Ken Wing, Tom Pollak, Patrick Rooney Alliance for Nonprofit Management 2004 Washington, DC

1. How Not to Empower the Nonprofit Sector:Under-Resourcing and Misreporting Spending on Organizational Infrastructure Ken Wing, Tom Pollak, Patrick Rooney Alliance for Nonprofit Management 2004 Washington, DC

2. Agenda • Findings from the Nonprofit Overhead Cost Project: www.coststudy.org • Discussion: What to do about the troubling issues this research raises and documents?

3. Thank-You! • Supported by: • Atlantic Philanthropies • Ford Foundation • Charles Stewart Mott Foundation • David and Lucille Packard Foundation • Rockefeller Brothers Fund • Housed at: • Urban Institute Center on Nonprofits and Philanthropy • Indiana University Center on Philanthropy

4. Context: Management Matters • Increased emphasis on “outcomes” • Greater concern about organizational effectiveness • More investment in capacity building • Let’s Empower the Nonprofit Sector…

5. Context: Administration is Waste or Worse • “100% goes to charity” • Money, Worth, Forbes, Charity Navigator and others have ranked charities by the percent they spend on overhead • Exposés and resignations regarding spending of 9/11 donations on administration • Scandals involving administrative costs at some foundations • What was that about empowerment?

6. Study Goals • Understand how nonprofits raise, spend, measure and report funds for fundraising and administration • Work with practitioners, policy makers and the accounting profession to improve standards and practice

7. Multiple Research Phases • Analysis of IRS Form 990 data, n≈228,000 • Survey of fundraising and accounting practices, n≈1500 • Detailed case studies, n=9

8. Fantasyland 990 • 37% of IRS Forms 990 reporting over $50K in private contributions report ZERO fundraising or special event costs • Ditto for a quarter of NPOs reporting $1-5M, and those over $5M, in such contributions • A quarter of NPOs reporting some fundraising costs report over $15 in contributions for each dollar spent: under 7 cents per dollar raised • 13% of Forms 990 report ZERO management and general expenses

9. About Those Overhead Ratios… • Of the 2/3 of NPOs under $500K, 16% reported no M&G, 3.4% reported 100% M&G, and 1.5% did not report functional costs • 12% of all NPOs reported all staff as M&G; 13% reported all staff as program • Under 1/2 report salaries for officers in Line 25. Of those that do, 12% reported it as all program, 1/3 as all M&G. • 7% charged all accounting fees to program; 1/5 split them across categories

10. Behind the Numbers: Survey Findings • Only 1/3 tracking staff time by category each payroll period • Of NPOs getting grants from foundations, only 25% charge the grant proposal writing costs to fundraising • Of NPOs getting grants from government, only 17% charge the grant proposal writing costs to fundraising

11. Pressure to Keep Overhead Low • 36% of NPOs feel pressure from government agencies to limit overhead, fundraising or administrative expenses • 30% feel pressure from individuals • 24% feel pressure from foundations • 21% feel pressure from federated campaigns

12. Case Study Findings: Reporting • Retrospective annual allocation of personnel expense. Accuracy questionable • Glaring functional expense reporting errors • Nonprofits responding to pressure to keep real and reported overhead low • Capital gifts and in-kind donations create unique reporting problems • Form 990 offers a different picture than GAAP for conglomerates and those leveraging donated space and services

13. Case Study Findings: Effectiveness • Nonprofits vary widely in the strength of their organizational infrastructure • Inadequate infrastructure compromises organizational effectiveness • Restricted funding and small size lead to inadequate infrastructure

14. Low Funding and Spending for Overhead Social Norms for Acceptable Overhead Reduced Sector Effectiveness Pressure to Underreport Overhead Bottom Line is a Circle

15. Free Publications • Guides for donors, boards, and financial professionals • 4-page briefs on: • Organizational effectiveness findings • Financial reporting findings • Pros and cons of financial efficiency standards • Who raises contributions • Early findings • Who feels pressure • Available at www.coststudy.org (Soon)

16. Conclusions • Nonprofits with restricted funding, esp. small ones, clearly struggling with inadequate administrative and fundraising infrastructure • Inadequate infrastructure reduces organizational effectiveness • Current spending on overhead at these organizations driven by policies of major funders • “Socially acceptable” overhead levels more the result of underreporting than reality

17. Issues for Discussion • What can we do to change the perception about how much is okay to spend on management and fundraising? • What can we do change the overhead policies of large public and private funders? • What can we do to increase the quality of financial reporting, particularly on Form 990? • Your issues…?

18. Contact Information • Thomas Pollak, Assistant Director, National Center for Charitable Statistics, Urban Institute, 2100 M Street NW, Washington, DC 20037, 202-261-5536 tpollak@ui.urban.org • Patrick Rooney, Ph. D., Director of Research, Center on Philanthropy, Indiana University, 550 West North St, Suite 301, Indianapolis, IN 46202-3272, 317-684-8908, rooney@iupui.edu • Ken Wing, Kennard T. Wing & Co., 224 Kathmere Rd., Havertown, PA 19083, 610-789-8727, kennarwing@aol.com