The Office for Civil Society’s recent withdrawal or reduction of funding to its strategic partners in the voluntary sector has thrown into sharp relief the long-standing but increasingly acute problem of core funding for charities.
Many of the strategic partners had been using their income from the OCS to cover their running costs, such as buildings, insurance and payment of staff. Its loss or reduction has meant redundancies, fewer services and, in some cases, complete closure.
Unrestricted income, such as that from the strategic partners programme, is especially useful to charities because it can be used flexibly for any purpose. But it can be notoriously difficult to secure.
Ben Wittenberg, director of policy and research at the training and information body the Directory of Social Change, says it is becoming more difficult to secure unrestricted funding and money that has in the past been referred to as core funding has become increasingly tied to meeting specific outcomes.
"If I was a fundraiser looking for funding, I wouldn’t hang my hopes on finding any unrestricted income anywhere," he says.
The gradual move by public bodies towards funding the voluntary sector through contracts rather than grants means that many charities and voluntary groups enjoy less and less flexibility when using the money, he says.
"I think the days of getting core funding solely to support a charity’s existence have gone – if not, they are going," he says.
Wittenberg says more organisations might turn to sources that they have never considered before, such as legacy fundraising, to secure unrestricted funds that can be used flexibly for core costs.
But there is a danger that this will not necessarily work – growing evidence suggests that donors prefer to give to restricted funds, which are earmarked specifically for a particular aspect of a charity’s work, such as one of its projects.
After the recent tsunami in Japan, MissionFish, the charitable arm of the auction website eBay, set up an appeal page that listed a range of charities, with details of how each would use the money. Nick Aldridge, chief executive of MissionFish, says that three times more money was donated to charities collecting for a restricted fund that would be used only for specific relief work in Japan.
"People were much more willing to give money to charities that made it clear it was a restricted fund," he says. "This was true even for donations as small as £1. There does seem to be growing numbers of more informed donors."
The charity Action for Children recently decided to tap into this trend with a new website that enabled people to choose which projects their donations would benefit. It was launched at the beginning of February, but has already attracted more than 660 donations totalling more than £115,000.
Andrew Harris, the charity’s director of fundraising, said the site was launched after research showed people preferred to donate to funds that gave them specific information on what the money would be used for.
"I think it taps into the idea of treating donors as consumers, which is how they like to be treated," he says. "It’s about donors giving to a cause or a project that actually means something to them."
But the opposite trend has been noticed among philanthropists by Salvatore LaSpada, chief executive of the Institute for Philanthropy. He says restricted funding has been popular in recent years, but he has seen evidence that the tide is turning the other way.
"There has been a misperception that investing in specific projects improves accountability," he says. "What people are beginning to realise is that this kind of funding can often bring nothing more than a lot of bean-counting, where charities are counting stuff merely for reporting purposes, rather than having a proper creative dialogue with their funders."
He says that philanthropists who give charities unrestricted funds can engage in a dialogue with those organisations – this can lead to the innovation that many of them want to see.
He cites Anthea Case, principal adviser of the Arcadia Fund, and Muna Wehbe, chief executive of the Stars Foundation, as examples of people who prefer to fund charities in this way, rather than focusing only on specific projects or outcomes.
David Emerson, chief executive of the Association of Charitable Foundations, says some foundations have become more willing to fund core costs in recent times – but this is not necessarily going to be a permanent solution.
"The stories I’ve heard are that trusts are more willing to consider core funding in order to keep organisations going. They recognise this might be necessary because of all the cuts" he says.
"But given the scale of the government cuts and the scale of the sector, foundations simply do not have the resources to be core funders for long periods of time."
One organisation that is willing to supply core funding is the Baring Foundation. But its director, David Cutler, says restricted funding can work well for charities, providing it is done fairly.
"If properly done, project funding is also an acceptable part of the picture," he says. "The problems come if you are doing project funding in a very narrow way, not taking into consideration all of the organisation’s other costs.
"That’s a bad way of funding and it could ultimately weaken the sector."