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| September 2004 |
Vol. 9, No. 1 |
The Draining of Community-Capacity:
The Impact of Funding Structures
The report “Community Capacity Draining: The Impact of Current Funding
Practices on Nonprofit Community” (2004) authored by Lynn Eakin for the
Community Social Planning Council of Toronto outlines the effects of the funding
changes in the nonprofit sector through an analysis of 155 programs provided by
10 organizations and funded at $36.5 million dollars. The findings raise serious
questions about the suitability of current funding regimes and identify an
urgent need to reform funding structures to meet the needs of the community. In
an effort to contribute to the dialogue on Funding Matters in Halton, this issue
of Community Dispatch shares with you this study’s findings and important
recommendations. They resonate with the experience of Halton nonprofit agencies.
Joey Edwardh
Context
Community organizations perform an important role in society. Community
organizations are among the most diverse of our voluntary organizations. They
provide services to seniors and the homeless, daycare and parent drop-in
services for young children, after school programs, youth programs, mental
health services, newcomer settlement services, supports for people with
disabilities and more. They are vital to the engagement and supports of a wider
array of individuals through provision of a myriad of services. Despite this
important role, community-based organizations are experiencing financial
distress which is manifest through staff streamlining and issues of program
quality. It is clear from these research project findings that current funding
practices cannot be sustained much longer for community organizations.
Since community organizations have multiple sources of funding, no single
funder has an overview of agency funding and it is difficult for agencies to
obtain a consistent analysis of their financial circumstance. Moreover, this
fragmented funding and the disengagement of agencies from one another has meant
that an overview for how the sector is faring does not exist. As a result of
this disconnect each agency has been struggling in isolation.
This study used a structured framework to analyze data from ten agencies,
both large and small, operating 155 funded programs totalling 36.5 million
dollars. This research was undertaken by the Community Social Planning Council
of Toronto for the City/Community Working Group on Stable Core Funding, funded
by the United Way of Greater Toronto. The study’s purpose is to better
understand the agency-level impacts of current funding practices, pinpoint the
areas of concern, and inform recommendations for funding reform so that they may
better address the structural challenges agencies face.
Findings
The detailed data analysis undertaken in this project provides information
that enhances and alters current understanding of the financing of nonprofit
community organizations, and suggests clear directions for the reform of funding
practices. The majority of government funding for community agencies is not
covering the entire cost of program operation and, therefore, agencies are
relying on their discretionary fund to cover the balance of what government
funding does not. Using discretionary revenues (i.e. revenues not intended for
programs), limits resources available to respond to emerging community needs.
Employee benefits, front line supervision and core organizational functions
(including human resource functions and financial management) are three areas
that are also suffering in particular as a result of systemic government
under-funding. There is a lack of willingness among funders to recognize the
real costs of employee benefits. On a related note, nonprofit sector wages are
far below those in the private, education and hospital sector.
Program funding is, by definition, funding which an agency receives to
deliver a service. That service is specified, often in great detail, by the
funder. Agencies seldom have discretion over the content or structure of these
programs or in determining who is eligible to receive the service. By applying
all of their discretionary revenues to cover shortfalls in programs under
contract to a funder, agencies have little or no capacity to respond to emerging
community needs or develop innovative service models.
In this context, agencies are fundraising to stay afloat. Since agencies are
responsible for program deficits, (surpluses are recovered by the funder but
deficits belong to the community organization) they have to apply the greater
part of, if not all of, their non-government revenues to cover the shortfall in
program funding.
Over the years we have become confused about the use and purpose of
community-raised funds and the role of community organizations as providers of
social services. Community Organizations have two functions:
- To build strong, caring and compassionate communities
- To deliver government funded services in local communities
These functions are compatible, mutually enhancing, but distinct activities.
Locally raised funds should be deployed toward building strong resilient
communities, while government funds should fully support social service
delivery.
In contrast, this research concludes that community agencies are operating
government funded programs at a significant loss. The most significant areas of
systemic government under funding are:
- Employee benefits;
- Front line supervision, and;
- Core organizational functions.
As costs keep rising and funding remains inadequate, flat-lined community
agencies are slipping away. Their staffing costs comprise 71% of total spending.
Typically staffing costs in the human services are well over 80% and often in
the 90% range.
Our study findings on the under-funding of staff supervision and the erosion
of core organizational capacity raise important policy issues of program quality
and risk management that pose significant concerns for both agencies and their
funders.
