Social Currency

This blog was originally posted on payforsuccess.org and can be found here.

White House Pay for Success Regional Summits: Fostering Dialogue and Building Momentum to Create Better Outcomes for Communities Across the U.S.

Nonprofit Finance Fund recently partnered with the White House Office of Social Innovation and the Laura and John Arnold Foundation to host a series of regional summits focused on Pay for Success (PFS) financing. PFS is an innovative funding model that helps improve the lives of those in need by driving government resources toward better, more effective programs. Under PFS, government officials identify high-quality programs and strong service providers, and tap mission driven investors to cover the upfront costs of those programs. The government then works with an independent evaluator to establish specific program goals. If those predetermined goals are achieved, the government repays those who made the original investment.

Seven PFS projects have been launched to date in the United States, and more than 30 are in the exploration phase. These initiatives are designed to address some of the country’s most pressing social issues, including homelessness, unemployment, child welfare, early education, recidivism, and public health. 

The regional PFS Summits were conducted to share information about current projects in an effort to advance the model thoughtfully. More than 400 representatives from federal, state, and local governments, nonprofit service providers, academia, philanthropic foundations, and impact investors attended the summits held in three cities that are at the forefront of PFS: Bridgeport, Connecticut; Chicago, Illinois; and Salt Lake City, Utah.

Several key themes emerged from this series of summits, and we have listed the top 10 takeaways from our discussions about opportunities, challenges, and next steps in PFS development.

  1. Federal support catalyzes the development of the PFS field, but state and local activity is where the on-the-ground change occurs in communities across the U.S.
  2. Definitions of “success” fall across a spectrum. For some governments, capturing cost-savings is required for PFS projects, but others are willing to pay based on the value of improving efficiencies and capturing long-term societal benefit. 
  3. Data is critical. Uneven availability of evidence and performance data on social services and a lack of access and ability to analyze administrative data are barriers, but partnering with evaluators and academia to learn about “what works” can push the field forward.
  4. PFS can help scale existing and rigorously evaluated programs, but is also a vehicle to build the evidence base for promising, innovative approaches. 
  5. With deep ties to neighborhoods and communities in need, service providers are the lynchpin to delivering on outcomes, and they must be at the table. Bolstering the financial, operational, performance management and leadership capacities of nonprofits is critical for adaptation in an outcomes-driven environment, PFS and beyond. 
  6. Philanthropy can play a number of roles to support the nascent field: from convener to field builder to advocate to capacity builder to investor.
  7. Project templates and document transparency can drive transaction costs down and shorten lengthy timelines for future projects.
  8. Elected government leaders can champion PFS efforts, but ongoing support and education for agency and career staff is required to affect long-term systems change beyond election cycles.
  9. Implementation matters: recognizing that no U.S. project has shown results thus far, it is critical to obtain real-time feedback from existing projects in an effort to improve future iterations of PFS activity.
  10. PFS is one piece of a broader systems change effort across government and providers to use data-driven, evidence based approaches for our communities’ most challenging social issues.

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Nonprofit organizations (501 (c) 3s) experience a unique set of financial problems that stem from both how the sector operates outside the traditional rules of supply and demand and the way our culture views philanthropy. Often, nonprofits enter the market when for-profit and governmental sectors can’t, won’t or shouldn’t, generally due to a gap or failure in the market economy. Their customers are often unable to pay for the services that they provide, and demand for services often goes UP as ability to pay goes down.

This systemic flaw is why nonprofits use two tools to subsidize their operations: tax exemption and access to tax-advantaged charitable contributions. Unfortunately, this system has its drawbacks, and many of them stem from an antiquated ideology our society has about what it means to be ‘nonprofit.’ For example, ‘surpluses’ (AKA ‘profits’) are often looked at critically and seen as antithetical to the authentic mission-driven organization. Expenditures on ‘overhead’ are also called into question, perceived as a sign that an organization is not spending their money on their mission. This ideology has serious consequences for nonprofit health—and their ability to fulfill their mission. Without surpluses, nonprofits struggle to achieve long-term stability and are frequently operating from month-to-month, without the breathing room to plan for the future of their organizations and the long-term impact of the work they do. Programmatic growth also often increases the need for fundraising and decreases “self-sufficiency.”

