Monday, December 30, 2013

Predicting Trends in Nonprofit Finances for 2014

As we approach the beginning of a new year, I want to offer my predictions for what the next twelve months will bring in the realm of nonprofit finances.  Actually, what I have in mind is an assessment of trends I believe may be on the horizon, though many may take more than twelve months to materialize and I admittedly have substantial uncertainty about whether they will materialize at all (note: I’m already providing excuses as to why they were poor predictions).  As an accountant, I’m perhaps better suited to summarize the past year than make predictions about what’s to come, but that’s less fun so here it goes…

Monday, December 16, 2013

Best Nonprofit Reads of 2013

Below is my admittedly biased and incomplete list of favorite nonprofit articles from this year.

This is an extremely well-written piece pushing back against the overhead myth campaign.  For some reason, many don’t try to look through the eyes of donors when discussing this issue.  Schambra is a notable exception.

Using the disproportionate philanthropic response to the tragedies in Boston and West, Texas as a backdrop, Cohen provides an eye-opening view of how media and donors treat urban and rural American differently.

This piece follows the highly-publicized and tragic story of a soccer dribbler raising money for charity. Though we quickly learn charity has little to do with it, the story provides an extraordinary view into human motivation.

The story of the New York City Opera has lessons for endowment management and legal gray areas surrounding permanently restricted funds. The entire sector should be taking notice.

Cooper Union’s financial problems are a lesson to all nonprofits, and no one understands them like Salmon.

Thursday, December 5, 2013

The V Foundation

It seems almost commonplace now to hear of a charity whose finances have disappointed its donors. Donor frustration seems most common among cancer charities, where donors often believe their funds will be used to promote research in pursuit of better treatments and a cure only to later find out that many resources are directed toward salaries, legal consultants, and "awareness" advertising.

With this in mind, I want to highlight a success story where finances paint a picture of an organization singularly focused on its mission: The V Foundation for Cancer Research.

Tuesday, November 12, 2013

Finances at the Scouts

It is hard not to notice the different ways the Girl Scouts of America and the Boy Scouts of America are viewed publicly.  Much has been written about the financial woes at the Girl Scouts.  While the Boy Scouts face their own controversies outside of the financial realm, their financial situation seems far less dire.  There is good reason for this – the Boy Scouts routinely outperform the Girl Scouts in terms of financial performance, despite  their similar sizes (approx. 2.3 million Girl Scouts compared to approx. 2.6 million Boy Scouts).  The last two years are instructive:

Annual Change in Net Assets

Thursday, November 7, 2013

Some Reactions to the Reactions to my Op-ed in the Chronicle of Philanthropy

I recently wrote an Opinion piece in the Chronicle of Philanthropy warning the nonprofit sector of the potential for a growing rift between nonprofit insiders and donors when it comes to financial accountability.  The gist of the piece was that while donors are very concerned about where their money goes, nonprofits seem to be spending more effort convincing donors not to pay attention to summary financial measures than they are in providing and highlighting more detailed financial information.  Here are my thoughts on some of the reactions.

Wednesday, October 23, 2013

Does Obamacare Really Punish Nonprofit Hospitals for Helping the Poor?

No, this is not a post in favor of or opposing the ACA ("Obamacare") – there's plenty of those elsewhere already.  It is an attempt to clarify a misconception about ACA and its effect on nonprofit hospitals.  Starting with a story in the Daily Caller, and since spreading to other sources (examples here and here), many have stated that ACA includes a provision to punish nonprofit hospitals for providing free or discounted services to those without the ability to pay.  Even the staunchest opponents of the law must admit that this claim seems pretty far fetched.  So, what is the reality?

Wednesday, October 16, 2013

What is the Reinsurance Tax in ACA and What Does it Have to do with Nonprofits?

As federal budget negotiations have repeatedly stalled and restarted, one obscure component of the ACA ("Obamacare") has proven to be a sticking point – the transitional reinsurance fee.  If you're like me, you may be curious about what this fee entails and what its purpose is; unfortunately, most discussion of it is too partisan to see its basic premise.  Below is my attempt at explaining it.

Thursday, October 10, 2013

What Determines Nonprofit Executive Pay?

Many in the nonprofit sector have embraced the growing "overhead myth" campaign that seeks to reduce the emphasis on the overhead ratio (i.e., the percentage of expenses not directed toward programs).  As I have mentioned here before, though the campaign has intuitive appeal and is boosted by compelling anecdotes, there is surprisingly little broad-based empirical evidence either supporting or negating it.

