Getting Something for Nothing

Sometimes relatively insignificant measures can assume an absurdly disproportionate importance.

For decades U.S. News and World Reports has been ranking the country’s top universities and colleges. These rankings have taken on great importance to college administrators, who routinely crow about moving up in the lists and who stay awake at night worrying about dropping down a notch or two. One of the qualities the magazine measures in compiling these lists is “selectivity” – that is, how hard it is for high school seniors to get admitted. The more selective the college, the better. And one of the dominant methods by which U.S. News and World Reports calculates selectivity is tracking the percentage of total applicants who are admitted.

Consequently, one of the easiest ways for schools to move up in the rankings is to do whatever they can to attract more applicants. Having more applicants lowers the percentage of acceptances and makes the school appear to be more selective, which in turn attracts a greater number of (status-seeking) applicants the next year, which reduces the percentage of those accepted once again, all of which which raises the institution yet higher in the rankings. So a single, easily manipulated measure affects an important (if deeply flawed) ranking system, which then feeds back to influence that measure and the ranking system still further.

Manipulation of these rankings came to mind when a report recently hit the internet about how a remarkably high percentage of nonprofits, including those raising lots and lots of money, report spending nothing – zero! – on fundraising expenses on their IRS 990 tax forms.

Neat trick, that, raising money without spending a penny. In fact, according to the study, 41% (that’s not a typo) of nonprofits with budgets of $1 million or more report that they spent not one dollar on fundraising costs.

For those of you who have never had the pleasure of filling out a 990 tax form, let me explain that there is a section where the organization needs to categorize every dollar spent into one of three areas: “Program services,” “Management and general expenses,” or “Fundraising expenses.” So if you do a mailing asking for donations, the cost of designing, printing, and mailing that piece are fundraising expenses. So too, of course, should be the staff time that goes into that work. Common sense justifies this expense: without the effort to ask for money, few donations will arrive. Yet somehow that lucky 41% of nonprofits report that they raise their funds immaculately – without any expenditure of money whatsoever.

There are many reasons organizations make this rather astonishing assertion, but undoubtedly one enormous driver is the preoccupation that the general public has with fundraising overhead. Fundraising costs have become a proxy for the careless spending of donated dollars. As Dan Pellotta has pointed out in his book, Uncharitable, the obsession that people have for keeping nonprofit overhead low has kept many organizations from raising enough for their mission. Pellotta rails against this approach and essentially asks: is it better for an organization to spend $10,000 (10%) to raise $100,000 or $150,000 (15%) to raise $1,000,000? Most people, in thinking about it, would say that the second scenario serves society better. But most people don’t think about it.

Instead, people obsess about fundraising overhead. And this has gotten worse with the advent of well-intentioned but, to my mind, deleterious efforts like Charity Navigator, an on-line service that rates nonprofits according to certain ratios and measures.

One of Charity Navigator’s central measures of a nonprofit’s value is “fundraising efficiency,” or how much an organization spends to raise the money it brings in. As Charity Navigator explains, “Financially effective charities must in part be efficient fundraisers, spending less to raise more. We calculate a charity’s fundraising efficiency by determining how much it spends to generate $1 in charitable contributions. In other words, we divide a charity’s fundraising expenses by the total contributions it receives.”

Some people believe in the power of faith, or democracy, or the value of hard work. The folks at Charity Navigator believe in fundraising efficiency. Their core belief is that a nonprofit should spend less than 10% on fundraising. Period. But I would bet that even Charity Navigator doesn’t think the percentage should go below 1%, because at that point even they would have to admit that the charity is lying. And lying in determining your fundraising costs is pretty easy to do: you simply manipulate what portion of each staff member’s salary is directed toward what. These figures rely on self-reporting and are usually not questioned by the IRS, though some state regulators seem much more effective than others in encouraging more candid results.

The rewards for honesty are more muted than those for getting a high score on Charity Navigator. A simple ratio is easier to measure than organizational effectiveness, so we latch onto it. In this high-tech interconnected age, where information is plentiful but real knowledge is hard to find, going to a website where nonprofits are rated on a simple scale of one to four stars is comforting and convenient, if largely meaningless.

As the adage goes, “Not everything that counts can be counted, and not everything that can be counted counts.” What everyone wants to know is: How good is the nonprofit at getting the job done? How well do they use my money? It’s complicated to answer these questions, and in their effort to come up with a simple answer, people confuse effectiveness with efficiency. And in embracing efficiency, we get overly simple answers that carry a ridiculous amount of weight. The fear of how people will interpret those answers consequently drives many nonprofits to underreport their fundraising costs.

I’m not at all condoning the slight-of-hand that seems to have overtaken the way nonprofits fill out their 990s. But, as with college administrators who game the system to move up in the national rankings, you understand why it’s happening. If you elevate a fairly unimportant number into the be-all-and-end-all for evaluating an organization, people will do extreme things. Even pretending that they didn’t spend a penny to raise a dollar.

Copyright Alan Cantor 2012. All rights reserved.

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