(Mis)Understanding Special Events--Philanthropy Leader's Column Cites Flawed Study

People who participate in walking, biking, dancing, dinners or other special events held to raise funds for charity may be disappointed by recent comments from Patty and Sandy Stonesifer in the duo's January 21, 2009 Slate.com advice column. Sandy is the daughter of Patty Stonesifer, who is the former president and CEO of the Bill and Melinda Gates Foundation and current chair of the Smithsonian Institution Board of Regents. A reader wrote in to the column asking whether or not his time and the $25 fee he paid to enter a charity's five-kilometer race were well spent. In answering this question, daughter Sandy unfortunately got it wrong when she criticized charity events based on a study published by Charity Navigator (CN), an organization that compiles charity statistics.

According to the Slate article, CN found that "nearly half of all charities use special events as a way to raise money-and that the charities they ranked spend an average of $1.33 to raise $1 at special events…." The obvious question many readers may have when viewing this statistic is why a charity would bother putting on special events at all if it will lose 33 cents on the dollar, on average, in the process. To try to answer this question AIP further analyzed the information CN used to compile its results and found that many of the groups in the study were efficiently raising money at their events, not losing it as CN's statistic may suggest.

For example, one group CN criticizes in its study is the New Jersey chapter of the National Multiple Sclerosis Society (NMSS), which held several highly successful events in 2005, raising a whopping $2,361,849 through its MS Walk, MS Bike Tour, Dinner of Champions and other events. After subtracting from this amount the $363,199 the group spent to throw these events, it had a commendable $1,998,650 left over and available to be used in the group's charitable programs. Instead of praising NMSS for keeping the direct costs of special events low relative to the funds it raised, CN claims in its study that NMSS spent $53.41 to raise $1 at its events in 2005. It puts the group in the number four spot on its list of charities that are the least efficient at raising funds at special events.

It does not take a math wiz to notice the wide discrepancy between the nearly $2 million NMSS reports netting at its events, and CN's study which seems to suggest that the group lost money and that donors may be better off skipping this group's events altogether. The source of this discrepancy is CN's decision to exclude all of the revenue the charity raised at its events from its calculations, $2,355,049, and instead include only the small amount of contributions the charity brought in, $6,800.

To understand from where CN grabbed this $6,800 figure, it helps to know a little bit about how charities are required to break out their special events activities in their financial reporting. Under IRS reporting rules, charities are not allowed to report the funds they raise at a special event in a lump-sum, and are instead required to break out the different types of funds raised into two categories: contributions, and revenue. For example, say a donor attending an event writes a check to a charity for $200. If the donor receives something of value in exchange during the event, such as a dinner valued at $90, the charity would need to report $90 (the retail value of the dinner) of the $200 it received as revenue, and the remaining $110 as a contribution. Whatever it actually costs the charity to provide the dinner, which may be more or less than the retail value, would be reported separately as an expense on another line.

Of the total $2,361,849 NMSS raised at its events in 2005, $2,355,049 consisted of revenue, and $6,800 consisted of contributions. In computing the "$53.41 to raise $1" special events efficiency of NMSS, CN divided the $363,199 it cost the charity to throw its events by only the $6,800 of contributions it raised, leaving out all of the revenue generated by the events. Likewise with the other charities included in its special events study, CN disregarded all of the revenues charities took in, and instead used only contributions figures from charities' tax forms which do not represent all of the funds raised at their events.

CN's decision to include only contributions in its calculations is not consistent with the purpose of special events, which is "to raise funds that are other than contributions [i.e., Revenue]" according to the IRS. CN's methodology is further flawed by the fact that it is computing a fundraising ratio based on a figure from a charity's tax form that does not include any fundraising expenses; a charity reports all of its fundraising expenses, including any related to its special events, in a lump sum. Nowhere on the form is there a separate breakout of special events fundraising expenses that could be used to compute such a ratio. AIP is disappointed that the Stonesifers, who purport in their column to offer advice on "real-life-do-gooding dilemmas," did not more thoroughly investigate or clarify CN's statistics prior to citing them as part of their advice to donors.

In deciding whether or not donating to charity through a special event is worthwhile, a donor should consider that most charities are attempting to accomplish more through their events than just raising funds. As the Slate article correctly points out, charities use annual walk-a-thons, dinners, and other special events as a way to raise awareness for a charity and its cause. Getting donors involved and excited about an event may have the positive, if not easily quantifiable, effect of building donor loyalty and encouraging future contributions to the charity.

On the other hand, a donor needs to be aware that the dinners, prizes, concerts, or other goodies a charity provides during an event may not all be given to the charity free of charge, so some of the money donated to a charity through its special events may be used to offset some of these costs. Donors can ask a charity for a breakout of its special events activities, or review this information in a charity's audited financial statements or tax forms to determine if its special events spending is reasonable. More importantly, donors should consider whether or not the charity is operating efficiently on the whole. A charity may throw a great walk-a-thon, bike-a-thon, or other event, but if it is spending your contributions inefficiently on its other activities the rest of the year, your time, effort, and donations may be better spent elsewhere.