With this in mind, I note that a new study by Karen Sedatole (Michigan State University), Amy Swaney (Michigan State University), Michelle Yetman (University of California, Davis), and Robert Yetman (University of California, Davis) sheds some light on the topic (as well as on other topics).  Their research paper, titled "Accounting-Based Performance Metrics and Executive Compensation in Nonprofit Organizations" looks at a large sample of nonprofits and tracks both their performance and their executives' pay across time.  It does not look at whether the low overhead nonprofits are actually "better" or even whether the overhead ratio should be emphasized.  But, it does speak to whether there is such an overemphasis on overhead.  By examining how pay changes with performance, the paper provides large-sample and statistically-significant evidence of the pressures placed on nonprofit executives.  The entire paper is available here, but here are a few notable takeaways:

  • There is strong evidence that nonprofit executives are rewarded for higher revenues, but little evidence that they are rewarded for lower administrative costs (i.e., revenues are more important than "overhead").
  • Nonprofit executives are incentivized to expend, rather than accumulate, revenues; how they spend such revenues is less important.
  • The rewards accrued to executives for generating revenues are lowest for taxable revenues and highest for program revenues.
This represents promising research that goes a long way in helping us understand what pressures and incentives nonprofits face.

Tuesday, September 10, 2013

The Size of Livestrong

The Livestrong Foundation gets widespread attention (this blog is no exception), both for its charitable efforts and its founder's scandals.  The question I want to address here is whether this attention has led to an outsized public perception of the organization.  For instance, a recent Washington Post piece about the organization's rebranding efforts labeled it "one of the largest and most respected nonprofits in the United States." And, in objecting to subjective media coverage, a vice president of the organization referred to it in a Huffington Post piece as "one of America's top cancer nonprofit organizations."

Before one concludes that Livestrong is one of the largest nonprofits around, some perspective is in order.  The following two charts, which present data from a few cancer charities' most recent financial statements, are revealing.

Net Assets (in millions)
Revenues (in millions)
As the numbers reveal, Livestrong's financial capacity is dwarfed by that of some other cancer charities.  It is not one of the country's largest charities or even close in size to the largest cancer charity.  Livestrong's public persona outsizes its financial capacity.  Therein may lie its fundamental problem: much of what Livestrong offers that other cancer charities cannot is its outsized public persona, the very persona it is now trying to shed or at least recast in a different light by cutting ties with its highly visible founder.

Tuesday, September 3, 2013

The Curious Case of Andre Agassi and the Cash Flow Hedge

With the US Open now in full swing, what better way to celebrate than discuss one of tennis' most well-known philanthropists, Andre Agassi.  Andre Agassi's Foundation for Education is a well-known charity effort aimed at transforming education, which includes its own charter school.

Despite its popularity, the foundation has also faced criticism.  Most notably, it has been scrutinized for its high fundraising expenses and low program expenses.  The low program expenses played a part in its receiving only one star by Charity Navigator.  Thanks to strong program expense growth, however, it now receives four stars for its financials.  Two pictures using data from the organization's audited financials demonstrate this change in financial fortunes:

Wednesday, August 21, 2013

A Few Observations on the Financials of The Clinton Foundation

Since the recent New York Times expose of The Clinton Foundation, many accusations and rumors have swirled about the organization and its finances.  Avoiding some of the larger issues about governance and the stability/clarity of the mission, I will offer a few observations solely about their financial picture.

