Many grant-making foundations have made deliberate shifts in recent years to incorporate more “general operating” grants as a way to more fully support their grantees while eliminating burdensome administrative requirements. Despite the widespread growth of this approach, not all grant-making foundations apply the strategy in the same manner, and what one foundation thinks of as “general operating” can vary widely from how another foundation uses the approach. Whether your foundation already incorporates general operating grants into its strategy or is considering doing so, here are some questions to consider:
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What does “general operating” mean? “General operating” seems to mean different things to different funders. The term is not defined by statute, and many foundations use it interchangeably with terms like “unrestricted” or “flexible”. If a foundation intends for a “general operating” grant to be actually used for operating expenses within a certain period of time, the grant agreement should say that. If the foundation instead wants to give its grantee complete flexibility regarding the use of the grant, including by deciding to invest the funds or hold them in an emergency fund, the foundation should clarify that as well.
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Are you accidentally making a taxable expenditure? Private foundations can make general operating grants only to other 501(c)(3) organizations[1], and general operating grants to other private foundations and to non-functionally integrated Type 3 supporting organizations also require expenditure responsibility. Private foundations cannot make general operating grants to non-501(c)(3) organizations. Failure to observe this non-negotiable rule subjects the foundation to costly taxable expenditure penalties.
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How do you make a general operating grant to a fiscal sponsor? In brief, you don’t. Grants to fiscal sponsors for sponsored projects are restricted grants. A private foundation treats them as general operating grants at its peril, especially if the sponsored project includes lobbying activity. The foundation instead could consider clarifying in the agreement that the grant funds are unrestricted other than with respect to the designation of the project and potentially with respect to the inclusion of the “no lobbying” prohibition.
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What about reporting and financial tracking? A foundation typically should not require its general operating support grantees to provide narrative or financial reports on their use of the foundation’s general operating grants. Such reports contradict and undercut the concept of “general operating” in the first place, and could present challenges issues if a grantee reports that it used foundation funds for lobbying activity. The foundation instead could consider requiring a copy of the grantee’s annual report and financial statements in the place of a tailored report. In some cases, the foundation could consider eliminating the reporting obligations altogether.
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Why are you including the standard lobbying prohibition? A common oversight in general operating grant agreements is the inclusion of the foundation’s standard “no lobbying” provision. That provision typically should be removed in all general operating grant agreements[2] unless the foundation truly intends to prohibit the use of the funds for lobbying (in which case the grant is not in fact truly general operating).
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Do you even need a grant agreement? The tax code does not require a written grant agreement for general operating grants to other 501(c)(3) organizations that are public charities described in Section 509(a)(1), 509(a)(2), or 509(a)(3) (except for non-functionally integrated Type 3 organizations). Many funders still choose to require an agreement in connection with other business considerations such as naming rights, publicity, and reversion of funds in the event of misuse. The choice to do so or not is one the foundation can make based on its specific goals and expectations.
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This Alert does not constitute legal guidance in any manner. General operating grants can be a fantastic option to incorporate into your grant-making toolkit. C3 Legal would be pleased to talk with you about how to best utilize them to achieve your mission.