Nonprofit leaders live with these management realities every day. To cope with the organizational implications, however, takes a unique set of financial disciplines that often get overlooked when mission is the primary focus. Below, we share a few foundational finance tips as a refresher to help new or emerging leaders remember to keep business and finance as an integral part of decision-making.

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Arts and culture nonprofits play a vital, yet often overlooked, role in community services and local identity. Arts and culture organizations (A&Cs) frequently serve as anchor institutions in a neighborhood and become core components of the local fabric. Cities and countries are often synonymous with their arts and cultural offerings: New York City’s Metropolitan Museum of Art, Mexico City’s Museo Nacional de Arte, and less formalized institutions like Vietnam’s night markets are all examples of the important link between art and local identity.

NFF has long understood the value of A&Cs in the public sector landscape. Every year our State of the Sector Survey queries organizations from around the country. So far, we’ve heard from over 750 arts and culture organizations that encompass a broad range of sub-sectors. Reflecting the overall geographic distribution of survey respondents, we’ve had the highest response rates in New York, California, Illinois, and Massachusetts. Survey respondents have varied immensely in scope, from a symphony orchestra in California to a theatre company in Illinois. Overall, here’s what nonprofits are saying:

  • Thus far, the majority of arts and culture organizations have reported making a meaningful investment in audience development  

The vast majority of this audience development (and/or engagement) was targeted at school-age children via arts education programs conducted on-site or in partnership with schools. Like other sectors, A&Cs reported that they were actively engaged in data collection and data-driven decision-making to inform programming.

  • Arts & culture organizations face challenges comparable to the entire sector

When asked about organizational challenges, arts & culture organizations struggled with similar challenges as their non-arts peers. The vast majority grapple with achieving long-term financial stability and the ability to offer competitive wages in order to attract new staff and retain current hires.

  • Arts programming has made strides to engage with audiences in new ways

Many organizations have adapted and moved beyond their four walls to bring programming to nonconventional spaces in the form of free concerts, arts education after-school programming, or weekend programming for low-income families.

Our State of the Sector Survey is open until Wednesday, February 18th and we look forward to hearing from other arts organizations from around the country. So please, strengthen the sector and share your nonprofit’s story today!

Ben CameronBen Cameron is program director for the arts at the Doris Duke Charitable Foundation. He is a passionate advocate for artists and their organizations, and a powerful partner to all of us working toward a well-capitalized arts sector. NFF has worked with Ben and the Foundation on projects including Leading for the Future, a pilot initiative designed to help a group of artistically outstanding performing arts organizations strengthen their business in a shifting environment. The Foundation has also provided support for NFF's analysis of arts sector trends and opportunities; this year's survey is now open at http://nff.org/2015.

This is the second in our interview series with foundation leaders about the intersection of philanthropy and financial strategy. We're honored to work with leaders such as Ben, who are challenging assumptions about how grantees and funders can pursue a more vibrant and viable arts sector.

Antony Bugg-Levine: We've seen some of the arts organizations we work with emerge from the 2008 economic crisis with a new or renewed sense of purpose, while others are still hunkered down trying to make sense of all of the changes. What are you seeing in the field, and what excites you about where the arts sector and its funders are going?

Ben Cameron: For organizations that survived the crisis, many can draw confidence from the fact that their communities have validated their importance, funders have indicated an interest to continue with them on the journey, and there IS a future for them, even while it may be challenging.

I'm excited when I see organizations stand back and ask, "What are the possibilities that this new world is opening to us?" and think expansively, particularly about how changes in demographics and technology might be an invitation to embark on new activities. This also demands that organizations be absolutely rigorous and unsentimental, and stop doing things that are serving them less well in order to free up time, energy and resources.

I am also personally cheered by the work of Ron Heifetz at Harvard's Kennedy School, who is exploring how we think about the capacity of an organization to continually adapt and change in the face of challenges that we can't yet foresee. The tendency for many arts organizations and their funders to be reflective about long-term capacity — of which healthy capitalization is one key — seems to me to be a positive way of helping a more vibrant arts sector thrive now and in the future.   

