Using Challenge Grants Has Fans And Detractors

By Meg Sommerfeld — November 09, 1994 7 min read

When the billionaire philanthropist Walter H. Annenberg announced last December that he would contribute $500 million to public school reform, he stressed that his gift alone would not be enough.

“This must be a challenge to the nation,” he said, announcing the gift at a White House ceremony. “I believe those who control sizable funds should feel an obligation to join this crusade for the betterment of our country.”

In the nearly 11 months since then, his gift has become known in shorthand as “the Annenberg Challenge.”

Challenge grants such as Mr. Annenberg’s--made on the condition that recipients raise matching funds--have been used for years by donors to help grantees strengthen their funding bases. But they are not without critics.

Recipients of such grants say the pressure to match the funding, and to do so under a timetable and structure set by others, can sometimes derail them from the purpose of their projects.

Others say that challenge grants on a national level can siphon money from a limited pool of funds and disrupt ongoing local efforts.

In the case of Mr. Annenberg’s grant, the former publisher of TV Guide and Seventeen magazines has made it clear that he wants foundations, corporations, and individuals to join a campaign of tremendous scope and size.

Matching Annenberg in N.Y.C.

As the first stage of his initiative, Mr. Annenberg pledged $120 million to four national education-reform efforts, none of which was in the form of a challenge grant. But it is expected that much of the rest of his $500 million gift will require matching contributions.

Most recently, the Annenberg Foundation pledged a $25 million challenge grant to support the creation of 50 small public schools in New York City, and an additional $25 million to other unspecified education-reform projects. (See Education Week, Sept. 28, 1994).

The first of the two grants was awarded to the Fund for New York City Public Education, on behalf of an alliance linking it with three other nonprofit groups.

The alliance, known as the New York Networks for School Renewal, will have to raise $2 in matching funds for every $1 from Mr. Annenberg: $1 from private sources and $1 in public-sector support.

When the New York City grant was announced, the media giant Time Warner Inc. said it would contribute $5 million. And last month, the Aaron Diamond Foundation in Manhattan announced a $2.5 million matching grant.

Grants at Work

There are a variety of reasons why foundations and corporations award challenge grants, rather than a grant with no strings attached, philanthropy experts say.

The most obvious reason is to help raise more money for a project.

Challenge grants are also a way to help recipients diversify their financial-support bases, so that projects do not become permanently dependent on a single donor.

“Frankly, I’m not certain myself that challenge grants provide the kind of incentive that we all hope that they would,” said Paul M. Ostergard, the vice president and director of corporate contributions and civic responsibility at Citibank.

But Mr. Ostergard said he has found challenge grants effective when Citibank, based in New York City, has looked for support for new ideas or projects.

“Part of the role that philanthropy plays in K-12 education is to help stimulate the new ideas and to try things that would be difficult to do with public money,” he said.

For new organizations, a challenge grant can lend credibility.

For example, a $500,000 challenge grant from the Texas businessman Ross Perot was a critical step for Teach for America in 1990.

“At that point we were new, and it was such a sign of confidence in Teach for America,” said Wendy Kopp, the founder of the program, which recruits recent college graduates for stints as teachers.

But the gift did not mean that donors were lining up with checkbooks, and Ms. Kopp still had to knock on a lot of doors to solicit matching funds.

“The minute we got it, we were faxing everyone we had ever met,” she recalled.

But Mr. Perot’s grant carried with it an aura of legitimacy that gave prospective funders more confidence that Teach for America was a good investment, Ms. Kopp said.

Since then, the teacher corps has received other challenge grants, such as a $3 million grant from Philip Morris Companies Inc. in 1992.

For existing organizations, a challenge grant may help focus time and energy on a new project or move the organization in a different direction, according to Robert O. Bothwell, the director of the National Center for Responsive Philanthropy, a nonprofit Washington group that serves as a watchdog for the philanthropic sector.

His own organization once received a challenge grant for a project that consistently had been on the back burner.

“Then this challenge grant came along,” he said, “and we moved it to the front burner, and never regretted it since.”

Feeling Pressure

But Mr. Bothwell also warned than a challenge grant is likely to work only if it is for a project an organization wants to tackle anyway and if the recipient has input on how the matching requirements are structured.

Joan Lipsitz, the program director for elementary and secondary education at the Lilly Endowment, an Indianapolis foundation, agreed. Earlier, when she served as the director of the Center for Early Adolescence in Chapel Hill, N.C., Ms. Lipsitz had to raise matching funds for a challenge grant only once.

“While I made the match,” she said, “I felt the pressure of making the match distracted us from some other important work that needed to get done, and we became too driven by the necessity of making the match within a particular time period which was imposed on us and not negotiated.”

Challenge grants on a national scale can also be a problem if they prompt local funders to switch their support.

Mary Leonard, the former director of the precollegiate group at the Washington-based Council on Foundations, described such scenarios as “helicopter money"--when funders drop money into a situation without making an effort to learn what is going on in a community and what type of challenge grant would be the least disruptive.

Another potential problem with national challenges, she said, is that different regions of the country have varying capacities to raise matching money.

She sees an advantage for “projects that are located in the old philanthropic clusters in Boston, Washington, California, Texas, and Michigan--those are sort of philanthropic hot spots.”

“But there are some places where there’s nothing,” she said, “that are really sort of philanthropic deserts.”

What remains a question in many people’s minds is how much “new” money is available. In the corporate sector in particular, many believe the well is pretty dry.

And even the assets of some independent foundations, such as the Lilly Endowment, are still tied to the health of their parent companies’ stock.

“If there really is all this new money available that the Annenberg grants can leverage, then this is a truly wonderful strategy for children in need,” said Ms. Lipsitz of Lilly. “If there isn’t, then of course it’s a wonderful opportunity to reassess priorities in the way money is being spent.”

Or, in other cases, donors may try to get credit for pledges that have already been made. Mr. Ostergard of Citibank said he believes the Annenberg Foundation will be relatively liberal in its interpretation of what qualifies as a match.

He expects that the New York City portion of a 10-year, $20 million commitment Citibank made to public schools in 1990 will count toward the match requirement.

Either way, he said, there are so many companies giving to K-12 education that he thinks the corporate fund-raising will be relatively easy. He also pointed to a consensus among New York City-area grantmakers and educators that creating smaller high schools is an effective vehicle for education reform. At a recent meeting of about 60 local funders to discuss the Annenberg Challenge, “there certainly were a lot of heads nodding in the room,” he said.

Others were optimistic about the prospects of the New York City alliance and other similar coalitions in Los Angeles, Detroit, and Chicago that hope to receive challenge grants from Mr. Annenberg.

“The one thing that makes this kind of interesting is that it’s directed toward urban areas,” said Diana Rigden at the Council for Aid to Education, a New York City-based group that tracks corporate giving. “For many companies, they’re very frustrated about all the problems in the urban areas, and this may give them an opportunity to structure something a little differently.”

A version of this article appeared in the November 09, 1994 edition of Education Week as Using Challenge Grants Has Fans And Detractors