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Are these the worst charities in America?

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Most people expect that when they give money to charity it will go directly to those in need: starving children, homeless veterans or people suffering from a rare disease. However, a new report from journalists at the Tampa Bay Times and the Center for Investigative Reporting (CIR) shows that there is often a staggering gap between how much charitable organizations collect and the how much is actually used for charity. The Times CIR report called those groups that spend the smallest percentage on their cause the “worst charities in America.”

At the top of the list is Florida-based Kids Wish Network, a nonprofit group that grants wishes to children with life-threatening medical conditions. Combing through thousands of pages of tax documents, reporters found that in 2012 the organization brought in $18.6 million but only spent $240,000 granting sick kids wishes. The rest of the money, according to the report, went to for-profit fundraisers and consulting firms that solicit donations for Kids Wish Network. In the 16 years Kids Wish Network has been in operation, it has spent more than $110 million on these services.

In other words, the charity hires telemarketers and ad agencies to help it raise money. For every $100 that was donated in 2012, $98.70 went to employees of the charity and the contractors it hired to help it raise money, while only $1.30 went to the stated mission of Kids Wish Network.

The implication of the Times/CIR report is that organizations that use a large percentage of their donations on fundraising and other forms of overhead are dishonest. But some industry experts caution that high overhead is not always an indication of a bad charity. "There isn't a correlation between what is spent on overhead and outcomes," said Ann Gregory Goggins, senior director at the Bridgespan Group, a nonprofit group that provides consulting services to other nonprofits.

In other words, it takes money to raise money. If charities did not spend money on fundraising and campaigns to increase awareness, many important problems would go unnoticed and opportunities to do something about them would be missed. For this reason, Goggins argues that overhead is not the most meaningful way to judge a charity, and the “overhead is bad” narrative can get in the way of more meaningful analysis. "At the crux of this argument is the fixation on a number that isn't meaningful," she said. Different charities require different levels of overhead to achieve their objectives, she said.

Telemarketers are expensive

Kids Wish Network isn’t the only charity to hire professional telemarketers to help it collect donations. Prominent organizations such as the American Cancer Society and the American Diabetes Association do so as well. Still, nonprofit experts say the use of paid telemarketers is often an indicator that an organization isn’t being a prudent steward of the funds it's been entrusted with. The main justification for using paid solicitors is that even if they aren’t cheap, using them can bring in more total revenue for the cause. In some cases, however, the costs can be even higher than the returns.

A Bloomberg Markets Magazine report last year showed this to be the case for the American Cancer Society (ACS). Since 1999, the ACS has contracted with InfoCision, an Ohio-based direct marketing company, to help collect donations. In 2010, InfoCision pulled in $5.3 million for the ACS, according to Bloomberg. Tax documents, however, show that none of this money went to cancer research. In fact, at the end of the year, the American Cancer Society actually had to pay InfoCision an additional $113,006 for fees it owed.

This does not necessarily mean that telemarketing in general, or InfoCision in particular, has been bad for the ACS. The 2010 numbers cited by Bloomberg are an example of the worst case scenario, a risk that charities take when they hire professional fundraisers.

The need for transparency

The expense of telemarketers isn’t the only problem facing charities trying to raise money, according to the Times and CIR. Another issue is the lack of transparency. In its examination of the American Cancer Society’s relationship with InfoCision, Bloomberg News found that telemarketer scripts approved by the ACS instructed solicitors to say that 70 percent of donations would be used for charitable purposes. This may be true for the charity as a whole, but analysis of the ACS contracts with InfoCision shows the telemarketing firm routinely keeps more than 50 percent of the funds it collects.

Charities should be held accountable for deceptive fundraising done in their name, says James Cox, a professor at the Duke University School of Law in Durham, N.C., and co-author of “Cox and Hazen on Corporations.” “If that’s what they do systematically, then they’re obtaining money under false pretenses,” he says. “I don’t just think it’s incredible. I’d be surprised if it isn’t criminal.”

Name games

Aside from the fact that they spent most of their donations on fundraisers, one reason that the Kids Wish Network appears unscrupulous is that it seems to be riding on the good reputation of the Make-a-Wish Foundation. The Make-a-Wish Foundation is a well-respected charity that also aims to grant the wishes of children with terminal and life-threatening illnesses. While the stated goals of these organizations are similar, they could not be more different in approach. For starters, the Make-a-Wish Foundation does not use paid telemarketers, according to spokesman Paul Allvin. Still, it often fields complaints from people who donated to similar sounding charities."While some of the donations go elsewhere, all the bad public relations that comes with telemarketing seems to come to us," he said.

The Times/CIR report makes use of the fact that many charities have similar objectives. Acknowledging that every charitable organization has overhead costs, and that these costs may differ for different causes, they suggest comparing the overhead of organizations that do similar things. Limiting the comparison to similar charities doesn’t make Kids Wish Network appear any better. While it spent 1 percent of donations granting wishes, the Central and North Florida chapter of the Make-A-Wish Foundation spent about 60 percent.

Other factors that determine the level of overhead

While grouping charities based on similar causes may make comparing overhead a bit more meaningful, there are other factors that can be even more relevant. For example, new charities may need to rely more on awareness campaigns to make sure that people know they exist.

Consider the Woman to Woman Cancer Foundation started in Lauderdale Lakes, Fla., by Jacqueline Gray and her husband Kevin. For two decades, the Grays worked to keep their charity, which provides free mammograms to low-income women, afloat. In 2008, they took in a total of $15,000 in donations. The next year they hired a professional soliciting organization based in New Jersey. In 2009, they brought in $1.5 million. Two years later that number ballooned to $6.7 million. Woman to Woman only a got a sliver of the total funds the solicitors took in: $50,000 in 2009 and $554,000 in 2011. Still, even these sums represented huge growth for the organization, a 3,500 percent increase from 2008.

Charities that focus on different methods of raising funds may need to be evaluated differently. Large charities like the ACS rely on several methods of fundraising that require different levels of overhead to reach different segments of the population. So, for example, if online donations have a smaller overhead than telephone donations, it may still make sense to use both methods because they provide an opportunity for different groups of people to support the cause.

In other words, using different methods may increase the overall size of the pie even if some methods are not as “efficient” as others. Smaller charities may focus on one or two kinds of fundraising, so their level of overhead is difficult to compare to larger organizations that use a variety of methods.

Thus, while overhead has become one of the primary ways donors decide which organizations are ethically meeting their objectives, experts warn against the danger of conflating efficiency and effectiveness. “The framework that nonprofits should not use their money on overhead is so powerful not even Dick Cheney and Nancy Pelosi disagree on it,” said Dan Polletta, an expert in nonprofit innovation. But this consensus may obscure more important ways of understanding the efficiency of nonprofits. "It's always presented as a zero-sum game, where any money (for overhead) is money wrenched from the hands of kids rather than money that is invested … to potentially dramatically enlarge the money available to the kids," Polletta said.