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Guest Blog by Beth Bowsky, Policy Specialist for Government-Nonprofit Contracting at the National Council of Nonprofits. 

As someone who regularly uses data from Nonprofit Finance Fund's (NFF) annual State of the Sector Survey, it occurs to me that those who are asked to complete it may not realize how truly important the information they provide is or why it is more significant than ever this year.

At the end of December, new regulations from the federal Office of Management and Budget (OMB) went into effect. Most notably, the OMB Uniform Guidance mandates that the vast majority of nonprofits with government grants and or contracts that include federal money must be reimbursed for at least a certain minimum amount of their indirect costs. Except in cases where indirect costs are limited by federal statute, if a nonprofit has a federally approved negotiated indirect cost rate (NICRA), all government agencies — federal, state, or local — are required to honor that rate. Nonprofits that have never had a NICRA may elect to be reimbursed 10% of their modified total direct costs or negotiate a rate based on the federal cost principles. This new policy is a significant improvement in the recognition of indirect costs and will impact the vast majority of nonprofits that have grants and contracts from federal, state, and local governments.

Data collected by NFF and others was instrumental in bringing about this change in policy. As a result of the NFF Survey, we were able to show OMB that 41% of nonprofits reported “achieving financial stability” as their biggest challenge with another 16% of respondents noting that “raising funding that covers full costs” was the top challenge for their nonprofit. Meanwhile, approximately 60% of respondents with government grants / contracts say those sources never or rarely cover the full costs of the projects they fund. These findings caught OMB’s attention for very pragmatic reasons. It provided the data needed to support a 2010 report from the Government Accountability Office, which concluded that the inconsistencies in how nonprofits are reimbursed for indirect costs “place stress on the nonprofit sector, diminishing its ability to continue to effectively partner with the federal government to provide services to vulnerable populations.”

The Survey also found that even when governments do provide some reimbursement for indirect costs, it is woefully inadequate. Among those with government contracts, between 44 and 51% of respondents (depending on which level of government they contracted with) reported average indirect cost rate reimbursements of 9% or less. What’s worse is that over one-quarter of nonprofits reported the amount they are reimbursed for indirect costs has declined over the past 5 years.

NFF2014Survey_AICR

These findings are reinforced in a separate survey by the Urban Institute, in which 53% of nonprofits reported that governments capped reimbursement for indirect costs. 76% of these nonprofits with rate limits reported caps of 10% and below – and 24% reported zero reimbursement for indirect costs. To put these numbers into perspective, Bridgespan and others have estimated that typically nonprofit administrative costs are (or should be for efficient operations) in the range of range of 25 percent to 34 percent. However, every nonprofit is different and administrative costs can legitimately be either higher or lower than this range.

Urban Institute

The ability to tell the nonprofit story using real data is what convinced OMB of the need to require reimbursement of indirect costs in the new Uniform Guidance. This year’s Survey data is no less essential. It will establish a baseline against which we will be able to see how well the changes are working and suggest ongoing advocacy efforts needed for further improvements. 

Looking Ahead

This tangible recognition by the federal government about the importance of indirect costs is a major step forward. But, our work is not finished. The development and implementation of the OMB Uniform Guidance holds only the promise of better treatment for nonprofits. To make it a reality, it is vital that each nonprofit organization learn the cost allocation rules, revise its accounting procedures accordingly, and report its costs accurately. And, since the Uniform Guidance must still be interpreted and applied consistently by tens of thousands of individuals throughout multiple layers of government, nonprofits must also Know Your Rights...and How to Protect Them. This means doing so as individual nonprofits for each new grant and contract, as well as engaging in efforts with other nonprofits to sector-wide advocacy efforts for consistent and systemic compliance at the state and local levels.

