overhead ratios

Today’s “overhead ratio” sparring match: Nonprofit Quarterly versus Nonprofit Quarterly.

Image courtesy of DollarPhotoClub.com
Image courtesy of DollarPhotoClub.com

For today’s lineup we have Claire Knowlton arguing charities should be funded for the full cost of their operations (including building cash reserves, additional reserves for new opportunities, and repaying debt) in order to remain healthy versus Ruth McCambridge and Alexis Buchanan body slamming Wounded Warrior Project because one line item on the 990 is more than what a couple of media reporters decided it should have been.

Let’s check out the NPQ versus NPQ match:

In this corner…

1/25 – Claire Knowlton at Nonprofit Quarterly – Why Funding Overhead Is Not the Real Issue: The Case to Cover Full Costs – In order to be able to continue delivering services to clients, charities need to be healthy enough that they can pay all their bills and have the ability to respond to opportunities.

Author suggests grants to charities should cover all of their costs, not just the immediate program under discussion in a proposal. Author introduces a new term, full cost, which is:

Day-to-day operating expenses + working capital + reserves + fixed asset additions + debt principal repayment = full costs

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Jim Ulvog

Overhead ratios getting more attention. Wounded Warrior Project is again focus of discussion.

Working on overhead. Yeah, that's a poor joke. Photo courtesy of DollarPhotoClub.com
Working on overhead.  Photo courtesy of DollarPhotoClub.com. Yeah, I know that is a poor joke.

A running debate in the donor and nonprofit community is whether the ‘overhead ratio’ is a good tool to measure the effectiveness of a charity. There seems to be more discussion of the issue lately. Wounded Warrior Project is the focal point for recent discussion. A few articles of interest along with some background:

1/27 – New York Times – Wounded Warrior Project Spends Lavishly on Itself, Insiders Say – Tell me your thoughts on the ongoing conversations in the nonprofit community about overhead ratios and I will tell you whether you will think this article is a balanced critique or a hit piece.

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Jim Ulvog

3 resources that explain the wrong way we look at evaluating charities

This is where we go in order to evaluation a charity's effectiveness. We need something better.
This is where we go in order to evaluation a charity’s effectiveness. Merely do one calculation using the totals at bottom of the functional expense page and you are done. We need something better.

If you want some background describing the wrong perspective used by charities, donors, and self-appointed rating agencies in evaluating nonprofit effectiveness, Marc Gunther at Nonprofit Chronicles points you to three resources you could check out. I discussed this post yesterday. Consider: (more…)

Jim Ulvog

Articles on overhead ratios and why not to accept every GIK you are offered

Here are a few background articles on the overhead issue and why it is a good idea to have a gift acceptance policy.

12/13/15 at Nonprofit Chronicles – If not overhead, then what? Maybe this. – Perhaps it is understandable that donors focus on the percentages on the functional allocation of expenses in assessing charities. What else is available? Nothing.

Article points to a new charity called ImpactMatters which is developing a methodology to audit the impact of charities with an intentional parallel to a financial audit of financial statements.

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Jim Ulvog

Another cancer charity under investigation; a summarized 2013 income statement

The Wall Street Journal reports an additional Cancer Nonprofit Investigated by Tennessee Secretary of State’s Office.

If you have been following the suit by the FTC and all 50 AGs against a group of four cancer charities, it will be worth checking out the article to learn another charity is under investigation in its home state.

The key leader of this organization has a familial link to the four in the FTC investigation. The article links this charity to those four.

Not much detail in the article about the particulars of this investigation. As to the general direction, you can get some hints from this quote in the article:

“They appear to follow a pattern similar to the groups that were part of the [FTC] claim,” said CharityWatch President Daniel Borochoff.

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Jim Ulvog

Details on FTC enforcement action against four cancer charities – 2

This is the second in a series of posts diving deep into the detail mentioned in the complaint by the Federal Trade Commission and all Attorneys General against four named cancer charities.

My goal is to highlight some of the information that I think is of particular interest to the wider nonprofit community.

I perceive the attention paid to the complaint is drying up. Before discussing the FTC complaint, want to mention one interesting article of late:

6/1 – Suzanne Perry at Chronicle of Philanthropy – $187-Million Fraud Case Puts Charities on the Defensive – Article has reactions to the FTC and 50+ AGs going after the cancer charities that were so far over the line.

My description of the comments are they range from wondering what took the regulators so long to whether this is just a start.  Article points out there has been regulatory action against some members of this group for a long time (over 20 years with CFOA) but that doesn’t seem to have deterred additional problematic efforts.

One focus on the article is the limited staffing at the AG offices which limits how much they can focus on the charity sector. Various industry sources comment on the limits of self-regulation.

Back to the FTC complaint, which can be found here.  It is a public document. I assert journalist status, so will quote the document at length.

Here is the summary of the organizations’ activities, as interpreted by the FTC: (more…)

Jim Ulvog

Details on FTC enforcement action against four cancer charities – 1

The news coverage has died down about enforcement action taken against four charities by the FTC and every state attorney general. I’ve not seen anything that dives a deep into the accusations. This post is the start of a series of discussions on the case.

Why go into detail?

After having read through the accusation, it is obvious this case contains most of the problematic issues we have seen over the last few years in nonprofit accounting and fundraising. Off the top of my head, I don’t recall any issues under discussion in the charity world that are not present in this case. That makes this set of allegations a good case study.

