawing on past experience as a nonprofit executive to recast the relationship between a foundation and its grantees. Fred is a champion of the movement to cover full costs and give nonprofits unrestricted flexible funding. In this latest installment in our series of conversations with foundation leaders, Fred and NFF CEO Antony Bugg-Levine discuss money, power, influence and outcomes.

Antony Bugg-Levine: The Weingart Foundation is known for providing unrestricted support -- a rarity in the world of philanthropy. What led you down this path?

Fred Ali: My own experience as a nonprofit executive has always guided my thinking. When the financial crisis hit, I remember the board meeting where I was asked, "What do we do now?" I made the argument for unrestricted support, and it really made sense to the board. We brought in some of our grantees as well to provide support for and help design our approach.. Our board has always appreciated when they hear from the field.

A lot of people said that nonprofits would just take the unrestricted money and invest it in programs, because demand was growing exponentially, and it is in the nonprofits' DNA to put programmatic needs first. And in our first round of unrestricted grant making, that is exactly what we saw. And then, we started to see a shift. Based on the questions our program officers were asking, what we started to see -- and what we continue to see, is that nonprofits recognized that these are very special dollars. We started seeing organizations use these dollars to invest in their infrastructure, to bring back that financial management position that was lost, or the development staff that they needed, and it was heartening.

ABL: How do you balance the philosophy behind giving grantees the autonomy to do what they know how to do best, while at the same time meeting your own need - and your board's need - to know the impact of those dollars?

FA: When we made our decision to devote the bulk of our funding -- now over 60 percent -- to unrestricted funding, it immediately raised the question of impact measurement. After a few years of hard work, we recently announced our a new assessment framework for the Foundation's grantees, which evaluates organizations on nine functional areas including: board governance, financial operations, fund development, staff and infrastructure, client and constituent engagement, diversity, cultural competence, organizational strategy and adaptability, and executive leadership. With the assistance of Paul Harder and Company, we co-created this with our grantees. We wanted a framework aligned with our core values as a responsive grant maker. We wanted a process that maintained a commitment to transparency and practical, actionable learning. And we wanted something that would not create undue burden on grantees or on own staff but would provide as with useful information. Our theory of change is that if you give a reasonably managed, well-governed, strategically focused nonprofit organization flexible, unrestricted dollars, outcomes will follow.

ABL: The framework gives you a way to determine if an organization is more effective over time, but how do you measure the contribution that your grant made to that effectiveness? Many funders have a concern about attribution versus contribution if they move to more general support. How do you and your board approach this issue?

FA: The system we have designed understands the complex nature of assessing contribution to impact.

We've developed a process to understand the growth in organizational effectiveness over time. It starts with the questions that we ask in the application process. Then, when a program officer makes a funding recommendation they complete a detailed assessment based on their perception of where the grantee is against the nine functional areas of our framework. That provides a baseline. At the conclusion of the grant period, we ask the grantee to complete an online assessment, and it gives them the opportunity to talk about where they are on those nine areas, and on big-picture organizational goals, and whether or not they can attribute the use of our unrestricted dollars to any movement in those areas. The program officer receives that information, compares it with their initial perception, and then has a discussion with the grantee around growth that has been achieved and areas of continued need. The program officer completes a closeout report that serves as the application for a new grant. Although it’s still early in the process things seem to be going well for both grantee and program staff.

ABL: Often, there is perceived a zero-sum tension between providing grants that allow organizations to serve more people, versus providing the kinds of grants that allow them to invest in their own capacity. I've heard funders say that paying full costs is theoretically nice, but if I do that, I either need to fund 20 percent fewer organizations, or have an expectation that the grants that I do give will result in 20 percent less program work being done. Do you accept the zero-sum proposition, and how do you respond to people who say that funding full costs comes at the expense of expanding programs?

FA: I think a lot of foundations are interested in buying outcomes, and are not terribly interested in really supporting organizations. Funders may not explicitly say that, but the incessant focus on restricted programmatic grants has come at a huge cost to our sector. When we were considering a shift to unrestricted grants, we took a look back and found that many times the organizations we were supporting were not producing the outcomes we were looking for because they didn't have the ability to invest in the kind of infrastructure that is necessary to produce those outcomes. So when I hear foundations object to our approach, I have to ask, “What are you trying to accomplish? Does your grantmaking approach help or hinder the development of capacity and sustainability?” It is pretty clear that we have a lot of nonprofit organizations that are doing incredible work, being asked to do even more work, and they are not getting the kinds of support they need to that work effectively.

ABL: In our State of the Sector survey, we ask about which aspects of financial health nonprofits feel comfortable discussing with funders. Not surprisingly, at the top of the list is program expansion, and rapidly falling off from there are things like need for operating reserves and unrestricted income. The way that question is asked is there are two ways to read it: either that organizations aren't discussing these things because they think their funders don't want to listen, or that organizations simply don't know what they need.

So when you talk about building an effective organization it sounds like what is important to you is that effectiveness doesn't solely come from a decision from a funder to provide unrestricted grants, but also requires the nonprofit itself to understand its financial position around things like liquidity and reserves. What's great about your approach is not so much that you want to give unrestricted support, it is that you have set out to build effective organizations. Being willing to fund full costs and provide flexible support is necessary but insufficient to engender effectiveness. Nonprofits must understand their financials, and a lot is gained by creating a trust-based relationship with grantees around issues of money.