  • One claim in the New York Times piece that many have noted revolves around annual deficits at the foundation.  Yes, the organization ran deficits in 2007 and 2008, totaling around $40 million.  And, their 2012 annual report shows another deficit ($8 million). However, the story didn't mention the surpluses in 2006 and 2009-2011, totaling $82 million.  Over that entire time-frame, then, there is little sign of financial distress.
  • Even if the overall financial stability seems sound, one implication of the deficits claim is that the organization's finances are too volatile.  On this count, one must give Bill Clinton some credit.  In his open letter response to the New York Times piece, Bill Clinton properly explained that this can be attributed to accrual accounting.  To elaborate, accounting rules stipulate that for multi-year pledges, the organization must recognize revenue in the year the pledge becomes unconditional, not when the funds are actually received.  So, an organization may smooth its expenses to match when funds are received and be left with finances that look more volatile than they really are.  In short, this concern is not terribly compelling either.
  • Another concern that has gotten some traction involves the travel budget of the foundation.  As the New York Post reported, the foundation has spent more than $50 million on travel expenses since 2003. Actually, when taking the figures for the consolidated financials (which includes Clinton Global Initiative and Clinton Health Access Initiative), the costs are much more, with travel and meetings accounting for over $65 million in costs from 2007-2011. Ok, this sounds like a lot, right?  Before deciding this proves the foundation's ineffectiveness, however, a little context is in order.  During the 2007-2011 period, travel/meetings represented 5.6% of the foundation's expenses.  For comparison, consider the expenses of The Carter Center – during the same time-frame, The Carter Center spent $63 million, or 7.0% of its expenses, on travel/meetings.  In other words, the travel expenses of the Clinton Foundation are not an anomaly. Some people (like the folks at Give Directly) may argue that travel costs for international aid efforts are too high, but this is not a concern specific to the Clinton Foundation.
  • Finally, I would be remiss not to mention an odd tidbit in Bill Clinton's Open letter. Regarding the $8 million deficit shown in the organization's 2012 annual report, Clinton notes that those figures are unaudited, and that "[w]hen the audited financials are released, they will show a surplus."  I am not sure why he feels that this is comforting.  Why would the audit uncover such a substantial discrepancy?  As it turns out, this is not unusual for the foundation.  Going back to 2007, the (unaudited) annual report figures deviate from the audited financials consistently, with the change in net assets typically being off more than $1 million.  What can explain this?  The usual suspects are that the (i) unaudited numbers are not GAAP basis but instead follow form 990 or other rules; (ii) the unaudited numbers are not consolidated but only reflect a portion of the organization's financial picture; or (iii) the unaudited numbers are a rough consolidation that does not eliminate related party transactions.  A quick perusal of the financials, however, reveals that none of these can alone explain the discrepancies.  I am curious as to what their explanation for such consistent and large deviations is.  For now, its safe to say that one cannot rely on the figures in their annual report presuming them to be accurate, but must instead wait for the audited financials.

Tuesday, July 30, 2013

The Future of the Charitable Deduction -- Expanding the Pease Amendment?

Tax reform and its potential impact on charities has been a point of discussion for some time now.  In many ways, it seems those in the nonprofit sector view the options as being to keep the charitable deduction or eliminate it entirely.  Realistically, though, most proposals that affect the deduction for charitable donations represent a middle ground.  The current approach by the Senate Finance Committee is to accumulate a laundry list of possible alternatives to eventually winnow down, with the hope of reaching a consensus.  The list of proposals examined thus far by the Senate Finance Committee is summarized here.

Presuming the goal of reform is to raise tax revenue and simplify enforcement while maintaining incentives for charitable giving, several of these proposals are worthy of consideration.  As I've discussed before, I'm particularly interested in proposals to close the loophole for donations of appreciated property – if that is not low hanging fruit, I don't know what is.

However, before getting to an in depth discussion of the possible avenues for reform, one additional thing may be worthy of consideration -- an expansion of the Pease Amendment.  Not only has that not been mentioned, but the Pease amendment is discussed in the Senate Finance Committee's list only as something to be eliminated.  So, why do I think an expansion is worth considering?

Wednesday, July 24, 2013

Five Observations from the 2012 Livestrong Financial Reports

The Livestrong Foundation has now released their 2012 financial reports.  Their audited financials and form 990 are available here.  The big picture is that they seem to be weathering the storm.  Given their reliance on royalties and corporate support however, 2103 may be the more difficult year.  Below are five initial observations from viewing the financials.

  1. Gifts from Movember ($4,563,944) and RadioShack ($3,182,885) helped cushion the blow, especially from a PR standpoint.  The official word will be that their donations only dropped 8% from 2011 to 2012 (from 990).  However, absent these two gifts, the drop in donations would actually be 39%.
  2. Given their heavy reliance on licensing fees, perhaps a more troubling development for them is that royalties and licensing fees dropped 35% in 2012. This is prior to the announcement that Nike was dropping their affiliation with Livestrong, so expect further declines in 2013.
  3. Livestrong's practice of consistently spending less than they bring in has helped.  Despite the revenue declines, they were actually able to increase expenses without seriously digging into net assets.  This was further helped by the large net asset balance they have accumulated over time, which generated investment income of $4.6 million.
  4. They have tilted their expenses a bit more toward grants and away from advertising and legal costs, but not substantially.  Their basic business model has actually stayed quite steady.  To the extent they have changed, it seems to be more in their more clear marketing of what they offer (and what they don't).
  5. Finally, one must mention that their form 990 lists Lance Armstrong once, as a current director. He was a director at the onset of 2012, which led to his inclusion.  In the future, his name will likely be gone from the filing entirely. Amazing for an organization whose previous financials were filed as "The Lance Armstrong Foundation".

Monday, July 22, 2013

Does Charity Telemarketing Pay in the Long Run?

