Saturday, December 29, 2012

Improving Measures of Efficiency

For some time now, the primary measure of charitable efficiency has been the accounting-based program expense ratio, which measures the percentage of expenses that are classified as program related (as opposed to those related to administration or fundraising).  The heavy reliance on program expense ratios by watchdogs, donors, and the organizations themselves, often to the point of ignoring the remainder of an organization’s financial statements, cannot be denied.

That said, recent years have seen a backlash against the prevalence of these accounting-based measures.

Thursday, December 27, 2012

The Accountability Gap - An Update

As discussed previously in this blog, a primary means of ensuring that charities are using donated funds to benefit the public good is the IRS requirement that they complete annual financial reports (Form 990 or a variant) to maintain their nonprofit status.  The notable exception to this is that churches and certain religious groups are exempt from annual filing requirements.  Though many church groups have been pushing for like-minded religious organizations to voluntarily provide this information to the public in order to promote accountability, compliance is the exception, not the rule.  A recent development may close this accountability gap, however.  A lawsuit has been filed by the American Atheists to eliminate what they view as discrimination against secular charities that takes the form of requiring an annual Form 990 of secular but not religious charities.  In my view, this is one to keep an eye on -- whatever your religious beliefs, it is hard to argue with the lawsuit's premise.  And, the outcome of the lawsuit has the potential to drastically change financial reporting for charities, especially religious ones.

Sunday, December 23, 2012

The Real Significance of Zuckerberg's $500 Million Donation

By now, it has been widely reported that Facebook founder and CEO Mark Zuckerberg has donated approx. $500 million of Facebook stock to charity.  In particular, his donation was made to the Silicon Valley Community Foundation to aid education and health efforts, and represents the first of several such gifts to come.  While the gift is substantial and noteworthy in itself, it also represents something more significant.  In the not too distant past, the ultra-wealthy conducted philanthropy in a different and very predictable way: late in life, they would start a private foundation in their own name and bequeath funds to that private foundation, the investment returns from which would later be used to fund charitable activities.  Zuckerberg's gift represents two key shifts from this formula: (i) the gift was made early in life; and (ii) the gift was not given to his own private foundation but instead a community foundation.  Both portend philanthropic efforts with more immediate impact.  The trend in (i) follows the lead of Bill Gates, while (ii) follows Warren Buffett's lead.  Though the donations to the Silicon Valley Community Foundation likely come with substantial restrictions (those details have not been released), they are still much more likely to be put in use quickly than funds placed in a private foundation.  It looks like Gates, Buffett, and now Zuckerberg have started a new wave of wealthy philanthropists with hopes of making notable impact during their lives.  Winkelvoss twins, your move...

Monday, December 17, 2012

The Rapidly Blurring Boundaries Between Investments and Missions

Many charities, notably private foundations and educational institutions, rely on substantial endowments to help fund their missions.  These endowment funds are typically placed in a range of investments, the returns of which are used to support the organizations’ day-to-day operations. These formerly clear boundaries between investment activities and their subsequent funding of mission-based operations have been rapidly disappearing in recent years.

Tuesday, November 27, 2012

Charity Check Cashing?

As the microfinance trend grows, I wonder why no major charities or foundations have looked to what I see as a point of obvious need – a charitable footprint in check cashing, payday lending, and other short term consumer debt. 

The idea behind microfinance is to provide loans to small businesses and entrepreneurs who either cannot get loans or have to pay exorbitant rates for loans they can get.  A nonprofit can step in and offer loans at interest rates well below market rates and, in doing so, help promote individual success and local economic growth.  To me, these same principles can and should be applied to payday lending.

Tuesday, November 20, 2012

Helping Wounded Veterans

The American public has a strong desire to help wounded veterans as they return home.  In this vein, I have recently been struck by the prominence of the Wounded Warrior Project.  ABC/ESPN, Heinz, Under Armour, the NFL and the PGA Tour, among many others, have sponsored the Wounded Warrior Project and/or publicized its efforts.  It led me to wonder what other charities serve wounded veterans and how they differ from one another.  I decided to look into three prominent charities that seek to help wounded veterans: the Wounded Warrior Project, the Fisher House Foundation, and the Injured Marine Semper Fi Fund.  Before discussing what their financials reveal about each organization, a bit on their stated missions.

