Monday, February 23, 2015

Things You Can Learn about The Clinton Foundation from Its Financial Statements

As Hillary Clinton and her presidential aspirations begin to take center stage in political discussions, some of the attention has focused on the Clintons' family foundation – many are already speculating about whether the foundation will prove to be a political asset or liability for Secretary Clinton.  While I can't speak to the politics angle, I do think it's worth considering what one can learn about the foundation and its activities from its financial statements. The following observations come from a review of the Clinton Foundation's GAAP financial statements (that reflect a consolidation of the Bill, Hillary, & Chelsea Clinton Foundation and its controlled entity the Clinton Health Access Initiative).

Monday, February 2, 2015

For Nonprofits, it Pays to be in the C-Suite

Not a week goes by that we are not told that nonprofits should learn to be more like their for-profit counterparts, or at least be treated like them.  For those who see charities as offering something unique to society, this call seems particularly odd. Yet, the refrain repeats.

There is one dimension, however, on which the refrain has been widely adopted.  Where once Executive Director was the chosen title of most nonprofit leaders, more and more have switched to the popular for-profit moniker of Chief Executive Officer (CEO).  It hardly seems like a critical difference, but the change  (even if merely semantic) is often seen as necessary to gain credibility and grow an organization.  With this in mind, I decided to conduct a mini-experiment, looking at the pay of the highest-paid executive at each of the 100 largest charities in the US.  Looking at the data with an eye on whether pay varies between those who are called CEOs and those who are not reveals a striking contrast.



Tuesday, January 27, 2015

"Overhead" Aversion - Is it the Head or the Heart?


Donors' reliance on accounting measures of efficiency and the frustration it creates among nonprofit leaders seem to permeate most discussions about how to improve the nonprofit sector.  Now over a year old, the Overhead Myth campaign continues to provide hope to those in the sector seeking to convince donors to happily fund administrative and fundraising costs.  Despite the optimism, recent evidence seems to confirm that the attention donors pay to so-called "overhead" costs isn't going anywhere.

Notably, a study recently published in Science showed that a simple way of increasing donations is to ensure and communicate that overhead costs have already been paid by another donor so that any donations the solicitation recipient makes are "overhead-free".  In fact, the study showed that this approach boosts giving even more than securing a matching gift.  The study underscores the emphasis that donors place on assurances that they are funding programs, not overhead. Yet, many have viewed this study as painting a picture of donors being driven by the heart instead of the head, showing that donors don't care about how much overhead a charity has but rather only care about a feeling that their donation counts.  As examples, Vox reports the study as providing evidence donors don't view overhead as inefficient but just want want the "warm, fuzzy feeling" that their donation went to services, and Brady Josephson's Huffington Post blog post declares it as evidence that donors "care more about how they feel when they give than how organizations spend their money."

To me, the evidence is not necessarily that donors are irrationally following their heart, but rather could indicate donors are being particularly rational.  To elaborate, if one thinks in terms of costs of making a new product or product line, Econ 101 tells us that that the relevant cost to pay attention to is the marginal cost of production, not the average cost.  It is no secret that accounting reports provide average cost information, not marginal cost, so a savvy decision-maker needs to consider if and how those numbers may differ.  The same holds with nonprofit accounting.  Accounting estimates of the percentage of expenses going toward programs may give donors a sense of the average use of donations, but again the relevant calculation to a savvy donor is instead one of the marginal use of a donation.  In this case, the fact that donors highly value a nonprofit who can ensure that the marginal use of a donation is 100% on programs may simply indicate that donors who find overhead distasteful are being entirely rational.

In other words, while it seems to have become the norm to assume that donors make poor and irrational decisions based on accounting reports, perhaps it is worth considering the possibility that donors are more savvy than many are willing to admit.

Wednesday, January 14, 2015

Reconciling Claims About Spending by the Red Cross

As part of their examination of the American Red Cross' response to Superstorm Sandy and Hurricane Isaac, NPR and ProPublica noted a discrepancy between claims by the organization about its spending and what the financial statements bear out. In particular, it was noted that even though it incurs substantial fundraising costs, the Red Cross often repeats the claim that "91 cents of every dollar that's donated goes to our services." Of all the criticisms of the organization, this one seems to have gained the most traction, even leading to calls for additional oversight and demands for answers from Sen. Chuck Grassley. In what follows, I seek to provide a simple reconciliation that supports the view that the claims made by the Red Cross are true but at the same time inaccurate. To do so, I make use of the 2013 fiscal year financial statements for the organization.