Any time someone criticizes charities for making use of for-profit fundraisers who keep large amounts of funds raised, their defenders are quick to point out that the value of for-profit fundraisers is more complicated than that.  The story usually goes that these fundraising companies do the hard work of donor acquisition, and though it costs a lot initially, their services pay off with more efficient fundraising in the long run.  More than one fundraising company informed me of this in response to my editorial in the Chronicle of Philanthropy.  Similarly, Dan Pallotta was quick to explain this in response to the 50 worst charities in America list.

I am willing to believe that the value added by charity telemarketers is more complicated than simply looking at the percentage of funds raised that are remitted to the charity.  However, I also believe that the claim that telemarketing pays in the long run needs more evidence for me to buy it.

As an illustrative case, consider the following.  Using the New York state reports on charities’ use of for-profit fundraisers, I chose three charities to examine their fundraising over time, beginning in 2006: American Diabetes Association, ALSAC/St. Jude’s, and MADD.  The three charities were chosen to satisfy three requirements: (i) they raised over $1 million from professional fundraisers; (ii) they each relied on multiple fundraising companies; and (iii) they were well-respected national charities.  Requirement (i) ensures we are looking at substantial fundraising campaigns; (ii) ensures this is not an examination of just one fundraising company but of the industry as a whole; and (iii) ensures were not talking about fraudulent charities, but reputable charities who have decided to use telemarketing companies.

Does telemarketing efficiency increase over time?
The first thing I wanted to consider is whether the percentages of funds remitted to the charities improved over time.  That is, does the claim ring true that telemarketing may be costly at first but gradually improves in efficiency.  The aggregate effects of the three organizations’ telemarketing campaigns is summarized in the next chart.

Note that there is definitely not a trend of improving efficiency – if anything, the efficiency is worsening over time.

Does telemarketing ease other fundraising efforts?
Another possible long-term benefit of professional fundraisers is that they help simplify the organization’s other fundraising efforts (say by expanding the donor base).  If this is the case, one would expect to see organizations that rely on for-profit fundraisers to see improved fundraising efficiency.  The aggregate fundraising efficiency (expressed in terms of cost to raise $1 of contributions) is summarized in the next chart.

Again, there is no sign of improving efficiency – if anything, the cost of raising $1 has increased.

What are we to take from this data?  Not much.  Being only three nonprofits who themselves self-selected into hiring telemarketers, this is far from definitive evidence of anything.  But, it does suggest that the claims of those defending the use of for-profit telemarketers are not self-evident.  This skeptic needs more evidence in order to give them the benefit of the doubt.

Monday, July 8, 2013

It's Time to Retire the Term "Overhead" when Talking about Non-Program Expenses

Accounting rules for nonprofits require expenses to be classified between three functional categories: program (those relating directly to the mission), fundraising (those aimed at raising funds), and administrative (those that pertain to the general operations of the organization).  Donors and watchdogs have found it helpful to examine the program expense ratio, the percentage of expenses that are program expenses, in evaluating charities' financial effectiveness.  Alternatively, one can view the ratio of non-program expenses as a measure of ineffectiveness.  It is now common to call this an "overhead" percentage.

There are, of course, many concerns that arise from excessively fixating on this number (as covered repeatedly in this blog).  In this post, though, I want to discuss something much more esoteric -- the use of the term overhead to describe non-program expenses.  This is the common jargon, one I too have adopted on several occasions since everyone in the sector knows what overhead refers to.  However, that's the problem.  I am not convinced they do.

Thursday, June 27, 2013

Remember that Evidence that Better Charities Have Higher Administrative Expenses? Turns Out the Reverse Holds in the US

In May, the group Giving Evidence released a study showing that high performing charities actually have higher administrative expenses.  This news was welcomed with fanfare by many in the nonprofit sector who believe there is too much pressure to reduce administrative costs.  Since then, it has been cited heavily and even featured as part of the Overhead Myth campaign launched by BBB Wise Giving Alliance, Charity Navigator, and Guidestar.  While I am willing to believe that lower administrative costs are not always better, and the Overhead Myth campaign has some merit, I also worry that the evidence to support the claims is rather weak.  To their credit, the folks at Giving Evidence have made the data publicly available so that these questions can be addressed.

Saturday, June 22, 2013

What Your Nonprofit's Twitter Usage May Reveal About Its Fundraising

When it comes to nonprofit fundraising, does the old adage that silence is golden ring true?  Consider the following mini-experiment:
  1. Take the top 100 charities as ranked by Forbes.
  2. Gather data on their fundraising efficiency from Charity Navigator (this excludes some observations due to missing data).  The fundraising efficiency number reflects how much it costs the organization, on average, to raise $1 of donations.
  3. Gather data on how talkative the charities are, as based on their number of tweets.
  4. Consider if/how the fundraising efficiency of organizations correlates with their talkativeness.
To see the data most clearly, I split the observations into quartiles based on number of tweets, from least talkative to most talkative.  The following chart reports the average fundraising efficiency of each quartile.

