the August 2010 Charity Rating Guide & Watchdog Report
"Make one gift now and
we'll never ask for another donation again!"
If you receive a solicitation in the mail from any charity that
makes the above promise, you would be wise to be skeptical. No
donor should ever feel obligated to make a contribution in order
to not be solicited.
A fed-up donor contacted AIP to let
us know that she had asked Smile Train, a charity well
known for its ads of children with cleft lips and palates, in
September and November of 2009 to remove her name from its mailing
list. In early December of the same year she received a letter
with Smile Train's promise that in exchange for a contribution
they would cease further solicitations to her. So to get the charity
off her back she sent them a contribution--yet she continued to
receive Smile Train solicitations (one more in December and two
more in April 2010) despite notifying Smile Train of her wish
to be removed from their list each time she received a solicitation.
Rubbing salt into her wounds, this May she received another solicitation
with the same offer to not be solicited.
AIP contacted Smile Train regarding its policy for donors who
do not wish to be solicited. Michele Sinesky, Donor Relations
Manager at Smile Train, told us: "It is our policy and our
practice to remove all names from both our acquisition file and
our retention file as soon as we receive a request from a donor
When we receive a donation from a donor who receives a 'once and
done' solicitation, we add a mail code that guarantees we will
not solicit them again." She adds that since Smile Train's
mail solicitations are produced several months in advance, donors
sometimes receive additional pieces before the mailings are stopped.
In the past AIP has disputed the meaningfulness of Smile Train's
claim that "100% of your donation goes to program - 0% goes
to overhead." Smile Train defends this statement by saying:
"All non-program expenses, such as overhead and fundraising,
are paid for with start-up grants from our Founding Supporters."
The problem with this reasoning is that any charity could ask
a portion of its loyal supporters to use their donations to cover
overhead. But overhead expenses will not disappear! Money is fungible,
regardless of its source; what is spent on one function is not
available for another function. The bottom line is that more donations
could go toward treating children with cleft palates if the charity
were operating more efficiently, regardless of whether or not
some donors earmarked their donations for overhead.
This AIP B rated charity with a fiscal
2009 overhead rate of 30% not only continues to make its "100%
goes to program" claim but a recent teaser on a Smile Train
solicitation envelope went so far as to quote Smile Train's president
as saying, "I run the most cost-efficient charity on Earth."
Brian Mullaney, the President and Co-Founder of Smile Train, moderated
slightly his boast in his appeal letter inside the envelope by
in spite of the downturn in the economywe're
probably the most cost-efficient charity in the world."
The letter does not tell you that Mullaney's total compensation
skyrocketed 61% from $420,210 in fiscal 2007 to $678,058 in fiscal
2009also in spite of the downturn in the economy.
Wink and a Smile Train
- published in the December 2008 issue
of the Charity Rating Guide & Watchdog Report
100% of your donation goes toward programs -- 0%
goes toward overhead.
Many AIP members have seen the above language in solicitations
from Smile Train, a charity that treats children born with cleft
lip and palate. One may wonder how a group that spends about $15.5
million or 34% of its cash budget on overhead, and receives a B-
from AIP, can make such a claim.
Smile Train promotes its no public contributions to
overhead claim by stating in its solicitations: "All non-program
expenses, such as overhead and fundraising, are paid for with start-up
grants from our Founding Supporters." The problem with this
reasoning is that any charity could ask a portion of its loyal supporters
to use their donations to cover overhead. But overhead expenses
will not disappear! Money is fungible, regardless of its source;
what is spent on one function is not available for another function.
Smile Train's fiscal 2005 audit shows that 99% of
its $48 million fund balance is unrestricted. This means that Smile
Train had discretion to spend just about all of its reserves on
programs and did not have to hang on to these funds for future overhead
costs. AIP had previously made this point in the August 2005 Guide.
Smile Train, like most large charities, reports its
net assets as being either unrestricted, temporarily restricted,
or permanently restricted. A charity may use its unrestricted fund
for any organizational expense, but may only use its restricted
fund for a specific purpose, or within a certain time-frame, as
designated by a donor or governmental authority.
