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.