Note that the least talkative charities spend, on average, less than 5 cents to raise $1; in contrast, the most talkative charities spend 12 cents to raise $1, quite a stark difference.  Not only that, but the cost gradually increases as you move through the intermediate quartiles as well.  In short, organizations who tweet more actively are, on average, less efficient at fundraising.

Statistical Significance
The first question one must ask is whether this is mere coincidence that arises from a small sample.  Using a regression model, with fundraising efficiency as the dependent variable and number of tweets as the independent variable, reveals a positive relationship with a p-value well below 1%.  This means that if there was truly no relationship between the variables, the probability of seeing such a positive relationship in a sample of this size is less than 1%.  That is, the relationship is clearly statistically significant.

  • Is this connection due not to talking (tweeting) but more broadly an organization's overall presence on twitter?  After all, as discussed in this blog before, organizations with more followers also turn out to be less efficient fundraisers.  To address this, I used tweets per follower (rather than tweets) as the "talkative" variable, and the positive correlation persists.
  • Is this connection driven by how an organization splits its costs between fundraising and non-fundraising categories?  After all, many complain that different application of accounting rules is what makes some organizations appear more efficient than others.  To address this, I used revenue growth (rather than fundraising efficiency) as the "fundraising" variable, and the connection again persists.
As with any data exercise, it is important to stress that the statistics demonstrate correlation, not causation.  That is, there is no indication that tweeting will itself reduce fundraising efforts.  However, it does indicate that organizations who actively tweet are also organizations that tend to struggle with fundraising efficiently.  Thus, twitter usage may portend difficulties in fundraising, even if it is not a cause of it.

Friday, June 14, 2013

Cherry Picking Impact Measures

Navigating grocery aisles in search of healthy foods has become an exercise in futility.  This is, in part, due to the proliferation of nutritional information.  Food companies have become quite adept at selective disclosure of nutritional information, from sugary cereals prominently labeled "gluten free" to fried foods boasting of "zero trans fats."  These cherry picked disclosures are meaningless at best and misleading at worst.  As the acceptance of impact measures for nonprofits starts to spread, similar concerns are sure to arise.  Will we see nonprofits collecting a variety of impact measures only to cherry pick those that paint them in a favorable light to donors?  Absent standardized (and audited) measures, donors who care about impact should be aware of the inevitable bias in those impact measures prominently displayed on websites and glossy annual reports.  It may pain some to admit it, but these issues may bring many back to the less thrilling (but also more objective and standardized) measures provided by accounting.

Monday, June 10, 2013

Impact Measures are Not a Panacea

Throughout the nonprofit sector, heavy criticism of accounting measures of efficiency and heavy praise for impact measures are familiar refrains.  Accounting measures are not perfect, but I believe that impact measures are not the panacea many people seem to think they will be.  My arguments are laid out in this piece in the Nonprofit Quarterly.

Tuesday, May 21, 2013

The Hidden Cost of Online Donations

One of the big takeaways from Frontline's recent story on the looming crisis in retirement accounts is that for all the efforts spent on deciding proper asset mix and risk tolerance, it is sometimes the little things that count most.  In that case, the "little things" were the fees passed on by actively managed funds that can quickly erode returns without employees even realizing it.  When watching that episode, I could not help but think of the similarities to small costs eroding charitable activities.  In this case, for all the concern about what charities do with donor money (which is, of course, justified), there are hidden costs that actually limit what donor funds even reach charities.  In this case, the important "little things" are credit card and processing fees that slowly cut into donations.

Friday, May 17, 2013

On the Locks of Love Scandal

Recently, the group Nonprofit Investor released a report on the well-known charity Locks of Love (which collects donations of hair to make wigs for underprivileged children with hair loss).  The scathing report accuses the organization of having over $6 million in unaccounted for hair.  The report makes some good points, but there are also some clear flaws.  I will discuss both.

Wednesday, May 15, 2013

The Big Three of Professional Fundraising

As discussed in this blog many times before (see here, here, and here), the inefficient use of professional fundraisers is unfortunately quite common among nonprofits.  As it turns out, there are three groups of organizations that are particularly notable in this regard: police & firefighters, children's cancer, and breast cancer.

Tuesday, May 7, 2013

The American Cancer Society's Bold Move on Direct Mail

In a surprising and bold move, the American Cancer Society (ACS) recently revealed that it is drastically cutting back on its direct mail activities aimed at soliciting donations.  The full details of this move are excellently described by FundRaising Success Magazine.  My focus here is on the financial aspects leading up to this decision and its possible ramifications.