So how could Smile Train's reporting of the same 2005
unrestricted balance be so different in its fiscal 2005 ($48 million)
and 2006 audits (negative $5.5 million)? The fiscal 2005 unrestricted
funds were shifted into its temporarily restricted fund, increasing
this account from $50 thousand in the fiscal 2005 audit to nearly
$51.5 million in the fiscal 2006 audit. The charity's fiscal 2006
audit letter states that "during the current year management
of Smile Train discovered errors were made in the classification
of certain donations
." A note to Smile Train's 2006 audit
says that "
2006 and 2005 [fund balances] have been adjusted
to reflect the reclassification
of two major donations that
were received during the early years of Smile Train."
Smile Train might have reason to say that these donations
were misclassified so that it can claim in its solicitations that
overhead costs have already been funded. The group's fiscal 2007
audit states that about $36.8 million of fund balances reflect "two
major donations received during the early years of Smile Train with
the stipulation that these funds be used to support the organization
of Smile Train and its non-program expenses such as administrative
and general and fundraising." Smile Train's management has
been unwilling to explain how it discovered five years later that
its founding contributions were incorrectly reported.
The two major donations cited above were $27,250,000
from the Charles B. Wang Foundation and $26,833,749 from the Walter
Haefner Foundation, according to Smile Train's fiscal 2001 tax form.
Hana Fuchs, Smile Train's VP of Finance & Administration, told
AIP in June 2008 that it was the founding donors' intention that
their contributions be used for overhead expenses. When we asked
Fuchs for a copy of any letter or written communication from the
donors expressing their intentions at the time the multi-million
dollar donations were made, she said that they did not put it in
writing. She said that they verbally communicated their intentions.
Smile Train has not been forthcoming with providing to AIP any written
internal memos or documents which contain a record of the donors'
In June 2003 Fuchs told AIP that the "two large
unusual and exceptional gifts in FY '01
were restricted for
future use, but which were recorded as current income for accounting
purposes." She said that $27,500,000 from a securities donation
was "to be converted over time for use in our programs as well
as to pay overhead and administrative expenses." A $20,833,749
donation, which was restricted because "it was promised in
future years," was also cited by Fuchs. In other words, the
restrictions on donations described in Fuchs's email are time restrictions--not
purpose restrictions, such as ones that would limit their use to
only overhead expenses.
(Note: The $20,833,749 donation was ambiguously reported
as the total restricted fund balances in Smile Train's fiscal 2001
tax form. At the time of publication, AIP did not have a copy of
Smile Train's fiscal 2001 audit to see if it reported whether these
funds were purpose or time restricted. Smile Train's fiscal 2002
audit stated that its total restricted fund balance of $13,668,160
was all time restricted.)
AIP traced the $27.5 million securities donation to
Smile Train to a fiscal 1999 donation of $120,327,621 from the Charles
B. Wang Foundation to the Sagamore Hill Supporting Organization.
Sagamore, as it reported on its 2000 tax form, later transferred
$27,719,000 of Computer Associates shares to Smile Train. The stated
purpose listed on Wang Foundation's tax form for its donation was
"GENERAL PROGRAM." If the Wang Foundation intended its
donation to be used for overhead, why does its tax form say it is
for program? Fuchs declined to answer this and other questions as
of the time of publication.
Donors that are not thrilled about funding the $420,209
compensation package of Smile Train's President & Co-Founder,
Brian Mullaney, ought not to take much comfort from this note in
the charity's fiscal 2007 tax form: "100% of Mr. Mullaney's
compensation, benefits and all travel expenses are paid for from
the temporary restricted funds set up by the founding board members
to cover overhead and fundraising (non program) expenses."
Being that Smile Train's audit allocated $190,775 of Mullaney's
fiscal 2007 compensation to program services, how can 100% of his
salary be paid for by a fund that is restricted for only non-program
expenses? All else aside, if Mullaney's compensation were lower,
then more of the temporarily restricted funds could be available
for other expenses.
Bottom Line: More of Smile Train's total donations
could go towards treating children with cleft palates if the charity
were operating more efficiently, regardless of whether or not some
donors had earmarked their donations for overhead.