The Casey Foundation's Journey Toward Equitable Grant Making

Establishing a New Indirect Cost Rate

Posted February 3, 2022, By Katie Tetrault

Woman standing outside, smiling, and talking to a group of individuals in matching navy T-shirts.

Too often, fun­ders fail to con­sid­er the total cost of their grants, cre­at­ing fund­ing gaps that have a dis­pro­por­tion­ate impact on small­er non­prof­its and orga­ni­za­tions of color.

Grantees that lack suf­fi­cient fund­ing strug­gle to pay for basic oper­a­tional costs, such as rent, util­i­ties, legal fees, equip­ment and oth­er admin­is­tra­tive expens­es. When grants fail to ade­quate­ly con­sid­er these indi­rect expens­es, orga­ni­za­tions can fall into a vicious star­va­tion cycle” that threat­ens their fis­cal health, lim­its their full poten­tial and hin­ders the advance­ment of their mission.

The Impact of Indi­rect Costs

A 2019 Bridges­pan study ana­lyzed the true costs of oper­at­ing non­prof­it, which include direct project expens­es and indi­rect costs. Grantees typ­i­cal­ly are unable to recov­er indi­rect costs with the fund­ing pro­vid­ed in project grants, the study found. This puts pres­sure on the orga­ni­za­tion to make up the fund­ing gap from oth­er sources.

First Steps Toward Equi­table Grant Making

The Annie E. Casey Foun­da­tion, like many phil­an­thropies, is deeply com­mit­ted to pro­mot­ing equi­ty in its pro­gram­mat­ic work and oper­a­tions and has con­cerns about the equi­ty impli­ca­tions of its indi­rect cost pol­i­cy. For years, Casey main­tained a low cap on indi­rect costs — but data showed that this approach left many of its non­prof­it grantees unable to oper­ate with­in the indi­rect costs funded.

Con­ver­sa­tions with­in the Foun­da­tion began in late 2019 and focused on the organization’s indi­rect cost cap. At 10%, this rate sat at the extreme low end among the range of options that oth­er foun­da­tions were offer­ing. In 2020, Casey raised its indi­rect cost cap to 15% and then took the time need­ed to con­duct an in-depth analy­sis and fur­ther exam­ine and dis­cuss a long-term pol­i­cy change.

Data-Dri­ven Field-Informed Research

A work group of pro­gram offi­cers and Grants Man­age­ment staff with­in the orga­ni­za­tion kept the dis­cus­sions rolling, and — while every­one agreed that this was an impor­tant issue to con­sid­er — the path for­ward was far from clear.

In ear­ly 2020, the work group exam­ined Casey’s grants data and ana­lyzed the costs grantees were list­ing in their bud­get requests. It also sought input from oth­er fun­ders, includ­ing the MacArthur Foun­da­tion — one of five phil­an­thropies involved in advanc­ing what is called the true cost” work — about how it land­ed on a 29% over­head rate on all grants and the lessons it learned along the way.

In June, the work group enlist­ed the fis­cal man­age­ment con­sult­ing firm BDO FMA (for­mer­ly Fis­cal Man­age­ment Asso­ciates) to help facil­i­tate dis­cus­sions and ana­lyze grantee data. Using pub­licly avail­able 990 data, BDO FMA per­formed a grantee port­fo­lio analy­sis, which pro­vid­ed infor­ma­tion on the finan­cial health of Casey Foun­da­tion grantees — includ­ing infor­ma­tion on their report­ed indi­rect costs.

The work group learned that the medi­an report­ed indi­rect cost rate of Casey grantees was 19%. Small­er grantees with bud­gets under $1 mil­lion had a medi­an rate of 22% and the largest grantees — those with bud­gets exceed­ing $100 mil­lion — had a medi­an rate of 14%. This inverse rela­tion­ship between bud­get size and indi­rect cost rate is con­sis­tent with BDO FMA’s research on non­prof­its as a whole and is like­ly due to economies of scale achieved at larg­er organizations. 

Each year, the Foun­da­tion col­lects demo­graph­ic data from grantees to mon­i­tor fund­ing to orga­ni­za­tions of col­or (defined as orga­ni­za­tions that have both a chief exec­u­tive and a major­i­ty of staff who iden­ti­fy as peo­ple of col­or). By dis­ag­gre­gat­ing this data, Casey learned that grantees of col­or had medi­an bud­gets that were just 59% the size of its oth­er grantees and car­ried a medi­an cost rate of 21% — more than 2% high­er than orga­ni­za­tions that were not grantees of col­or. These dif­fer­ences sug­gest that a one-size-fits-all approach to an indi­rect cost rate pol­i­cy is inequitable and dis­pro­por­tion­ate­ly lim­its small­er grantees, includ­ing grantees of color.

Guid­ing Principles

Equipped with this infor­ma­tion, the work group focused on three guid­ing prin­ci­ples when recon­sid­er­ing Casey’s indi­rect cost rate pol­i­cy: 1) Grantees deserve equi­table access to resources; 2) the Foundation’s prac­tices should aim to min­i­mize the bur­den to grantees in areas such as apply­ing for, bud­get­ing and report­ing on grants; and 3) grant mak­ing prac­tices should seek to improve — or at least not jeop­ar­dize — the finan­cial and orga­ni­za­tion­al health and sus­tain­abil­i­ty of grantees.

The group ulti­mate­ly land­ed on a three-tiered rate struc­ture that pro­vides a 25% indi­rect cost rate for grantees with bud­gets under $5 mil­lion, 20% for grantees with bud­gets between $5 mil­lion and $100 mil­lion and 15% for those with bud­gets over $100 mil­lion. This new struc­ture cov­ered the report­ed indi­rect costs of the major­i­ty of Casey’s grantees in each of the tiers.

Imple­ment­ing Change

Imple­ment­ing this new pol­i­cy came next — a chal­lenge that prompt­ed ques­tions about how to pay for such a sub­stan­tial shift in prac­tice. Foun­da­tions gen­er­al­ly have three options when imple­ment­ing a new indi­rect cost pol­i­cy. These are: 1) reduce the direct cost por­tion of the grant, there­by reduc­ing the scope of the work; 2) reduce the num­ber of grants award­ed to ful­ly fund the indi­rect cost reim­burse­ments on the remain­ing grants; or 3) increase grant mak­ing bud­gets to accom­mo­date an uptick in indi­rect cost reim­burse­ments. Casey chose option three: grow­ing its grant mak­ing bud­get to cov­er imple­men­ta­tion costs. 

Today, the Foun­da­tion is con­fi­dent that its new pol­i­cy is dri­ving equi­table grant mak­ing for small­er orga­ni­za­tions and orga­ni­za­tions of col­or. Equipped with the right resources, these non­prof­its are bet­ter posi­tioned to suc­ceed — and to help Casey advance its mis­sion of build­ing a brighter and more equi­table future for America’s chil­dren, young peo­ple and families.

Katie Tetrault is the vice pres­i­dent of Finance and Grants Man­age­ment at the Annie E. Casey Foundation.

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