The National Council of Nonprofits and its network of state associations of nonprofits have been working with OMB and other stakeholders to identify and troubleshoot anticipated barriers to implementing the new rules. See our recently published special edition of Nonprofit Advocacy Matters to learn more about how the Uniform Guidance applies to your nonprofit. If you have grants or contracts with government at any level, we encourage you to share those experiences – whether positive or negative via a form on our website to help our network identify trends quickly and build the evidence for better practices and additional reforms.

Together, we can realize the promise of the Uniform Guidance, see a big change in the 2016 State of the Sector results, and make an even bigger impact in our communities.

3,000 strong. We’ve been stunned by the sheer volume of nonprofit stories being shared from around the country. Our State of the Nonprofit Sector Survey opened on January 14th, and we’ve heard from organizations in all 50 states and who represent a broad range of service providers. The nonprofit sector has always been marked by incredible diversity, and it shows in the survey results so far. We’ve heard from arts and culture organizations in Hawai’i, affordable housing advocacy organizations in New York, and community development groups in Colorado.

The survey data reflects the broad trends and regional nuances expected from a national survey. Here’s a snapshot of preliminary findings gleaned from what nonprofits are saying:

  • Sustainable funding models are a priority
    Organizations are very concerned about the volatility of funding streams that characterize both public and private support. Many nonprofits are engaging in long-term fiscal planning and seek diverse revenue streams in order to achieve multi-year financial stability.

  • Rural nonprofits face unique challenges
    Nonprofits serving rural communities state they suffer from a triple threat: the frequent inability to provide services for their communities, a dearth of human capital, and the struggle to attract and maintain funding streams. Many rural nonprofit providers frequently feel like they can’t compete with their urban counterparts and have populations with comparable, urgent needs.

  • The Affordable Care Act (ACA) has changed the landscape
    From an organizational management perspective, ACA implementation has been complicated and challenging. However, once nonprofits have successfully implemented ACA regulations, they’ve reduced their healthcare expenditures. Equally promising, nonprofits are reporting that expanded coverage through ACA and state-based Medicaid expansions has had a profound impact on their clients’ lives.

  • There is a critical need for affordable housing across the country
    Nonprofits are very concerned by the lack of high-quality, low-cost housing options in their service regions.  Low and moderate income housing developers are unable to meet the ballooning demand.

  • A human capital crisis is brewing…
    From fundraisers to leadership to front-line direct service workers, nonprofits report difficulties attracting and retaining top candidates. Many nonprofits are monitoring competitive wage indices and are concerned about their inability to offer attractive compensation packages. Additionally, many organizations recognize and understand that offering a living wage is mission critical and aspire to adequately compensate staff.

Stay tuned for updates in the spring when we release our annual State of the Sector report. We are entering week 3 of data collection and hope you will consider joining this sector-wide community organizing action!

Share your story today and take the survey!

Using data to support change. This is one of the goals of our annual State of the Nonprofit Sector Survey. As one of the largest nonprofit data gathering efforts in the sector, Nonprofit Finance Fund's (NFF) Annual Survey supports thousands of nonprofits each year by aggregating their stories into a collective data set that is used by nonprofits, advocates, funders, and reporters to understand the needs and challenges of the sector. And we couldn’t do it without the participation of the thousands of nonprofit leaders that have contributed every year. In this blog, we wanted to share with you the underlying mission driving our Survey activities, and why it matters to the sector.

NFF's Survey Mission

Overall, we have a 3-part mission with the survey. These three aspirations drive all of our activities, from the survey content, to outreach, to how and when we communicate our results. 

To provide stakeholders and the public with timely data on trends, challenges, opportunities, and actions in the whole nonprofit sector

NFF's survey is open at the same time every year, from mid January -mid/late February. Once the survey is closed, we work as fast as we can to get the results out to the community, to ensure that they have access to timely data. Our initial results are released no later than the first week of May every year, and often earlier.

To coalesce the nonprofit sector into a data-driven community organizing effort, creating a collective voice and spurring the use of data for change

Because of the nonprofit sector's diversity--in mission, size, business model, geography, and a multitude of other factors--it operates in a decentralized way. Yet we believe that coming together in a collective effort can help magnify what we DO have in common. That's why we work with hundreds of partners-- nonprofit associations, funders, advocates, umbrella organizations, and more-- to get the word out to as many pockets of nonprofit communities as we can. If your region or sector is under-represented in the survey results, please reach out to us for advice about how to spread the word. We have created an outreach kit to help communities share the survey with their own networks.

