Tuesday, March 11, 2014

The (Unfair) Demonization of PGA Tournament Charities

Many of the tournaments on the PGA tour are organized as 501(c)(3) charities. Both the PGA and the tournaments themselves have faced substantial criticism in recent months for the apparent lack of charity from these tournaments. This criticism has surfaced in a variety of arenas but reached a peak when covered by ESPN/ABC as part of their "Outside the Lines" series. To summarize the concern, ESPN and the nonprofit rating agency Charity Navigator noted that the PGA tournament charities have, on average, only given 16% of their expenses to charitable causes, far below the level of 65% recommended by Charity Navigator. Due to such low percentages, Charity Navigator rated every PGA tournament as receiving zero stars, its lowest rating.  Ken Berger, president of Charity Navigator summarized the outrage: "The lion's share of the money is going to big prizes, cash prizes for athletes and all the promotion around it, so it's really pathetic, actually...[e]very single taxpayer in this country ultimately is bearing the burden of having to pay the taxes for this wildly inefficient organization that's giving so little to charity." My question: is it really as bad as they say?
I'm not here to say that PGA tournaments are perfectly run or that the could not be doing more for charity. However, I think the view that they are pathetic organizations that are fleecing taxpayers should be corrected. Really, there are two issues here: (i) does the fact that only 16% on average goes to charity indicate they are inefficient? and (ii) are taxpayers suffering from this seeming "inefficiency"?

Amount of Money to Charity
The starting point of the criticism is that a charity should divert 65% or more of its costs to its primary cause, and PGA tour tournaments fall far short of this benchmark, averaging only 16% (a full breakdown provided by ESPN is here). In short, this is simply an unfair benchmark.

The idea that at least 65% should be directed to the cause may apply to charities that operate on donations alone, but this clearly is not the operating model of a PGA tournament. It is better to view a PGA tournament as a business endeavor whose profits are directed to charity rather than being distributed to an owner. This is what makes them nonprofits: there is no owner to reap the profits, only a public mission. Viewed in this light, the 16% figure is not bad at all. There are, of course, costs of running a business (here, prize money and promotion are such costs), and most business owners would kill for a 16% profit margin. In this case, the owner who reaps the benefits of the profit margin is the charitable cause.

Do Taxpayers Suffer?
The second issue here is that if the PGA tournaments are operating as charities, are they fleecing taxpayers? Again, a comparison to the alternative – tournaments being run as for-profit businesses – helps. If they were run as for-profit enterprises, only their profits would be taxable (not their entire revenues), meaning that only the 16% portion would be subject to tax. Admittedly, being a charity means that the 16% portion avoids taxation too, but that 16% is the charitable portion anyway. This seems entirely consistent with the intent of their nonprofit status.

In fact, if these tournaments were instead forced to be for-profit entities and chose to donate the 16% profits to charity, they would show no taxable income (and pay no taxes) so we would be back to square one. In other words, it is just not clear how taxpayers are losing out in the current arrangement. True, there may be some local tax breaks provided to individual tournaments (which they may get even if they weren't charities), but one would need to know what those were and their magnitude to make any assessment of how taxpayers are really footing the bill. So, while the outrage over the charity status of PGA tournaments may be justified, I haven't seen any evidence yet that provides such justification.

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