Tuesday, April 30, 2013

Professional Fundraising and Politics

As discussed in previous posts of this blog, a surprising number of charities make use of professional fundraisers to solicit funds on their behalf.  The surprising part is that this occurs despite the fact these professional fundraisers often retain large portions of donations in the form of fees.  The end result many times is that the fundraisers actually get more of the donations than the charities get.  This phenomenon is present in advocacy and political groups as well, and extends to both ends of the political spectrum.

Wednesday, April 24, 2013

Is the Desire to Limit Overhead Stifling Advertising by Nonprofits?

Is nonprofit growth being thwarted because the need to keep accounting overhead low prevents sufficient advertising by nonprofits?  My take on this issue, featured in the Nonprofit Quarterly, is available here.

Saturday, April 13, 2013

When Summary Accounting Metrics Fall Short: The Case of Breast Cancer Charities of America

Many donors rely on summary measures of accounting performance to assess the financial propriety of nonprofits.  While accounting statements certainly provide important information about a nonprofit and its operations, a simple glance at summary measures can often fail to provide an adequate picture.  A case in point is the Breast Cancer Charities of America (BCCA).  A quick review of their website and their overall financial performance paints a picture of a growing organization committed to providing assistance and research to those suffering from breast cancer.  A deeper look into the financials reveal a more complex story.

Wednesday, March 20, 2013

Social Media and Nonprofit Fundraising

Many nonprofits take it as given that reaching out to donors and other constituents through multiple channels will automatically improve fundraising, donor retention, and the like.  The result is that many focus on reaching as many people as possible, especially through social media channels, without an intentional strategy as to how these new channels can be used efficiently to engage donors.  In this post, I want to take the time to examine some data on this viewpoint to shed light on its shortcomings.

Monday, March 18, 2013

Are Popular Charities More Efficient?

At this point, it seems widely accepted that the most well-loved charities charities are also often the best at accomplishing their mission.  Whether it is that effectiveness makes them popular or that popularity makes it much easier to focus resources on a mission is hard to say.  However, what few seem to admit is that the relationship between popularity and efficiency may actually be more complicated.  After all, popular charities perhaps may face less scrutiny since people find it hard to question these highly-regarded organizations.  Or, it could also be that attaining popularity requires an organization to take its focus off the mission, instead focusing on visibility.  If true, these considerations suggest that the connection between popularity and a strong focus on mission may be tenuous.

Tuesday, March 12, 2013

Charity Telemarketing Update

Following up on recent posts (here and here) about the use of third-party fundraisers by charities, the State of Michigan's Attorney General recently released a report on the use of outside fundraisers by charities in its state (which also includes national campaigns conducted, in part, in the state).  The state's report concluded that on average charities only received 35% of the funds raised on their behalf, a stunning figure.   The full report is available here, and is a fascinating read.  Among the most notable entries are:

  • Alzheimer's Disease and Related Disorders Association got 26.4% of the $3.7 million raised.
  • Autism Spectrum Disorders Foundation got 8.9% of the $3.0 million raised.
  • Breast Cancer Charities of America got 15.0% of the $5.0 million raised.
  • Breast Cancer Society got 14.8% of the $10.6 million raised.
  • Children's Cancer Fund of America got 18.6% of the $2.2 million raised.
  • Disabled Veterans Services got 17.5% of the $2.4 million raised.
  • Foundation for American Veterans got 15.0% of the $5.5 million raised.
  • National Vietnam Veterans Foundation got 11.0% of the $3.4 million raised.
  • Others First, Inc. got 18.0% of the $6.4 million raised.
  • Veterans Support Foundation got 15.0% of the $3.7 million raised.
  • Woman to Woman Breast Cancer Foundation got 10.8% of the $4.0 million raised.

For those that think these figures are unacceptable, I encourage you to consider the possible remedies and, importantly, add your own suggestions.

Monday, March 4, 2013

Effectiveness of Cancer Research Spending

"Where Do the Millions of Cancer Research Dollars Go Every Year?" is a recent article by David Chan, MD, in Slate.  In it, Dr. Chan argues that despite the many dollars funneled in to cancer research by the government and nonprofits, the efforts have been ineffective.  The article is an interesting and provocative read.  To me, two things stood out: (1) the current emphasis on cure rather than prevention; and (2) the current emphasis on certain forms of cancer at the expense of others.