Tuesday, November 13, 2012

Charitable Contributions and Tax Reform

As the federal government considers tax reform as part of a broader effort of improving its long-term budget crisis, charitable contributions have been one area of discussion.  The question seems to be whether the deduction afforded taxpayers who donate to charities is a “loophole” that should be removed from the tax code.  Being one of the larger deductions, it seems a natural target.  On the other hand, charities rely heavily on contributions, and these contributions are sure to decrease if the tax benefit is removed.  What surprises me is that there has not been a strong push for what I see as sensible middle ground – restrict the charitable deduction to cash donations.  Let me elaborate...
  • According to IRS figures, noncash donations to charities that are claimed as deductions on individual tax forms amount to around $50 billion each year.  A recent study by Ackerman and Auten (2011) in the National Tax Journal estimates that this accounts for $9 billion of lost tax revenue each year.  Depending on whether you ask the Democrats or Republicans, this amounts to somewhere in the range of 9-12% of new revenue goals.

Monday, November 12, 2012

The Lance Armstrong Foundation

The recent decision by Lance Armstrong to sever ties with the charity he founded, the Lance Armstrong Foundation (LAF), marks a substantial point of transition for the organization.  In reading much of the coverage of Lance Armstrong and his foundation, I have been struck by some fundamental misconceptions about the foundation.  Below, I discuss three things that hopefully help clear up these misconceptions.

1. Where the money comes from
One question that immediately arose after Lance Armstrong decided to stop fighting doping charges was how it would affect donations.  Since most public charities rely very heavily on public donations, the concern is a natural one.  The prominence of this question was underscored by quick press releases by the foundation noting an uptick in donations in recent weeks.

100% Charities – Too Good to be True?

A somewhat new trend among charities is to publicize to potential donors that 100% of their donation will go directly toward the charity’s stated mission.  The implication is that the charity is very efficient with donor funds and, thus, your donation will be put to good use.

It turns out this 100% promise is a bit too good to be true.  What typically underlies the promise is a circumstance where a charity has other sources of revenue (corporate sponsorship, board member donations, or giving by other charities or foundations).  The charity designates (a portion of) the funds from other sources to be used to meet non-program needs such as fundraising and administrative costs, thereby leaving all new donations to be dedicated to the mission.  However, since money is fungible, the organization could have just as easily promised any individual donor that 100% of their donation would go toward legal fees or travel expenses and designate that the revenues from others sources be used for programs.  In short, the 100% promise is somewhat empty, as almost any organization could make that promise to an individual donor.  A more meaningful indication of efficiency is what percentage of all the organization’s expenditures are spent on programs.  This figure, the “program expense ratio”, gives a much better sense to donors of the efficiency with which the organization uses funds (it too has flaws, but that’s a story for another day).

Thursday, November 8, 2012

The Accountability Gap

Here are a few facts:
  • In 2010, total charitable giving in the US was over $290 Billion.
  • Of that amount, an estimated $29 Billion, or 10%, went to churches.
  • The IRS requires virtually all charities to file a "Form 990" (or variant thereof) on an annual basis.  The filing provides disclosures about an organization’s revenue sources and how its funds were spent.  Further, each organization is required to make their Form 990 available to the public.  There is one notable exception: churches (which encompasses houses of worship broadly) are not required to provide this information.
  • The IRS also places limits on political activities of charitable organizations.  However, the IRS has all but shut down its enforcement of these requirements for churches. 

Wednesday, October 31, 2012

Text Donations

Text donations to the Red Cross and others have expanded in recent years, and have become particularly prominent after natural disasters like Hurricane Sandy.  The appeal, I believe, is that it's quick and allows people to give small amounts while still feeling that such amounts are appropriate.  There is, however, some confusion about how much money gets to the charity and when.

The easier question is when the charity receives your donation.  The funds reach the charity only after you have paid your wireless bill and the funds have been transferred to the processor (for example, mGive Foundation) and the processor then transfers it to the charity.  This can take 60-90 days.

As for how much goes to the charity, the organizations involved typically stress that cell carriers waive fees so that 100% of the donation goes to charity.  True, cell companies typically waive fees (though may charge you for sending a text message).  This means that 100% of the donation reaches the donation processor (another charity, such as the mGive Foundation).  However, these processors typically work with for-profit mobile vendors (such as that transmit funds from the cell company to the processor and then to the charity.  These vendors do charge a fee, which can be in the range of 3%.  Thus, typically less than the entire donation actually reaches the intended recipient.  There are times when these fees have been waived, so this only represents the typical experience.  In case this discourages you from using texting to donate, however, think of the alternatives.  Credit card donations too come with their own processing fees (typically 3% or more).