Wednesday, December 17, 2014

Nonprofit Financial Trends for 2014 & 2015

Perhaps against my better judgment, I made several predictions in this blog one year ago for what I thought may transpire in 2014. Here goes an assessment of their accuracy.

1. The Tax Deduction for Charitable Contributions would Remain Unchanged
Ok, this one was pretty easy. Despite several efforts for serious reform, in the end, nothing notable was undertaken. Talk of new tax reform has begun anew, and my best bet is that this prediction will hold once again in 2015.

2. Efforts to Expand Lending by Nonprofits to Americans in Need would Take Hold
This prediction was largely wrong. True, cash transfers and lending have expanded in small bursts in the US, but nothing that would constitute a sweeping change of charities' approaches to poverty. And while I suggested payday and other short-term lending would be an area ripe for nonprofits' help, a push for the US Postal Service to fill this void seems to have gained more traction. This one may take some time.

3. Increased Efforts to Regulate Charity Telemarketing would be Implemented
This was also largely a bust. True, several state attorneys general have sought to expand rules to limit abuses, but nothing sweeping has been undertaken yet. This prediction too may need time, though much uncertainty remains.

4. Donor Advised Funds would Face Added Requirements
No doubt that this one was wrong, at least for 2014. I thought that the notion that private foundations can meet their own distribution requirements by giving to Donor Advised Funds would force a change, but that seems unlikely. However, the massive expansion of money in Donor Advised Funds has brought the issue to the forefront and with recent critiques in The New Yorker and ProPublica, the push for regulation is likely to gain steam.

5. Legal Challenges Will Require Churches to File Form 990s
I suspected one of the two big legal challenges to the policy that churches are exempt from filing their financial statements with the IRS would succeed. One (the American Atheists' suit) has been dismissed; the other (the Freedom from Religion Foundation's suit), has made it further by surviving a motion to dismiss but is still in early stages. This too may take some time to resolve.

In sum, my predictions were mostly off in terms of having notable resolution in 2014. However, several show signs of coming to fruition, so they may hold more promise as predictions for the coming years. Thus, meet my 2015 predictions, same as my 2014 predictions.

Sunday, December 7, 2014

Best Nonprofit Reads of 2014

Below are my favorite nonprofit articles this year, based on my biased interpretation of a biased sample.

This was undoubtedly a hard piece to write. The Red Cross is perhaps the most trusted charity in the US, and any effort to expose its flaws takes courage. The piece was fair and well-executed, and if it is taken as it should be, it will also lead to changes in the way the Red Cross operates going forward.
Every year, the NFL's nonprofit status comes into question, and this year was no exception; in fact, the voices appeared much louder this year. With all the writing complaining about the NFL using its nonprofit status as a tax dodge, this piece distinguished itself by considering the facts, even if they are less salacious. Weissman deftly explains how the NFL's nonprofit status came about and why it is unwarranted, while also recognizing that very little (if any) taxes are avoided by it.

This was a tough choice, only because Al Cantor and Ray Madoff have both written convincingly about the problems of donor-advised funds. So, I went with the most recent incarnation – it's best to view this as representative of the collective work of Cantor and Madoff in explaining the glaring issues with permitting donor-advised funds to continue unregulated. With more money finding its way into donor-advised funds, permitting tax deductions now for the promise of future charitable distributions, the problem will only escalate in years to come.
When it comes to providing pushback against conventional wisdom, Bill Schambra never disappoints. In this case, the target is the nonprofit management trend of strategic philanthropy. Schambra convincingly argues that strategic philanthropy, like innovative performance measurement trends among for-profits before it, suffers from a false sense of having all the answers. I view the piece as more than that in that it underscores the importance of skepticism for any new trends, especially those claiming to drastically change the management landscape.
It seems like everyone had something to say about the ice bucket challenge, and its unprecedented success. The articles ranged from advice on how others can replicate the viral reach of the challenge to shock-value critiques of the challenge (which seemed more about getting clicks than anything else). I found both of these extremes unconvincing to say the least. I would put Dan Pallotta's piece in another category – a means to use the success of the challenge to provide context for one's broader views on charity. Whatever you happen to think of Dan Pallotta's world view, you also have to admit this piece is a well-written and well-argued defense of it.

Monday, November 24, 2014

Ohio State vs. Michigan - How Do They Compare in Charitable Giving?

The Ohio State - Michigan rivalry is in full effect here in Columbus. To honor the rivalry, I thought I would see how the two schools stack up when it comes to charitable giving. Here's the tale of the tape...

(1) Statewide comparison



(2) Local comparison



And the winner is...The Ohio State University (not that I'm biased).