Data is only as good as how--and if-- it's used. That's why we don't simply release the results and return to business as usual. After release, our staff spends the next 7 months of the year integrating the findings into their daily practices, communicating the results through presentations, and sharing them as widely as possible. We also talk about the results with advocates, government officials, funders, nonprofits, and other practitioners in the field, diving deeper into ways that the data can be used in practice. Below are a few examples. Click here to see more.

  • Nonprofit leaders like Cynda Mack, Vice President of the Metropolitan Development Corporation, have used the data to assess whether organizational leadership were on the same page about the strategic direction of the organization. "While taking the survey, I wondered whether the leadership would agree with all of my answers. We are a very diverse group and have been working very hard the last two years on Strategy, Dashboards, Logic Models, Theory of Change, Mission, Vision, Focus, etc. Answering the survey brought many of those exercises together to show a progression of change that made sense. I am hoping that leadership will see their hard work in our agreement on the answers and that we are on the right track to success."
  • The National Council of Nonprofits used the data to inform government policy recommendations on the treatment of Indirect Costs.
  • Grantmakers can use this dataset to remain responsive to the needs of nonprofits in real time and refine their philanthropic investment strategies.

To provide accessible, data-driven insights that inform discussion and, ultimately, improvements in social sector practices

We work hard to make the data as accessible as we can. As requests for data increased over time, we looked for ways to make it even more accessible. That's why we created the NFF Survey Analyzer, an open tool that allows anyone to filter the data to see results that are most relevant to them. You can filter the whole data set look at state specific results, and much more. If you have any questions about the Analyzer, please contact us at survey@nff.org!

Stories from 2014

Below, please check out stories from last year's respondents. We want to hear your story as well. We're proud of the impact our findings have had in past years, but we believe we can do better. Please help us continue our work on behalf of your organization and your peers across the country by contributing your knowledge and encouraging others to do so as well. Click here to take the survey today, and share the link http://nff.org/2015 with your peers and colleagues.  

"Nonprofits need to be visible in the communities they serve. Many nonprofits are only heard from when asking for support. The community needs to know that the nonprofit is a part of the community, the good it does, the care with which its leaders use the community's resources and the impact it makes in meeting the needs of the community. A community will support a nonprofit with time, talent and treasure IF the impact the nonprofit is making is known and appreciated as meeting a need in the community."
- Public, Societal Benefit Org, PA

"We are having to adapt programs to meet needs of a younger generation of veterans and one that includes significantly more women."
- Human Services Org, CA

"In the past 6 months... we have been able to secure new and expanded funding both for our core youth programs (restricted grants) and for general operating support from individual donors (major donors). We made the case by first refining our program offerings and getting very clear about our program strategy and what we are trying to do. This clarity has made asking for support, both from foundations and from individuals, much easier and more effective. As for major donors, we made the case by being very honest about our organizational challenges (both financial and programmatic), and sharing our vision of where we want to go. And then cultivating them earnestly - through mail, phone, and direct in-person meetings."
- Education Org, PA

"We initiated development campaigns targeted to specific audiences to support specific pieces of our work and also initiated "friendraisers" at board members' homes where we can talk about what we do and how we need their support."
- Workforce Development Org, MD

Kimberlee CornettAt NFF, we're fortunate to work with some of the most creative foundation   leaders who are wrestling with the challenges of connecting the resources they have to the social outcomes they seek. In this new interview series, NFF CEO Antony Bugg-Levine chats with some of these foundation partners about various aspects of philanthropy and financial strategy. We hope foundation and nonprofit leaders alike find sparks of inspiration and challenge in these explorations of how money can best support mission in the social sector. 

Our guest: Kimberlee Cornett is managing director of The Kresge Foundation’s Social Investment Practice. Kimberlee works closely with the foundation’s program teams  to make capital and financing available to organizations working on key, strategic priorities of the foundation. She identifies capital gaps and then structures loans, loan guarantees and alternative financing through banks, community development financial institutions and specialized lenders to meet specific project needs.  

