Charitable Giving's Efficiency Problems

Too often, gala fund-raising events for many charities wind up costing more than they bring in

New York Giants defensive end Osi Umenyiora started a charity two years ago after an uncle living in Nigeria died of AIDS. His uncle didn't know he was infected until the end of his life. After his death, Osi and his brother Jim decided to form a nonprofit that would fund HIV clinics in their home country of Nigeria.

Umenyiora may be an All-Pro on the gridiron, but when it came to running a charity, he proved to be out of his league. To raise funds for his cause, Umenyiora spent $40,000 to stage lavish black-tie events and "Strike 4 a Cure" bowling tournaments in Atlanta. But when their patrons donated only $4,000 at a bowling fund-raiser in May, Umenyiora was stuck with the tab. While he agreed to pass along the donations to other charities, he was left with nothing to build clinics. "The right people didn't come out," Umenyiora laments. "They were just looking to have a good time."

Umenyiora's troubles are not uncommon. Many charities know how to throw a party, but they don't always know how to pay for these showy fund-raisers. According to a 2007 survey of charitable events by New Jersey watchdog group Charity Navigator, the average fund-raiser in 2005 lost 33¢ for every dollar raised. (By comparison, IRS filings show that, overall, the average charity spent only 13¢ on fund-raising efforts for every dollar it raised.) Sandra Miniutti, vice-president for marketing at Charity Navigator, says it is well-known in the industry that these events are not the most efficient.

Fewer Contributions

Charitable giving in the U.S. topped $300 billion for the first time last year, according to a report released on June 23 by the Giving USA Foundation in Glenview, Ill. The study found that Americans gave $306.39 billion, up 3.9% from 2006. But there are concerns that as the economy slows, so will the pace of giving.

Among groups with the biggest losses in the Charity Navigator survey (the group tracks more than 5,000 nonprofits) are the state chapters of some nationally known organizations—including the Greater North Jersey chapter of the National Multiple Sclerosis Society and the Michigan chapter of the Arthritis Foundation. Experts say it's easy for fund-raising benefits to be money pits, because these events are labor-intensive—and because many charity executives may be knowledgeable about their cause but know little about keeping large parties under budget.

"You have someone who runs a food shelter, and a couple of times a year they have to become an expert in catering and hosting," says Miniutti. But Miniutti also blames growing competition among charities to stage an event splashy enough to stand out from the pack and attract wealthier individuals. "High-end donors can be rather demanding about these events," she says.

Tim Seiler, the director of Indiana University's school of fund-raising in Indianapolis, says that special events have value. Not only can they help raise the profile of a charity and provide a good way to tell the organization's story; they also help groups reconnect with old donors, he points out, while introducing them to prospective new contributors. Such events "can be very effective," says Seiler.

Too Much Spending

But sometimes even the best-laid plans can go awry. In 2002, Pallotta TeamWorks, a for-profit company that organized the Avon Breast Cancer three-day walks that were held in nine cities around the country, came under fire for spending too much on logistics. According to financial disclosures on Pallotta's Web site, as much as 55% of donor contributions went to cover such expenses as marketing and participant support in some cities. Pallotta oversaw the walks for five years and disbanded in 2002. The Avon Foundation took control in 2002 and refashioned the walk into a two-day event. While the foundation doesn't break out financials for each event, officials note that its overall fund-raising expenses eat up only 19% of contributions. "I think the Avon Foundation's actions speak for themselves," says Carol Kurzig, the foundation's executive director.

Charity golf outings can also be tricky. Cindy Morgan, an actress who was featured in the 1980 comedy Caddyshack, organized a celebrity tournament in 2006 to raise money for Illinois families of soldiers deployed in Iraq—but ended up losing money. According to court documents obtained by the Chicago Tribune, vendors sued Morgan for nearly $100,000 in unpaid debts. Morgan, who says the suits have since been resolved, says that in hindsight, she should have signed up corporate sponsors and other donors before announcing the event. "It's important that you have more than just passion," Morgan says. "You have to treat this like a business. It was a real eye-opener."

Such experiences illustrate the value of studying a charity's finances before making a financial donation. One place to start is the Web sites of independent watchdog groups, such as Charity Navigator and the Better Business Bureau's Wise Giving Alliance, which provide tips for donors as well as lists of the most financially "efficient" charities. Charity Navigator includes studies of different charities. It also ranks every charity in its database, giving each group one to four stars.

The Wise Giving Alliance gives visitors to its Web site a list of the benchmarks that a well-run nonprofit should achieve—such as spending no more than 35% of contributions on fund-raising. It also provides individual evaluations of charities, such as whether a charity meets all of the Alliance's 20 standards of accountability.

Check Their IRS Filings

If you'd simply like to peruse a charity's IRS forms (which a charity must file to qualify for nonprofit status), GuideStar will provide each charity's most recent IRS 990 forms, which are filed annually, to individuals who complete the free registration process at its site. IRS filings older than three years are available for a fee.

Be forewarned: Many of the 990s can be voluminous—a typical one for a large charity can run 30 to 60 pages. But on line 1 of the first page, you'll find total contributions during the past year, and total fund-raising expenses show up on line 15. At its Web site, GuideStar provides a tutorial on how to interpret the tax filings. And if you don't find the forms for a particular charity at GuideStar, you can ask a charity, in writing, to send you a copy of its Form 990 filings for the past three years. Under law, all nonprofits that derive a significant portion of their revenue from outside donors must provide copies of 990s to the public on request.

For their part, some charity executives say would-be donors should be careful when comparing the tax filings of various nonprofits, because not all groups use the same accounting methods. For instance, the St. Petersburg Times reported in early June that Tampa General Hospital Foundation netted only 10¢ on the dollar on its 2006 events, but Robin DeLaVergne, the foundation's executive director, contends that it actually did much better. The reason? The foundation included in its revenue only ticket sales for charitable fund-raisers, DeLaVergne explains; additional contributions from donors went into a separate category. The foundation appears to have lost more than $32,000 on its 2007 events, but DeLaVergne insists the group actually earned nearly $675,000. "The IRS understands, but other people don't," she says. "They're really not able to look at this and get the correct picture."

Charity Navigator's Miniutti acknowledges that charities interpret IRS requirements for Form 990 in different ways—which leads outsiders to draw different conclusions. But she says the IRS is scheduled to release a new, more detailed Form 990 for the 2008 tax year, which she thinks "will remedy a good deal of the confusion."

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