SeaChange has never received money from MacKenzie Scott, although we know of several nonprofits that have. Some have asked us to help them consider how best to use the money. While we have experienced firsthand the transformative power of her generosity, the BDT debacle reminds us that large, unexpected, and unrestricted gifts also come with risks. I have a modest suggestion for how she could help mitigate those risks and thereby have even more impact.
Recipients of Scott’s grant should ask themselves three questions: What will we spend the money on? Over what period of time? What will we do when it runs out? In our experience, it can make sense for nonprofits to divide the money into four pots:
- Immediate expenses: one-off things that require immediate spending, such as an urgent roof repair, replacing creaky equipment, unpaid bills, or overdue debts.
- Ongoing operations: Money used to expand the program (or at least to maintain it at a higher level than would otherwise be the case) over a period of time.
- Emergency reserves: Money that (God willing) will never be spent but is set aside to tide you over for a while when there are shortfalls due to late payments, the unexpected non-renewal of a major grant, or some other unexpected problem.
- Quasi-foundation: money to support operations Unlimited time with annual payments equal to the expected inflation-adjusted income.
There is no one-size-fits-all answer to the question of how much goes into each pot, as nonprofits’ needs, capabilities, and risk appetites vary widely. However, most land between the extremes of “running with the big boys (Nos. 1 and 2)” and “staying on the porch (Nos. 3 and 4).”
The wonderful thing about Scott’s money is that it is unrestricted, which most nonprofits rightly believe is far better than traditional earmarked funds. However, insights from behavioral economics and psychology suggest that the need to make decisions (how to spend the money) imposes several costs on nonprofits:
The first is the emotional costs of deciding what to do with the money, given the uncertainty under which nonprofits operate and the significant disagreements that often exist among board members or between the board and staff.
The second reason is the cost of Selection. Many of us would be uncomfortable making high-stakes decisions in fields (e.g., medicine) for which we do not have the skills. While managing a nonprofit is not brain surgery, some boards lack the expertise to make smart decisions or suffer from well-documented cognitive biases such as overvaluing short-term gratification, etc.
The third factor is the cost of “Weakness of will”. Nonprofits have no legal way of imposing binding obligations on themselves. No amount of thought at the board level about how to spend the money can lead to less thoughtful decisions in the future. All unrestricted grants remain de facto unrestricted, forever.
Given these costs, I suspect some nonprofits take the easy route by not thinking carefully enough about how they use the money, or they develop solid plans that they later abandon in moments of weakness, poor management, or difficult times.
Scott would help mitigate these risks by issuing grants with restrictions, which require nonprofits to impose binding limits on themselves on how the money can be used. The nonprofit would receive a letter notifying it of the impending grant and requiring it to allocate the funds—according to a board resolution—into four categories: Immediate Expenditure, Program Growth, Emergency Reserves, and Endowment Assets. (For example, a nonprofit choosing to leave the funds completely unrestricted would enter 100% under “Unrestricted” and 0% in all other categories.) The completed form would generate a grant letter embodying the funder’s chosen restrictions as being imposed by the funder.
Restrictable grants would reduce the risk of poor decisions by making 100% unrestricted giving a considered decision rather than a passive default. They would eliminate the need for willpower, because the restrictions imposed by funders are sacrosanct. They would be consistent with Scott’s nonprofit, trust-based approach by giving nonprofits even more freedom (i.e., the freedom to restrict themselves). If carefully communicated, these binding restrictions could also reduce the risk that Scott’s large and otherwise readily available gift will crowd out other funders.
The fact that nonprofits can benefit from restrictions on the use of one-time windfall funds that are otherwise unrestricted is consistent with charitable law. For example, Section 510/511 of the New York Nonprofit Corporation Law may require, among other things, that a nonprofit that receives significant unrestricted funds from the sale of an illiquid asset hold them in trust until a board-approved strategic plan is developed or distribute them as an endowment, subject to a maximum spending rate of 7% per year.
Finally, although it would be heresy to admit it, SeaChange benefits from a mix of restricted and unrestricted grants. While unrestricted grants provide a welcome level of flexibility, restricted grants help us remain programmatically and financially disciplined. Would SeaChange turn down an unrestricted (i.e., unrestrictable) windfall from Mackenzie Scott? Of course not! But we would be better off with a restricted grant. And so would other nonprofits.