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Antony: The Kresge Foundation is a leader in social impact investing, going beyond grant-making to support nonprofits with other types of capital. What have you learned as you've built the social investment practice at Kresge over the last 4 years?

Kimberlee: There is a reciprocity between grants and investments. We knew this from an academic perspective, but are now developing muscle memory about it. I estimate that for every ten dollars we've invested, it has been supported by a dollar in grants. Some of these grant dollars have been used to better understand what types of capital are needed and to seed future investment. Serving as both grantmakers and investors gives us incredible leverage in terms of financial impact, influence, and knowledge, which makes us able to do our work better. The foundation is exercising a different way of making change around complex social problems using grants strategically as an onramp to other kinds of capital. Man cannot live on grants alone!

We're finding a similar dynamic with our clients' needs for advisory services and lending. One of the things organizations need most in today's environment is resources to enable them to adapt, but a loan is not the right starting point for adaptation in most cases. An organization needs a business plan before they need a loan. Can you speak more about the "knowledge leverage" you achieve by making both grants and investments?

Awhile ago, we did a sort of "speed dating" exercise with program and investment staff. We found that our program staff knew a lot that our investment staff did not; our investment staff knew a lot that our program staff did not. This approach is still in its embryonic stage, but it has helped inform the development of our comprehensive healthcare investment thesis, covering everything from grants to market-rate investments. We have now invested in two healthcare companies, with products that relate to safety net and vulnerable populations, and are looking at our third now. We call this our "better investor overall" project. If we really understand both sides of the equation, our hypothesis is that we may be a better investor with all of our capital resources.

That sounds unusual. For the grant and investment sides to come together, requires each side to change the way they think about how to optimize what they do. When Jed Emerson and I wrote Impact Investing, we couldn't find a single example of real collaboration between investments and grantmaking teams at foundations happening without the strong leadership of a foundation CEO or board. 

It is unusual. Our CIO happens to be someone who takes fiduciary responsibility very seriously, but also has an open door. He's open to strategic opportunities where the endowment can play a role.  

You and I agree that impact investing, while trendy right now, is not new. Community Development Financial Institutions (CDFIs) have been making impact-generating loans for decades, foundations have been using Program Related Investments (PRIs) since the '70s, and so on, but there is a lot of excitement around this latest wave. What new opportunities do you see?  

Things are changing. Right now we're seeing more product and platform development. We did exploratory work with a crowd funding site tied to real estate development, and looked at using it here in Detroit. We're an investor in Sustainable Insight Capital Management. There's the McKnight Foundation's commitment of $200 million in impact investments, the Pay for Success agreement that Bank of America Merrill Lynch introduced in New York[1], and other examples. So there is certainly new momentum.

What do you see as the unique highest and best use of a foundation PRI program in a world where others, including banks, are making impact investments? It does seem that compared with CDFIs and other banks, foundations could have unique risk appetite, and could use that ability to catalyze deals and help crowd in other flows of capital.

I believe our best tool is our guarantee, which is inherently risk capital, even though we are judicious in deploying it. That capacity seems to catapult deals forward, sometimes even more than loans. Right now, we're developing an investment channel/thematic approach that will take us deep into a space that relates to the overall objectives of the Foundation, uses multiple forms of capital (including market rate investments), requires sustained focus, cross sector solutions and policy reform. We are mid-stream in this work but expect to be making investments and grants in 2015.

In terms of the evolution of the role of PRI programs, there is a need for programmatically agnostic social investors who just want to see the market move faster. But that's not where we are today.

How do you measure the catalytic power of social investments?

One example is a current partnership where we're looking at how a “forward commitment” of a guarantee might expedite the raising of other capital so the financing can get into the market sooner. If the guarantee allows the fund manager to expedite the capital raising process then that is time and money saved for the Manager and new value at work in a community that much sooner.  A guarantee can also function as a stamp of approval for other investors. In the case of New York's Pay for Success contract, the Rockefeller Foundation's guarantee may have made the agreement easier to sell.  