Thursday, February 28, 2013

In Defense of A-Rod (Sort of)

Last week The Boston Globe wrote a piece that examined the charities of several well-known athletes.  The conclusion was that their overall financial effectiveness was less than stellar.  Among the poor performers, it seems that everyone has latched on to Alex Rodriguez' charity, The ARod Family Foundation, as the worst.  The stories pillorying A-Rod have spread across the spectrum, from Breitbart to Huffington Post.  The damning evidence is that the charity brought in revenue of over $400,000, mostly from a poker tournament, in 2006 but only paid out $5,090 in grants that year -- about 1% of its revenue.  Yes, this sounds quite bad.  As a Red Sox fan, I can't believe I am saying this, but I think the rush to judge A-Rod is a bit premature.  I'm willing to believe his charity could have been poorly run and failed to achieve its stated mission (after all, 2006 was its first year and the last in which it filed tax forms; its status was revoked in 2010 as a result).  I just don't think the evidence being provided for this is sufficient to make that conclusion.

Looking at the organization's IRS Form 990-PF in 2006, it did raise $403,862 in revenues that year.  Of that, the majority ($368,862) was from the charity poker tournament discussed widely.  Most people infer that since only $5,090 was paid out for charitable causes, the rest must have been wasted on salaries/perks for those in the foundation.  However, it paid no salaries, and its primary expenses were the cost of running the poker tournament.  The remaining funds, about $290,000, were simply retained by the organization at the end of 2006.  The poker tournament, where the bulk of the revenues originated, was in November 2006.  So, it is not entirely reasonable to expect all of its proceeds to have been collected and disbursed in the period of one month.  Again, I am not saying the funds were disbursed properly; what I am saying is that the 2006 filing does not provide sufficient information to make that judgment.  Since there is no 2007 filing, though, we are left to guess...

Wednesday, February 27, 2013

Higher Education Fundraising -- A Case of the Rich Getting Richer?

America's colleges and universities are often portrayed as bastions of liberal thought that indoctrinate their students with philosophies of wealth redistribution.  If the halls of academia are truly dominated by such philosophies, they have a strange way of showing it.  To the contrary, the nation's colleges and universities seem to be a prime case study in the rich getting richer.

Monday, February 25, 2013

Matching Gift Campaigns and Transparency

A matching gift campaign, in which a large donor pledges to match funds that are donated by others, can be a very effective means of fundraising.  For a donor with large funds to give, a matching gift offer provides the ability not only to make a donation to help fund the organization but also to kick start the organization's other fundraising efforts.  For prospective donors, a matching gift campaign offers the appeal of doubling the power of their donation.  Despite the upside, I wonder to what extent charities are fully transparent about these campaigns.

Wednesday, February 20, 2013

Cultivating Repeat Donors with Financial Transparency

Perhaps a more daunting task for nonprofits than finding new donors is convincing such donors to give again.  It is often the case that an emotional appeal and/or strong interest in an organization’s mission can kick start a donor’s initial interest.  However, in my view, follow-up donations are often more cerebral in their motivation.  With this view in mind, I offer my suggestion for how to generate more repeat donations – superior financial transparency.  Let me elaborate on what this means to me …

Monday, February 18, 2013

Fundraising and Thinking Small

Here is a link to a recent article by Wray Herbert titled "The Power of One: The Psychology of Charity".  The article describes recent research done by professors at the University of Chicago that finds people are more generous in their donations when asked to envision one individual that their donation can support prior to making a donation that can help a larger group, rather than asking them to focus on the larger group itself when making the donation.  This psychological notion of "scope insensitivity" has the potential to change the way charities think about fundraising.  It is often the case that charities stress the scale of the problem they face, hoping to convince donors how seriously funding is needed.  This research seems to suggest that by thinking small, stressing not the scale but one piece of the puzzle at a time, may actually increase the desire to give.  Of course, charities do this to some extent by highlighting individuals and their success stories.  But, such anecdotes can do more than effectively demonstrate successes.  Anecdotes can apparently also effectively demonstrate needs to donors.

Wednesday, February 13, 2013

Matching Mission and Financials: The Case of the Michael J. Fox Foundation

Perhaps too often, this blog has highlighted circumstances where an organization's financial statements paint a different picture from that of the prevailing public perception.  However, it is worth noting that there are many success stories when it comes to matching an organization's mission and its financial performance.  Today, I highlight one such match between mission and financial performance, the Michael J. Fox Foundation.

Monday, February 11, 2013

Not All Pink Ribbons are Created Equal

A couple of years ago, Susan G. Komen for the Cure faced substantial criticism for its efforts to prevent other organizations from using pink ribbons and/or including "for the cure" in their names and/or fundraising event names.  While many viewed this as a mean spirited attempt to squash small charities with good intentions, it turns out there is something to their concern.  Many organizations rely on the pink ribbon to tout their support of breast cancer research and breast cancer survivors, and not all have the same credibility as Komen.  Below, I will discuss a few breast cancer charities that use the pink ribbon extensively to raise funds, but use those funds much differently than donors may think.