In addition, this study points out that:
- 85 % of study agency revenues are from program funding, 13% comes from
other sources including fundraising and undesignated grants and 2% from fees
(no agency covered complete program costs through user fees).
- Organizations in this study receive 14% less funding, on average, than
needed to cover operational costs.
- Agencies are fundraising as a coping strategy to support programs that
are under government contract. Fundraised revenues are the most precarious
of all revenue sources. The amount raised requires extensive staff and
volunteer support.
- Smaller, newer organizations have less capacity to access alternative
revenue sources.
- Employee benefits are, on average, under funded by 22% by program
funders. Agencies, therefore, have to find other revenues to pay for the
benefits provided to program staff.
- Only 53% of programs are provided funds for supervision of front-line
staff. The under-funding of supervision raises important policy issues of
risk management and program quality standards for both agencies and funders
especially in light of recent court decisions on vicarious liability.
- Community-based organizations have reduced the number of staff in their
organization to cope with rising costs and stagnant unreliable funding. Over
the years, “other revenue sources” have not kept up with funding shortfalls
so in addition to redirecting agency discretionary funds, agencies have cut
back on staffing. Across the agencies, staffing is down to an average of 71%
of budget from a norm in human service organizations, of 85-90%. Unlike
staffing which is understood as an adjustable variable, audit insurance,
rent and program expenses are beyond the control of the agency.
- Program funders are under-funding their share of core organizational
costs by 58%. Program funders are contributing very little to common core
organization expenses. Senior mangers explain that core staff is so
overburdened with work that they are inefficient.
- Funding instability is a serious issue for community organizations.
Indeed, in most of the agencies involved in this study one fifth or more of
their programs are unstable.
- Community organizations spend a lot of time and energy applying for
grants and starting up programs that are not sustainable. These grants are,
in fact, costing organizations considerably more finances to implement than
they actually receive in funding.
Recommendations for Funding Reform
The report identifies 5 best practices for funding that promote the
maintenance of organizational capacity and deliver quality and safe services.
1. Funding the Full Cost of Programs
Funders, when contracting with a community organization to deliver a service,
should pay the full costs of service provision including a proportionate share
of organizational operating costs and the actual operating costs of service
delivery. In an optimal situation the funder would pay a community investment
premium (equal to the business profit margin) to help build local communities.
2. Moving to Global Budgeting
Funders should implement a global budgeting approach where they approve a
total budget amount and let the service provider determine how best to spend the
funds to achieve agreed service outcomes. Funders need to focus on
accountability measures such as service outcomes and deliverables, not the
day-to-day management of programs.
3. The Strategic use of Lead Funding
Governments should use a lead funding model (funding both program and
organizational infrastructure) for services that further government policy
objectives in a given service area, and in order to sustain long-term community
capacity.
4. Providing undesignated funding to support organizational capacity and
service innovation.
Funders should provide undesignated funding that agencies can spend flexibly
as a preferred means to build local capacity, encourage service innovation and
meet local needs.
5. Fundraised funds and donations from United Way and foundations should be
used for service innovation, strengthening communities and addressing local
needs.
Locally raised funds should be deployed toward community building activities
while government funds should fully support social service delivery.
Conclusion: Making Changes, Moving Forward
All the necessary pieces are in place to support a process of funding renewal
– a policy framework for funding nonprofit organizations, and the research on
the human resource and organizational issues facing community agencies. Now,
with this study, we have important data demonstrating the significant shortfalls
in program funding, the key areas of under funding and have evidence of the
serious pressure this is placing on community organizations. The study findings
raise questions about the suitability of current funding models to accommodate
the realities and capacities of community agencies.
This study has produced strong trend data on the major areas of funding
shortfalls and described how agencies are coping in the short term. It is clear
from the information gathered by this research that current funding practices
and funding levels cannot be sustained for much longer by community
organizations. The need to reform program funding to community-based
organizations is urgent.
For a copy of the full document “Community Capacity Draining: The Impact
of Current Funding Practices on Nonprofit Community Organizations” visit the
Community Social Planning Council of Toronto website:
http://www.socialplanningtoronto.org/CSPC-T%20Reports/Community%20Capacity%20Draining%20Report.pdf
PDF: 76k
Produced by Community Development Halton
860 Harrington Court
Burlington, Ontario L7N 3N4
(905) 632-1975, (905) 878-0955; Fax: (905) 632-0778; E-mail:
office@cdhalton.ca
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