FA: If you're doing it the right way, unrestricted funding allows you to look holistically at the organization Rather than just a specific program. This opens up the possibility of having candid conversations where grantees can talk about things like financial instability, liquidity, and other issues that they are usually afraid to talk about because it may be perceived as a weakness. Now, a number of years into this approach, we look at our grant applications and grantees are being really candid about the issues they have, the problems they face, and what they could do with unrestricted dollars. It is a much richer and more productive kind of relationship. The survey work that NFF does is incredibly helpful and in many ways reinforces the approach we have taken.

ABL: What else have you learned is necessary for foundations to be a partner in building the effectiveness of the sector?

FA: As somebody running nonprofits for many years, I was always struck by the fact that many times foundation program officers fundamentally didn't understand our work. They may have had a fairly strong background in programmatic aspects of homelessness funding, or mental health funding, for example, but they didn't truly understand how a nonprofit works. To effectively support nonprofits, you need to understand the field. You can't come to work for the Weingart Foundation unless you have work experience in the sector. That applies to everyone from our receptionist to the CFO. That in and of itself isn't sufficient, but at least you start with some sensitivity to the issues. And then we provide constant training. With the help of partners like NFF and others, we make sure our program officers really understand nonprofit financial management.

ABL: Besides hiring people with nonprofit experience, which might not be a short-term solution for most foundations, it strikes me that bringing grantees into your board room is another way to close the foundation/grantee gap and make sure that the people in the field are heard. In addition to breaking down misperceptions, it also cultivates empathy. We spend a lot of time helping the voice of the nonprofit be heard in the rooms we are in with funders, and at the same time, helping nonprofit clients to understand the constraints their funders are under. How much better we all would be if we could cultivate a more generous spirit!

FA: Building empathy is a tried and true formula. When we bring people from the field into the board room , it always goes better.

Part 2: Full Costs

ABL: We're seeing more support for the idea of covering full costs. With your leadership, with Darren Walker at the Ford Foundation voicing support, and GuideStar's visible leadership in the “Overhead Myth” campaign, we are seeing new momentum around this issue that some of us have been talking about for a long time. NFF's Claire Knowlton just wrote a piece for Nonprofit Quarterly making the case for full costs that has sparked a good deal of discussion. Are we having our full cost 'moment' as a sector? Is it a sign of real change, or a flash in the pan?

FA: I think that we are having a moment, and it is important. But a lot of the people engaged in these discussions may not be at the right levels in their organizations. At most of the conferences where I've presented on this topic, the audience has primarily been program staff.

We need more boards and executive staff to engage in this discussion. That is where people like Darren Walker are having an impact. I think it is incumbent upon us who really care about this to force this conversation at that level. That's the next thing we're going to do here in California, with a series of briefings for foundation executives.

There is also a training issue. We've seen program offers almost universally accept the need for full-cost funding, but they have no idea how to have the conversation with their grantees. We need a different kind of training for the program officers and the nonprofits. Because many times even if the program officer is asking, nonprofits can't answer questions about their full costs. So this issue raises questions for both sides, but if we invest in this together, hopefully it will lead to better outcomes. We also need to engage more deeply with government. Philanthropy can lead on this issue, but the real money is on the government side.

ABL: What arguments do you find most persuasive with government when talking about full costs? Here in New York, we had the bankruptcy of one of our largest social service agencies last year, and to some degree that made people recognize that underfunding the human service sector creates instability. So one argument is that paying full costs is necessary to ensure a stable safety net. There is another argument around equity and fairness. Why is it that hospital systems get billions of dollars to subsidize transition to a new accountable care orientation and that same money isn't being made available to human services organizations facing similar disruption? Are there other arguments that you find particularly effective?

FA: What has been most effective in our experience has been bringing nonprofits face-to-face with their counterparts in the government, and having them explain what happens to them on a day-to-day basis because of inconsistent, indirect cost recovery. It morphs into a discussion about the multiple reports that are required, about what happens when payments are delayed. I think it is a mistake to assume that people in government don't care about this. We've found there are a lot of people in government who do care about this but haven't had a forum to discuss it.

ABL: We've also found that many in government don't understand that they're not paying full costs. When we shared some of our survey data with people in the federal government responsible for working with nonprofits, they were surprised that 70 percent of respondents reported that federal grants rarely or never cover full costs.

So once again, when people understand the issue, the question becomes how to implement. People say they "get it" but don't know how to make it work.

FA: With a number of funders in California, we've been involved in an initiative to encourage foundations and well as governments to pay full costs. This includes helping them understand the new Uniform Guidance issued by the White House Office of Management and Budget (OMB) that states that a nonprofit's indirect costs are legitimate expenses that need to be reimbursed.

In California, we've put a lot of energy working with the City and County of Los Angeles. The County just passed a unanimous resolution directing their CFO's office to develop a plan for the implementation of the OMB guideline. That's big. And it wouldn't have happened if philanthropy didn't lead on the issue. If governments paid full costs, especially in the areas of health and human services, our foundation dollars could be spent much more effectively.