Wednesday, January 14, 2015

Reconciling Claims About Spending by the Red Cross

As part of their examination of the American Red Cross' response to Superstorm Sandy and Hurricane Isaac, NPR and ProPublica noted a discrepancy between claims by the organization about its spending and what the financial statements bear out. In particular, it was noted that even though it incurs substantial fundraising costs, the Red Cross often repeats the claim that "91 cents of every dollar that's donated goes to our services." Of all the criticisms of the organization, this one seems to have gained the most traction, even leading to calls for additional oversight and demands for answers from Sen. Chuck Grassley. In what follows, I seek to provide a simple reconciliation that supports the view that the claims made by the Red Cross are true but at the same time inaccurate. To do so, I make use of the 2013 fiscal year financial statements for the organization.

Again, here is the claim:
91 cents of every dollar that's donated goes to services.

Here is what the accounting says:
90.4 cents of every dollar of operating expenses is spent on programs.
(approx. $3.055 bil. in program expenses vs. $3.381 bil. in operating expenses)

While the two numbers are approximately the same (in fact, the latter number was 91 cents in 2012), it is the language surrounding them that makes the claim inaccurate:
  • Funds received (revenue) are not the same as funds spent on operations (operating expenses).
In this case, operating revenues were $3.436 bil. So, if one wants to say something about how funds received relates to program expenses, the correct statement would be: for every dollar of operating revenue in 2013, there was 88.9 cents spent on programs.
  • Donations received are not the same as funds received.
This is the big difference for the Red Cross. Revenues from biomedical (blood) services made up 59% of all revenues, whereas contributions only made up 31% of revenues. So, if one wants to say something about how disaster relief donations relate to program expenses, there is more work to be done. Since the Red Cross does not issue separate financial statements for its separate programs, a precise calculation is not readily available in this case. However, for a quick back-of-the-envelope calculation, let's remove biomedical services from both revenue and expense calculations. Doing so should provide a rough estimate of what things would look like if blood donation, processing, and distribution were not in play. Doing this yields the following statement: for every dollar of (non-biomedical) operating revenue in 2013, there was 63.7 cents spent on (non-biomedical) programs.
Before one berates the Red Cross for misleading the public due to the differences, it is worth noting that this is quite common: nonprofits routinely communicate the program expense percentage as  if it means the same thing as percentage of donations spent on programs. 

What is the solution? At the least, the Red Cross and others should be more precise about their language. In this case, however, given the size of the organization, the Red Cross could also consider providing detailed reporting on its segments (much like its for-profit counterparts do), which would allow users to more easily see the financial distinction between how disaster relief money is received/spent vs. how the biomedical services are provided.

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