The complaint can be found here. That is a public document. I claim journalist status, so will quote the document at length.

Here is the opening of the complaint, with a few comments added: (more…)

Jim Ulvog

More followup on FTC action against 4 cancer charities

There is a lot more to say on the FTC and all AGs going after four charities that were way out of line.

5/19 – William P. Barrett at Forbes – Cancer Charities Agree to Dissolve Amid Fraud Claims – Article summarizes the case by the FTC. Two of the four charities have agreed to close their doors. Three of the named individuals have agreed they will not have future involvement with charity management or even fundraising.

We did nothing wrong and we agree not to break the law again

Article points out the irony we seen these kinds of settlements. Even though the three individuals agreed to not be involved in the charity sector again during their lifetime and two of the charities agreed to be taken over by receivers and then liquidated, the charities and individuals involved denied doing anything wrong.

It is as if it’s a normal and everyday thing that individuals agree to be legally barred from involvement in their economic sector and charities agree to corporate suicide when they have done nothing wrong.

But that’s the legal dance that is necessary. Denying wrongdoing is necessary to prevent the consent degree from becoming proof to anyone who later tried to sue the charities or individuals.  Even though I understand the reason, it seems silly to those looking in from the outside.

Contested claims

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Jim Ulvog

Good stuff for the nonprofit world – 5/8

A few articles on the nonprofit sector.

  • Do huge staffing levels in huge foundations have any impact on outcomes?
  • The widespread attitude towards ‘overhead’ that charities have to deal with.
  • How disaster reporting goes sour and what good outcome questions might look like in disaster relief.
  • Charities can now get dot-NGO and dot-ONG addresses.

Why do I mention the first two articles? They show the entire nonprofit world has a long way to go on outcome measures. I’m not sure there is even a tidbit of agreement on the right questions to ask, let alone measuring answers.

5/7 – David Callahan at Inside Philanthropy – Top Philanthropoids Are Paid Over $600 Million a Year. Is That Too Much? – Mr. Callahan is continuing his discussion I’ve mentioned here and here wondering if the humongous staffing levels at the gargantuan foundations makes any difference in the impact of those foundations.

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Jim Ulvog

More good stuff on impact, outcome measures and overheads – 4/27

A couple of articles on measuring outcomes and some discussion on the high cost of using telemarketers.

4/19 – Nonprofit Chronicles – Foundations, Nonprofits and Performance Anxiety – Marc Gunther describes a theater in Houston that sends an email survey to all customers the next day after a show. Their goal is to “enrich” and “stimulate” their audiences. The surveys ask questions to see if patrons get deeply involved. They want to know more than what the ticket count is.

Those are the kinds of outcome measures that nonprofits ought to be looking for, but aren’t.

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Jim Ulvog

Does the mere size of the infrastructure in large foundations create an issue in itself?

Here is an issue I’ve not seen before: Is the size of the infrastructure at humongous foundations a problematic issue just by itself?

David Callahan, writing at Inside Philanthropy on April 10, stretches my brain:  Ford Sinks Over $1 Billion a Decade Into Overhead. Is That Money Well Spent? – First, adjust that decade cost figure to annual.  That would be $100M a year.

In 2013, the Ford Foundation spent $146M on G&A out of $685M total expenses, according to the article.  That is 21.3%, which would usually be considered respectable.

The issue, according to the author, is their overall approach of making programmatic grants. That means the foundation chooses this study, that new effort, and another ongoing project. Which in turn means they drive the programs of their grant recipients. That heavy control approach requires a lot of staff.

Therein lies the rub, according to the author. With that approach, foundations gather power and authority unto themselves. At that scale, the agendas of the grant officers are driving the funding of lots of charities.

The author’s perspective: (more…)

Jim Ulvog

More discussion on how to analyze a charity’s financial statements. Red Cross as an illustration.

There is some dialogue in the nonprofit world on how to characterize the ‘overhead’ of American Red Cross. Here’s a few articles.

1/9 – ProPublica – Senator Demands Answers on Red Cross’ Finances – Sen. Grassley is asking the American Red Cross to explain the math behind their widely repeated public comments that 91% of donations go to their services. Article says their audited financial statements reportedly show that 26% of expenses are for fundraising.

01/2015 – Charity Watch – Don’t Be Misled by Deceptive Charity Efficiency Claims – Do you see a big difference between these two statements?

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Jim Ulvog

An illustration why interpreting functional allocation information is difficult: the Wounded Warrior Project financials

Apparently there is conflict going around on how to interpret the functional expense allocation information for Wounded Warrior Project.

All their info is laid out in their audited financial statements, which you can find here. Their annual report, audited financial statements, and 990s for the last eight years are all available on their website. Good on them for making all that info readily available. That is an example for all charities to follow.

How can three different calculations all be correct?

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Jim Ulvog

More good stuff on overhead ratios and impact 8/5

Here are a few more articles in the ongoing conversation of overhead and the “worst charities.”

Good discussions are developing on the Alliance for Charitable Trust Linked-In group. That’s where I found two of the following articles.

3/24 – Skoll world forum – Reimagining the ‘overhead’ debate– Article provides an example of full costing instead of ‘overhead’ ratios. The organization calculated the grand total of cost for their program in Malawi is $885,767. They then provided three paragraphs explaining what that $886K accomplished. Great illustration of outputs with several outcomes included in the narrative instead of a supporting services ratio. Donors can make their own decision whether that program deserves their support. (more…)

Jim Ulvog