What advice to you have for foundations that are considering impact investing? Start slow and find good partners? Or has enough been done that foundations can leap in?

I don't think it is necessary for foundations to slog their way through some of the early learning that we did! Engaging program staff at the onset can catapult an effort forward. There is also a case to be made for buying the investment capacity externally and not building it internally.

Well, social investment requires time and expertise and capacity that few foundations have. If everyone builds, it leads to fragmented efforts where few teams achieve the scale that fosters expertise. At NFF we’re excited to use our investment capabilities and expertise to support foundations looking to partner to achieve their impact investing goals rather than go it alone. But I do think it is important for foundations, even those just getting started, to have an internal champion to connect deals from a mission and human perspective to the foundation.  

Yes. A lot of times we have looked at what has helped us in terms of "skill and will" on program teams. Skill is an added asset but “will” is essential. We've recently interviewed a few candidates very carefully around “will”. Even if they weren't coming from a place where they had deep expertise with investment, we looked to see that they had an appetite and receptivity to using investment tools. Because we've hired people with “will”, we've seen a dramatic uptake in momentum.  Kresge is changing from the inside out because program staff are increasingly interested, motivated and seeking a wider range of opportunities.

Interesting. Even if program folks haven't done deals, making sure they’re open to learning and using different types of capital to reach goals is a great approach to strategic hiring. We find a lot of our work comes down to figuring out best ways to deploy various types of capital to support social impact, and there is an element of flexibility and creativity in every success story. Thank you for sharing your insight from your work as a leader and doer in impact investment. 

[1] http://payforsuccess.org/resources/new-york-becomes-first-state-launch-social-impact-bond 

An abbreviated version of this blog post was also published in NFF's Money and Mission blog on The Chronicle of Philanthropy. Click here to view. 

NFF received more than 5,000 responses to our annual State of the Sector survey in early 2014. Of these responses, the arts and culture sector was represented by 919 organizations covering a broad cross section of artistic disciplines and budget sizes. In addition to questions on financial health and viability, we also asked cultural organizations about sector specific challenges and how they are working to address them.

High Level Findings

The story that emerged depicts a sector in flux: amid constant concerns about financial health, arts organizations continue to experiment with new programming and audience engagement tactics.

  • Perhaps not surprisingly, “achieving long-term sustainability” was cited by 47% of organizations as a challenge—the leading response to this question by far.
  • 71% of respondents are working to develop programs targeted to specific visitors and audiences, 59% are collecting data on audience preferences and behaviors, and 56% are implementing new marketing strategies.

Barriers to Success

Although these new investments and programs may promise positive results, a number of systemic challenges continue to exert an outsized influence on the viability of the arts sector.  Our 2014 survey responses point to the following barriers at play in the arts funding ecosystem.

1.       Mismatched funding

Financial reserves are a necessary part of doing business, whether for operations, facilities, artistic risk-taking, or to protect against the unexpected. Yet, organizations often struggle to obtain or even discuss a more balanced capital structure.

 2.       Missing dialog

While 53% of respondents could have an “open dialogue” with funders about program expansion, only 12% felt the same about operating reserves, and the numbers were even lower for facility reserves (9%) and growth or change capital (9%). A colleague at NFF recently drafted a separate blog on the specific obstacles preventing healthy dialogue and  transparent conversation.

 3.       Misaligned or outsized reporting requirements

Grantmakers often neglect to support the costs associated with managing their grant awards, like proposal writing, ongoing reporting requirements and impact measurement. (For example, a grant of $50,000 with reporting requirements that cost $10,000 is a “net grant” of $40,000).

 4.       Funding falls short of full costs

Planning for financial sustainability begins with an organization’s ability to truly cover the full costs of operations, for the short- and long-term. Tightly restricted program grants with unrealistic provisions for overhead will often sustain immediate programs, but stymie an organization’s chances for long-term mission success.

