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Yesterday we discussed the difficult question of “room for more funding”: how can a donor determine how more funding will translate to more activities?

One common practice is to try to “force” your donation to fund the activities that attract you. Charities will formally honor your restriction by allocating your funds to the program in question.

But let’s look at an example of this in practice. Say you want to support Smile Train‘s core program of funding developing-world doctors, so you restrict your donation to that program. This restriction can’t change the fundamental underlying issue that we perceive: Smile Train has more funds available for this program than it has appropriate doctors.

So what happens? Smile Train might refuse your donation, but what seems more likely is that they’ll restrict it to the program you requested – freeing up an equivalent amount of unrestricted funding for their other activities (research, “provid[ing] materials on cleft lip and palate for free to anyone interested in this birth defect,” etc.) While “your” money pays for the core program, the effect of your donation is that more of the other programs get funded.

In other words, the idea that your fund is “restricted” to the core program is a close parallel to the illusion that it is “restricted” to non-overhead costs.

Could there be cases in which a restriction “works”?

We think so. It seems to us that the necessary conditions are that

• The program you restrict your donation to has no unrestricted funding allocated to it – so your donation can’t “replace” such funding, and the charity must react to your donation by increasing that program’s budget. (More precisely, if the amount of unrestricted funding allocated to the program exceeds the size of your donation, your donation will merely “crowd out” unrestricted funding; if the amount of unrestricted funding is less than the size of your donation, your donation will have to increase the program’s budget size by such amount. Thus, the larger your donation is, the more likely it is to be able to actually affect an organization’s priorities.)
• The program you restrict your donation to can productively use more funds (not a given).

How often do the conditions above actually hold? We aren’t sure, and have been trying to get a clearer picture. We have been working on analyzing major international charities’ restricted/unrestricted funding situations, and so far have produced the following using their most recent audited financial statements (generally from 2008):

The purple, orange, green, and red all represent revenues that are “restricted” in some way, and the black represents the fundraising and administrative costs that presumably have to be covered with unrestricted revenues. The blue is calculated as unrestricted revenue minus “operating costs” – i.e., revenue that is likely free to be used at the charity’s discretion.

Since several of these lines are distorted by large (and possibly concerning) amounts of in-kind donations (i.e., gifts of goods rather than cash), we reproduce the charts with in-kind donations excluded to get a clearer picture of the restrictions on cash revenue:

What seems clear is that most large charities have a sizable chunk of “free unrestricted” funding available. This doesn’t fully answer the question we posed – there still could be some programs that are funded almost entirely with restricted funding (and that could be expanded further).

More investigation is needed. In the meantime, we note that

• We would guess that cases fitting the conditions for “meaningful restricted funding” are rare – i.e., when you give to a multiprogram organization, your donation usually will expand what they want to expand, regardless of how you restrict it.
• We have a general aversion to restricting donations. It seems like “micromanaging” an organization in this way is asking for trouble: the charity may avoid your intentions using technicalities or spend the “extra money” allocated to a program badly, and in any case, you are creating an extra headache for the charity.

Thus, our current rule of thumb is to find an organization whose existing priorities you are comfortable with – and give unrestricted.

Further challenges raised by this rule of thumb

The above rule of thumb can be tricky to apply, because you have to (a) identify what counts as an “organization” (b) identify the organization’s priorities, which (as we previously discussed) can be very difficult. We’ll briefly discuss (a) here, and discuss (b) in future posts.

Cases where it’s not obvious what counts as an “organization”:

• One of our top charities, the Stop Tuberculosis Partnership, takes donations through the UN Foundation, and requests that they be earmarked for the “Stop Tuberculosis Partnership.” Should such gifts be thought of as restricted gifts to the UN Foundation or as unrestricted gifts to Stop TB?
• A recent debate on Tactical Philanthropy brings up a cancer research program within a university. Can/should one meaningfully earmark a donation to this program as opposed to the university as a whole?

To us, the ultimate test is “Do the people who exercise discretion over the pool of funds including my money have priorities that I’m comfortable with?” We perceive the UN Foundation as a pass-through that does not exercise discretion over the Stop Tuberculosis Partnership budget. We would guess that the university situation is somewhere in the middle, with different parties exercising different amounts of discretion, but that to a large extent, the cancer research program is responsible for raising its own funding rather than reliant on the discretion of the university. Both of these cases contrast with something like earmarking a CARE donation for a particular country – that donation is going to go into the pool of funds allocated with discretion by the central office.

Future posts will discuss some ideas for tackling the more difficult part (b): getting a handle on an organization’s true priorities, even as it tries to assure you that your funds will pay for the program that appeals to you most.