March 2021
The secret curse of the nonprofit world is restricted donations.
If you haven’t been involved with nonprofits, you may never have
heard this phrase before. But if you have been, it probably made
you wince.
Restricted donations mean donations where the donor limits what can
be done with the money. This is common with big donations, perhaps
the default. And yet it’s usually a bad idea. Usually the way the
donor wants the money spent is not the way the nonprofit would have
chosen. Otherwise there would have been no need to restrict the
donation. But who has a better understanding of where money needs
to be spent, the nonprofit or the donor?
If a nonprofit doesn’t understand better than its donors where money
needs to be spent, then it’s incompetent and you shouldn’t be
donating to it at all.
Which means a restricted donation is inherently suboptimal. It’s
either a donation to a bad nonprofit, or a donation for the wrong
things.
There are a couple exceptions to this principle. One is when the
nonprofit is an umbrella organization. It’s reasonable to make a
restricted donation to a university, for example, because a university
is only nominally a single nonprofit. Another exception is when the
donor actually does know as much as the nonprofit about where money
needs to be spent. The Gates Foundation, for example, has specific
goals and often makes restricted donations to individual nonprofits
to accomplish them. But unless you’re a domain expert yourself or
donating to an umbrella organization, your donation would do more
good if it were unrestricted.
If restricted donations do less good than unrestricted ones, why
do donors so often make them? Partly because doing good isn’t donors’
only motive. They often have other motives as well — to make a mark,
or to generate good publicity
[1],
or to comply with regulations
or corporate policies. Many donors may simply never have considered
the distinction between restricted and unrestricted donations. They
may believe that donating money for some specific purpose is just
how donation works. And to be fair, nonprofits don’t try very hard
to discourage such illusions. They can’t afford to. People running
nonprofits are almost always anxious about money. They can’t afford
to talk back to big donors.
You can’t expect candor in a relationship so asymmetric. So I’ll
tell you what nonprofits wish they could tell you. If you want to
donate to a nonprofit, donate unrestricted. If you trust them to
spend your money, trust them to decide how.
Note
[1]
Unfortunately restricted donations tend to generate more
publicity than unrestricted ones. “X donates money to build a school
in Africa” is not only more interesting than “X donates money to Y
nonprofit to spend as Y chooses,” but also focuses more attention
on X.
Thanks to Chase Adam, Ingrid Bassett, Trevor Blackwell, and Edith
Elliot for reading drafts of this.