Unrestricted funding can also come with some limitations. Donors might, for example, designate the money for operating expenses like rent or to help strengthen the organization through support for leadership development.
However, only about 20% of U.S. funding for nonprofits has any degree of flexibility, the Center for Effective Philanthropy has estimated.
More often, nonprofits get money for a specific project in exchange for agreeing to several conditions and a specific timeframe. For example, someone might give a museum or a hospital US$20 million to spend building a new wing within three years.
Starting in 2020, author and billionaire MacKenzie Scott has disclosed donations of at least $8.5 billion to 798 nonprofits. Unlike most major philanthropists, Scott has encouraged the nonprofits to spend the money as they see fit. In addition, foundations including the MacArthur Foundation and the Ford Foundation are providing more unrestricted funding. They hope it will help the organizations they support address complex issues like social and racial justice.
Why unrestricted funds matter
Like businesses, nonprofits must employ skilled staff and use updated technology – and they have many other expenses.
When funders provide money that can be spent only on specific projects, nonprofits may struggle to cover these overhead costs. Their staff can end up working too many hours for not enough pay, without the equipment and other essential expenses they need to get their jobs done right. This “starvation” can make organizations less effective – reducing how much good every donated dollar does.
When they get multi-year unrestricted funding, nonprofits can become more financially stable. That increases their ability to respond when crises arise or situations change, while making it easier for them to innovate and take risks.
The coronavirus pandemic challenged nonprofits to be flexible and adaptable and to respond quickly to new needs.
But, at least before Scott shook up the charitable world by distributing billions of dollars in unrestricted donations to historically Black colleges and universities and other groups focused on racial justice, nonprofits led by Black people and others with historically marginalized backgrounds were less likely than organizations with white leadership to receive unrestricted funds.
All in all, unrestricted funding can certainly help nonprofits achieve their mission with greater effectiveness. But its role is also more complex than it might appear, for donors and nonprofits alike.
The Conversation U.S. publishes short, accessible explanations of newsworthy subjects by academics in their areas of expertise.
Genevieve Shaker, Associate Professor of Philanthropic Studies, Lilly Family School of Philanthropy, IUPUI and Pamala Wiepking, Visiting Stead Family Chair in International Philanthropy, Lilly Family School of Philanthropy; Professor of Societal Significance of Charity Lotteries, Center for Philanthropic Studies, Vrije Universiteit Amsterdam, IUPUI