The trend towards more core cost funding is welcome, but too tentative. The whole concept of restricted funds in charities is out of date. It’s time it went.
It is a common knowledge amongst funders and fundraisers that unrestricted funds are highly desirable.
Amongst funders, I think there is less appreciation of just how desirable unrestricted funding is. For many years my favourite charity stat was from a 2012 NfPSynergy charity survey: charities would on average trade a £100k grant restricted grant for just £70k of unrestricted funding. I thought that was startling enough, but when the survey was re-run in 2018, it produced a jaw dropping new answer — of £55k. Yep, from the charity point of view, funders are in effect wasting £45,000 in every £100,000 made in restricted grants.
Surveying people about what they hypothetically would do always has its limitations, and as far as I know, no-one has done any real world experiments on restricted vs unrestricted grant offers with actual cash. However, the scale of the discount that charities say they are willing to swallow in return for lifting the accounting restriction is so dramatic, that it is surely worth serious attention.
The good news is that unrestricted funding (or at least its slightly ambiguous cousin ‘core costs funding’) is coming back into philanthropic fashion. IVAR has produced a great research resource, the Esmée Fairbairn Foundation is (as so often) leading the way, and the Lloyds Bank Foundation is just the latest to move in this direction in its recently unveiled new strategy.
In my funding utopia, restricted funds and restricted grants would be consigned to history.
Funds held within charities would be legally restricted only to the overall purposes of that organisation, just like they (usually) are in any private business or public body. No more sub-dividing into virtual jam jars, based on who makes a particular donation. Any allocation and apportioning of costs will be solely to serve the charity’s internal management needs, not to reassure (or fool) funders that there is a pure and unsullied process whereby their largesse is converted into pure project outcomes, without touching the sides of organisational reality. The choice for donors becomes much simpler — is this an organisation that you trust to deliver effective work that you want to support?
The lovely thing is that unrestricted funds are not only great for grantees, they are wonderful for grant makers too. Here are just a few of their many virtues:
1. It puts the values and competence of applicants at the heart of the grant assessment
You are going to give a charity a load of cash, and not get anything directly back. Presumably that means you trust their intentions and their ability to do a good job. So why not focus all of your assessment time on checking that, rather than scrutinising project plans which may well have to change in the light of circumstances anyway?
2. You get to talk about the work, not the compliance
Whether you are supporting horticultural therapy, debt advice or community energy schemes, its far more productive to engage with grantees about the issue and the work being done, rather than discrepancies between the work planned and delivered, or — worse still — budget variance.
3. They are much simpler to administer
With the right financial skills and accounting package, managing and reporting on multiple restricted funds can be done smoothly. More often than not, grantee and grantor exchange slightly confusing spreadsheets that neither are completely convinced by. How much better to simply be checking that the money got there, and that the published annual accounts are in order.
4. Your grantees become more independent, and get more done
A story like the Windrush scandal breaks. Who do you want the campaigning charities in the sector to phone first … A trusted media contact, to help inform and strengthen the story? A sympathetic civil servant or opposition MP, with well-researched proposals for fixing the immigration system? Or you, to discuss reallocating part of a restricted grant to respond to this unexpected policy development?
5. They build capacity
Many charities, particularly smaller ones, are under-capitalized, with too little investment in operational capacity, and sparse reserves leading to cash flow problems. Restricted funds exacerbate this problem. Unrestricted funds open up space for the best charities to build reasonable reserves, get the right policies and systems in place, invest in training and IT, and be ready to grow further.
6. You get to share in all the successes
If you are willing to give up on attribution and instead appreciate contribution, then as a funder you can enjoy knowing that you helped in all the good work that a charity has done.
There are already small donors that stick to making small unrestricted donations, and small charities with no restricted funds.
Is there a major charity out there with a policy of not holding or accepting restricted funds? Is there a major institutional donor with a policy of only making unrestricted grants? If not, who will be the first?
 The terms core costs and unrestricted funds are often used almost interchangeably. The latter is a clearer term, as it has an agreed meaning within charity accounting.