Thursday, February 7, 2013

Why are IRS audits of Charities up since 2009?

A Fox News opinion piece is reporting on the increase in audits of nonprofits that has occurred since President Obama took office.  In particular, the Fox News piece noted that starting in 2009, IRS audits (examinations) of tax exempt organizations increased materially relative to the Bush years.  The conjecture is that this is part of a strategy of undermining charities by the Obama administration.  Naturally, many others have piled on.  Here is the data on IRS examinations that is causing the stir ...

Sure enough, examinations are up, and the largest jump was in 2009, the year Obama first took office.

I hate to ruin a good conspiracy theory, but there is a more simple explanation for the jump.  Starting with tax filings made in 2009, the IRS adopted a new form 990 (the annual filing of tax exempt organizations).  The new form required more entities to file their financial information and also required additional disclosures about compensation, fundraising, and governance.  The new form 990 itself came from a long review of oversight for tax exempt entities.  The intent was to gather better information about, and place more scrutiny on, nonprofits' practices.  In fact, perhaps the loudest voice in Washington pushing for this additional scrutiny was Chuck Grassley, hardly a guy simpatico with President Obama.  So, it is correct that IRS scrutiny of nonprofits has increased in recent years.  However, it is hardly fair to consider this to be an effort led by the current president.

Wednesday, February 6, 2013

Do Thank You Gifts Increase Giving?

The conventional wisdom of charity fundraising is that if donors are offered or given "thank you gifts" for their donations, they are more willing to give and are more generous when doing so.  Some recent research by George Newman and Jeremy Shen of Yale University provides a stark contrast to this conventional wisdom.  Their paper, "The counterintuitive effects of thank-you gifts on charitable giving", was published in the October 2012 issue of the Journal of Economic Psychology (full text available here).  They find that regardless of the gift quality or the quality of the charity itself, offering a thank you gift actually decreases donations.  My rough interpretation of this finding is that when a thank you gift is offered it creates in the donor a mindset that the donation is more of an exchange transaction than a pure donation.  As a result, the donor (perhaps subconsciously) thinks of making a donation that ensures a more fair exchange.  In contrast, without a thank you gift, the donor's mindset is entirely on charity (altruism) and the donor is thus focused on generosity when making a gift.  The implications for charities are clear -- think twice before showering your donors with gifts.  Even if they think it is nice, they are likely to be less charitable in the process.

Monday, February 4, 2013

Cost Allocation and the American Heart Association

With National Heart Month now well underway, I thought it would be useful to take a look at the financial picture of the country’s largest heart health charity, the American Heart Association (AHA).  As discussed here before, the most widely used measure of financial effectiveness for charities is the program expense ratio, which measures the percentage of expenditures geared toward the organization’s primary mission (as opposed to fundraising or administrative efforts).  For the American Heart Association, the program expense ratio stands at a healthy 79% (based on its FY 2012 audited financial statements).  This financial effectiveness played a key role in the organization’s accreditation by the BBB and its 3-star rating on Charity Navigator.  However, it may not mean quite as much as people may think it does.  To see what is driving this ratio requires a diversion into cost allocation…

Wednesday, January 30, 2013

Enhanced Charitable Deductions for Businesses

Generally speaking, a charitable donation by a business enables it a deduction from taxable income equal to the fair value of the donated item less whatever ordinary income would have been gained on the item.  In other words, the general rule is that donations of inventory only permit a deduction equal to their cost.  However, some provisions have been enacted that provide “enhanced” deductions for certain donations.  Under IRC section 170(e)(3), a business that donates items that are put to use by a charity or operating foundation to help the needy (e.g., food, clothing, medicines) is eligible for deduction not equal to cost but instead the lesser of (i) twice cost or (ii) the midpoint between cost and market value.  Over the years, this provision has been expanded (and contracted) to include different types of business entities, different types of donations, and different types of donees.  These enhanced deduction provisions have some notable effects:

Wednesday, January 23, 2013

Class Action Settlements and Charities

One little known source of funds for a variety of charities is in the form of unclaimed class action settlement funds.  Such funds are awarded to charities under the "cy pres" doctrine.  The idea is that if a class of individuals is subject to receive funds as part of a class-action settlement, often many class members fail to claim their funds (due to relocation, inconvenience, etc.).  While the default outcome in such cases is that unclaimed funds revert to the defendant, there has been an increasing interest for unclaimed funds to go to a charity or charities related to the plaintiffs interests (or even just in the interests of society).  The thinking is that such outcomes are more in line with the intent of class participants than returning funds to the defendant would be.