Breaking the Barriers

For now, the nonprofit creative sector continues living up to its name. Arts leaders have shown incredible creativity and resiliency, piecing together funding and developing innovative ways to support their mission amid financial uncertainty. But for many organizations, there is a real question about how long new programming and revenue strategies can be sustained if they don’t deliver positive financial results—and quickly.

You can download our new brochure to learn more about the full range of program and financial strategies that organizations are pursuing, the systemic barriers they face, and tips to help the sector overcome these challenges (for nonprofits and grantmakers alike).     

You can also slice and dice the data yourself using our online Survey Analyzer tool; it’s filtered here for arts organizations. We encourage arts leaders to select the data set—which is sortable by budget size and sub-sector—for their peer group and use this information in making the case for support to funders. Likewise, we encourage funders to filter the data to help understand benchmarks and dynamics affecting the organizations they fund.

Data like this can be an invaluable resource for our sector, but only if we pause to understand its implications and use it to inform our path forward.

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As we plan for a new year of data in our 2015 State of the Sector Survey, we are reaching out to leaders in the Arts & Culture nonprofit sector to increase participation and strengthen our findings.

A higher volume in response rate yields more accurate and fine-grained data that is ultimately more useful to the diverse community of nonprofit supporters. Please sign up to take our survey in 2015, and share this link with your networks in the Arts & Culture nonprofit sector: http://nonprofitfinancefund.org/state-of-the-sector-surveys

This post was orignally published on the White House Office of Social Innovation and Civic Participation Blog on December 4, 2014. It can be found here 

By Jonathan Greenblatt 

Two years ago, President Obama prioritized Pay for Success (PFS) as one of the key strategies in his second-term social innovation agenda. PFS is a rapidly expanding approach to funding social services that is making great progress around the country.

For those unfamiliar with PFS, it is a type of performance-based contracting for preventive social programs wherein government pays if desired set of specified outcomes are achieved. PFS often involves mission-driven investors who fund the preventive services with intent to be repaid from government savings generated when the services reduce demand for more costly safety net programs. If the services miss their targets or do not deliver, then investors absorb the loss. Thus, government only “pays for success.”

Today, the Administration can point to federal investments of almost $40 million that have helped to jumpstart the field and established the U.S. as the largest PFS market in the world. Just today we announced the nation’s sixth PFS transaction. This new initiative aims to reduce foster care costs in Cuyahoga County, Ohio by supporting mothers with children who have lost their homes.

As exemplified in Cuyahoga County, PFS will be driven outside D.C. at the local level. To improve the model, it’s valuable to analyze the early PFS deals and consider their lessons. Therefore, in collaboration with the Laura and John Arnold Foundation and the Nonprofit Finance Fund, we are proud to host a series of White House Summits on Pay for Success around the country to share best practices and spread the learnings with hope of driving down transactions costs and accelerating wider PFS adoption.

The first summit took place last month in Bridgeport, Connecticut. At that meeting, Governor Malloy and Mayor Finch kicked off a conversation with policymakers, business executives, and nonprofit leaders from across the east coast about PFS. They shared best practices and key insights based on PFS deals to date and new concepts in the pipeline.

We will host two more PFS Summits, including a session in Chicago that took place today and convened more than 100 stakeholders from across the Midwest and central U.S. We will host a third and final summit in Salt Lake City in January with elected officials and other interested parties from across the West and Southwest.

Yet, even as PFS rolls out across the country, Washington, D.C. does have a key role to play. With bipartisan legislative support, the President has provided grants through the Social Innovation Fund that will help communities identify and close PFS transactions that address a range of issue areas from mental illness and childhood asthma to foster care and homelessness. Recent bipartisan workforce legislation will permit states to use over $200 million in support of “pay for performance” reduce unemployment. We are also excited about new bipartisan legislation circulating in the House and Senate that will enable the federal government to pay for success in the form of rigorously verified outcomes that save federal government money.

PFS is not a silver bullet. The market is nascent and needs to mature. But we believe that PFS can serve as a powerful new social innovation to create better outcomes for communities, enabling them to invest in what works and conserve tax payer resources.


Jonathan Greenblatt is Special Assistant to the President and Director of the Office of Social Innovation and Civic Participation.