Thursday, May 8, 2014

It's Getting Surreal in the Whole Foods Parking Lot

As I approached my local Whole Foods parking lot, I saw what is now becoming a familiar sight, a clothing donation bin. This time, my curiosity got the better of me, and I wondered what happens to these donations?

A little bit of research on this bin, and what I uncovered were more questions than answers.

1. What happens to the clothes?

The clothes are not directly used in charitable activities, but rather sold to a corporate partner, NCC Services and the proceeds are directed to the National Children's Cancer Society (NCCS) [see description here].

2. Then what happens to the cash made from selling the clothes?

This is more a question of the overall financial efficiency of the charity.
  • I decided to start with the charity watchdogs. Problem is there is no clear cut answer: the Better Business Bureau grants the NCCS its highest rating, whereas Charity Navigator grants NCCS its lowest rating.
  • A review of NCCSs most recent publicly-available Form 990 (for year ended 9/30/12) reveals a program expense ratio of 80% (quite good), but that's just the beginning. It turns out $12.2 million, or 67% of its program expenses, are grants outside of the US - quite strange for a "national" charity. Sure enough, its largest program entails collecting and providing pharmaceuticals for overseas distribution. If such overseas gifts-in-kind are ignored in the calculations, the program expense ratio is only 56% (not very good).
  • With a huge chunk of costs going overseas, where is the rest going? Over $3 million paid to professional fundraisers is treated as a fundraising cost. Actually, though, the total professional fundraising costs are higher once allocated joint costs are included. From Schedule G, professional fundraisers were paid over $5.1 million on total collections of $7.5 million (meaning NCCS received only 31% of the funds raised). It's hard to argue this is an efficient fundraising operation.
  • With overseas support and professional fundraisers the largest line items of the statement of functional expenses in dollar terms, other notable line items are domestic grants and financial support ($3 million), "other" program services ($1.8 million), and salaries and wages ($1.1 million)
3. What new questions were raised from this?

As stated before, learning about the finances associated with donations to this bin raised more questions than it answered. In particular...
  • How much money does NCCS get from sales of donated clothes and how much profit does NCC Services make?
  • Given the similar names, how is NCC Services related to NCCS?
  • Why is the organization involved in overseas pharmaceutical distribution, and what is its comparative advantage in doing so?
  • Why does the organization list overseas support far down its list of activities when it is (by far) the largest in terms of dollar amounts?
  • Why does the organization make use of inefficient fundraisers who retain (on average) 69% of the funds they collect?
Though this is just one clothing bin for one organization, it speaks to a broader issue of transparency throughout the nonprofit sector. If I were a board member of this organization, I would want answers to these questions, and I would also wonder why the organization doesn't make the answers immediately apparent to any potential donor. I am not necessarily saying this organization is a bad one. What I am saying is that it doesn't provide me enough information to make that call. And, this organization is far from unique in that regard.

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