Don’t blame the donor for the “crowding out” effect of govt funding

Yesterday’s blog post — “Does Government Funding Destroy Philanthropy” — was about the University of Notre Dame’s “Science of Generosity” initiative and the concept of “Crowding Out” when it comes to government funding and its effect on non-profit organization’s resource development programs. Since I posed more questions than I stated opinions, I’ve had this topic on my mind for the last 24 hours and engaged a number of people in this discussion. Not surprisingly, I’ve also been combing through the internet looking for some answers. Here is what the question boils down to :

Does accepting government funding impact a non-profit organization’s resource development program because: a) donors don’t see the need to contribute to an agency that appears to have adequate resource via federal, state or local government grants OR b) non-profit staff and board volunteers relax their efforts once these dollars are added to their revenue budget?

Joshua Benton wrote a great post at the Nieman Journalism Lab blog that examined this question by looking at a study done by Jame Andreoni and A. Abigail Payne.  Joshua Benton did a great job boiling it all down when he wrote this:

“The paper finds that for every $1,000 given through a government grant, nonprofits reduce their spending on fundraising by an average of $137. But that decrease leads to a drop of $772 in donor gifts. (The paper found that, contrary to the fears of some, government grants encourage outside donors to give instead of discouraging them — but the impact is small, only about $45 per $1,000 in government grants. In other words, adding it all together, $1,000 in government money only nets out to $410 in the end, on average.”

At first, I read this and thought . . . “Oh, the return on investment is still on the positive side and not something non-profits should worry about.” However, after thinking about it for two seconds, I believe non-profits SHOULD BE concerned.

I believe non-profit folks need to think about it this way:

  • $1,000 of government dollars really isn’t adding $1,000 to your revenue budget when you look at what you end up losing. So, for every $1,000 you are only “up” by $410.
  • The donors that stop contributing do so because non-profits (probably subconsciously) reduce their financial investment and focus on engaging donors.
  • Once these donors stop contributing and disengage, they can’t be easily “reactivated” once they’ve lapsed for 12 to 24 months. This essentially means the financial investment to reactivate a lapsed donor starts to look like the investment a non-profit makes to cultivate cold prospects.
  • When the government money dries up (which happens during tough economic times), a non-profit who has been dependant on public sector funding and under-invested in their resource development program is poorly positioned to survive. I liken this phenomenon to a human being who turned into a couch potato, stopped exercising, lost muscle mass and is suddenly called upon to run a marathon.

The bottom line is that non-profits cannot blame donors for the position they’re in today . . . many non-profit professionals and board volunteers took their foot off the accelerator and eased up on their fundraising efforts.

While assigning fault and blame is a common human reaction, the better question is what should non-profits who find themselves in this position start doing today if they want to survive this current economic downturn and the impact associated with shrinking government funding? Here are just a few of my thoughts:

  • STOP applying for “new” government funds as a strategy to make up for what you are losing from other government revenue streams.
  • START engaging board volunteers and donors in a conversation around how to reduce dependency on government funding and boost revenue from foundations, corporations and most importantly individuals. Make sure it isn’t just talk because talk is cheap. Put it down in writing and make sure action plans answer tactical questions pertaining to who, what, where, when, why, and how.
  • ENGAGE your current government funding agencies is honest conversations around the state of the funding programs your non-profit organization currently participates in. Do they anticipate cuts? If so, how large do they project those cuts to be. BE PROACTIVE.
  • RE-INVEST in board development efforts and start building a board with amazing “fundraising acumen”.

I believe government funding is damaging to your non-profit mission and suggest you get out of it as soon as possible. If you want help, you know how to get a hold of me.    😉

Have you done an analysis of your non-profit organization’s government funding trends and compared it to your investment in fundraising efforts and systems? If so, what do you see? What is the state of your government funding? Do you feel comfortable with where you are or do you have that infamous “knot in your stomach”? Where are you steering your agency’s resource development efforts as you look ahead to the next 3-years?

Please share your thoughts to one or more of these questions by using the comment box found below. We can all learn from each other!

Here is to your health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC!/eanderson847|


  1. ur last two blogs have been spot on, the topic off “weening” our organization off of Govt. Funding has slowly worked its way to the top of the agenda.

    1. Chip . . . your organization has been on the frontlines for the last decade. I am glad to hear you’re turning your attention to transitioning from a government funding business model to something else as we enter the era of “bankrupt government”. See you in a few weeks!!!!


  2. I’ve seen my work with organizations yield over 50% of their $1 million budgets in federal and state grant dollars. The reality is that money “seems” easy, but like United Way, it’s going to go away! Time spent on writing and administrating these government funds would be better spent on donor cultivation. The local people who care about what you do are the ones who will be there when parties change, government spending is cut and grants get so competitive that getting one is like winning the lottery! Use your energy where it matters most!

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