Tricks of the Charity Trade
Donors Unknowingly Pay to Receive More Solicitations
—from the May/June 2013 issue of the Charity Rating Guide &
How many return address stickers, note pads, and greeting cards have you
collected from charity mailings urging you to make a contribution? How many phone calls have you received
from pushy telemarketers using any and every tactic to secure your donation? These mailings and phone calls,
which also include information about a charity and its cause, are clearly designed to raise funds. But people
who have given in response to such solicitations are often surprised to learn that many charities consider
the costs of contacting potential donors to be, at least in part, one of their "educational" programs. A
big portion of the donation you just gave likely will be used by the charity to send out more trinkets
and information to other potential donors, and probably more to you in the future, as well.
Under current accounting rules (AICPA SOP 98-2), a charity that
includes an "action step" in its phone or mail solicitations, such as "don't drink and drive"
or "buckle your seatbelt," can claim that it is "educating" the public. It can therefore report
much of the cost of these appeals (often amounting to hundreds of thousands, if not millions,
of dollars) as a program expense rather than a fundraising expense in its financial reporting.
Such "action steps" are typically relayed to potential donors through for-profit professional
fundraising companies hired by charities to broadly solicit the public for donations. The
"educational" component is often information that is common knowledge, or that could otherwise
be distributed to the public using a method far more efficient and targeted than fundraising
solicitations. Professional telemarketers, on average, keep two-thirds of the money they
raise before the charity receives anything. What this means is that someone donating $50
to charity through a professional fundraiser may have just paid over $30 to be solicited
and "learn" that they should buckle their seatbelt.
In charity financial reporting, the funds a nonprofit spends
on telemarketing, direct mail, or other solicitation activities that also include an
"action step" or "call to action" are referred to as "Joint Costs." Charities often use
joint cost reporting as a way of inflating their reported program spending and deflating
reported fundraising costs. In this way, they can tout a high program percentage and low
overhead in their marketing materials, web site, and fundraising pitches to donors. This
accounting trick, while often perfectly in line with reporting rules, makes it difficult
for donors to understand whether or not a charity will use their donations on the programs
they are intending to support.
The following real-world example concerning National Veterans
Foundation (NVF), a Los Angeles based veterans charity, illustrates how impactful joint
costs can be on a charity's financial efficiency ratios:
NVF's claimed mission is to serve the crisis management, information
and referral needs of America's veterans and their families. The left-hand column in the above chart
represents the percentage of NVF's budget it claims to have spent on veterans programs in 2011, 2010
and 2009, respectively. While not outstanding, taken at face value these ratios reflect a fairly
efficient charity. However, after CharityWatch reviewed NVF's tax forms for these years, we found
that the majority of its reported program expenses consisted of "joint costs." Once CharityWatch
adjusted these expenses out of program and into fundraising, NVF's program spending on veterans
was extremely low, as reflected in the right-hand column above. NVF would earn an F rating from
CharityWatch for these years based on these adjusted program percentages ("without joint costs").
As with many charities that report costs related to joint
educational/fundraising activities, NVF contracted the services of a for-profit professional
fundraising company to solicit donors on its behalf. Specifically, NVF entered into an exclusive
direct mail fundraising consulting agreement with Brickmill Marketing Services (Brickmill)
effective July 1, 2008. Per the agreement, Brickmill was to conduct a direct mail campaign
with a "call to action" that would help NVF "reach its mission goals and, at the same time,
when appropriate, include an incidental request for financial support." NVF spent $20 million
of its $24 million in total expenses from fiscal 2009 to 2011 paying Brickmill and other
independent contractors for fundraising activities.
NVF eventually was made to come clean about how it was spending
donations. The California Attorney General's office examined NVF's finances and concluded that
its solicitation activities were not eligible to be reported as joint costs. Following the
examination, the charity re-filed its 2009, 2010 and 2011 tax returns. As a result, NVF's
amended returns for the years CharityWatch rated NVF (2009 and 2011) reflect the same low
program percentages that we had reported for the group all along.
Unfortunately, many inefficient charities are able to waste
millions of charitable dollars on fundraising activities while staying well within
accounting rules, and they continuously trick well-meaning donors into thinking
their donations are used efficiently on programs. When a charity claims that it spends
"85% on programs," many donors do not realize that this 85% may include telemarketing,
direct mail, and fundraising consulting costs. CharityWatch believes that most donors
do not consider a charity's joint solicitation/educational activities to be equivalent
to the purely programmatic activities they are intending to support with their donations;
e.g., sheltering and feeding the homeless, assisting injured veterans, conducting literacy
programs, funding cancer research, etc. For this reason, during our financial analysis
we adjust such solicitation expenses out of reported program expenses and add them to
fundraising prior to calculating a charity's efficiency ratios and letter grade rating.
Activities that are purely educational and that do not contain a fundraising component
are not "joint costs" and are included in a charity's reported program spending.
CharityWatch treats expenses spent on purely educational activities as legitimate programs and
does not reallocate them to fundraising when making our efficiency calculations.
If there are donors who do consider joint solicitation/educational
activities to be charitable programs, CharityWatch also provides the efficiency ratios that
include the charity's reported joint costs for program services. By providing both sets of
calculations, CharityWatch has been ahead of other charity monitoring and rating services in
giving donors the choice of assessing a charity's efficiency based on their own opinions
regarding joint solicitation/educational activities and whether or not they should be
included as program service activities for a given charity.
Before donating in response to a direct mail solicitation
or telemarketing call, ask the fundraiser what percentage of your donation will be used
on charitable programs that do not include any joint costs. Otherwise, there is a high
probability that your donation will be spent on funding more fundraising rather than
furthering a charitable cause. Better yet, be proactive by seeking out efficient
charities to support. Donating to a charity you know nothing about simply because
you received a phone call or letter often results in a missed opportunity to accomplish
For more discussion on the accounting rules that allow
nonprofits a lot of discretion on how they report their joint solicitation costs, read:
Accounting Rules Allow Nonprofits Discretion in the Reporting of Joint Costs.