The hidden costs of 'free' money

As we enter into the brave new world of ‘economic stimulus’ via government spending, it seems an appropriate, albeit inopportune time to praise the virtues of self-reliance and caution against accepting ‘free’ money. But I’m going to do it anyway.

When we first start working with a community on developing a long-range plan for success, one of the first things we do is to start asking people what types of things they would like to see done to improve their community. Build parks. Replace old sewer and water lines. Attract more jobs. Tear down abandoned buildings. Make improvements to their school. Etc...

We then encourage the community to start talking about how it is going to make these things happen. What specific actions are they going to take? How much time and money and effort will it take? Who in the community is going to take the lead on it?

It is at this point in the process that we can predict with almost-certainty which towns will succeed in their efforts and which will not. Those whose first question when formulating their plan of action is “Who is going to go out and apply for some grants” are probably doomed to failure. On the other hand, those whose first questions have more to do with which local businesses they are going to ask for funding or which of their neighbors is going to take the lead on a project are much more likely to succeed.

While accepting ‘free’ money from some outside source – whether it is government or philanthropy – may seem like a no-brainer, we would argue that it is a course of action that should be taken cautiously. Here are a few reasons:

1. Communities that get into a pattern of chasing grant dollars tend to not do anything. The process of finding someone to apply for a grant, going through the application process, and waiting for a decision can take months if not years. In the meantime, you haven’t taken even little steps towards accomplishing your goals. If your community is unsuccessful in obtaining a grant, then you have to start all over again or just keep slipping further and further behind.
2. Grants usually come with big strings attached. Recent government handouts to financial institutions aside, it is rare that money is given out without some requirements for how that money is spent. The vast majority of grants are required to clearly specify what the grant dollars can be spent on and what they cannot be spent on. Unfortunately, the restrictions are usually tight enough that the things you really need to do are not eligible costs.
3. You tend to lose site of what it is that you want and need to do. Similar to the last problem, it is all to easy to start going after whatever grant you can possibly get your hands on. This is the “something is better than nothing” mentality, but in a twisted kind of way. The problem is that if you go with whatever grant you can get, you are dedicating your time and effort toward something that you really don’t need or want. Almost every grant these days requires some kind of local match – either local money or local effort. If the project goes bad, it can create a lot of animosity and apathy to the next project from those you really need to help make it happen locally. And this time, it might be that project that you really need.
4. Using outside grants to operate a program for a year or two can create a false sense of security and permanence. What happens when the money for a specific program runs out? Usually, as obvious as it sounds, there tends to be a sense of shock and surprise when the grant program ends and suddenly your community is faced with the question of “What now?” Unfortunately, “what now?” is usually followed shortly thereafter with “who else can we ask for the money?”
5. Accepting grants to help in the funding of infrastructure – roads, buildings, sewer lines, water towers, etc... - can often lead to even greater spending demands in the future. When you are building a sewer line with a government grant or loan because you can’t afford it yourself, the tendency is to overbuild – to build that sewer line as far out as you can so that you’re ready to go out and attract new development. The problem is that often times that new development is at a very low density or worse yet, doesn’t come at all. Then, when the loans need to be paid off or the sewer lines need to be replaced, there is not enough local tax base to pay for it. What then? Ask for more grants? It’s a cycle that just can’t be sustained.

This is not to suggest that you should never seek or accept a grant again. What we have found though, is that the most successful communities tend to be those that think first of how they can accomplish their goals on their own. Assume there isn’t any outside money coming in. How would you accomplish your goals if that were the case?

What this kind of thinking tends to do is to make your efforts more realistic and achievable. It may not seem very glamorous to take small steps, but over time you will usually be much further along in achieving your goals than if you are always swinging for the fences and trying to get that big grant.