So you just made a donation to your favorite charity. How much of that donation is spent on administrative costs and fund-raising and how much actually goes to help the organization carry out its mission? That was the question posed in a new study by the Indiana University Center on Philanthropy and the Urban Institute’s Center on Nonprofits and Philanthropy.
In the largest study of its type to date, the Nonprofit Fundraising and Administrative Cost Study compiled data from over 127,000 IRS 990 forms, surveys from over 1,500 nonprofits and a small number of detailed case studies.
According to the study, nonprofits have “pervasive” problems stemming from weak accounting and management infrastructures, as well as incentives that encourage poor reporting.
Given these facts, how should you donate? According to Patrick Rooney, the study’s co-leader and director of research for the IU Center on Philanthropy, nonprofit expense ratios don’t tell you about their effectiveness. “I don’t look at expense ratios when I give,” he said.
Instead, Rooney encourages donors to find a charity they believe in. “It’s more important to give to a charity that you are passionate about,” he added.
But Rooney said donors should research the charity they want to support, including looking at their 990 forms, asking for their literature or even talking with staff members. The cost study’s Web site, www.coststudy.org, offers a charitable giving guide.
The study’s researchers found that 37 percent of nonprofits with annual private contributions of $50,000 or more reported no fund-raising expenses. This included more than 18 percent raising $5 million or more. The study’s authors say these claims are improbable.
Part of the problem is that, for better or worse, nonprofits are judged on the level of their administrative and fund-raising expenses. “Nonprofits are feeling pressure from donors to report zero fund-raising costs,” Rooney said. “They’re not necessarily misrepresenting total costs, but they may be reporting fund-raising costs as other types of costs.”
In addition, some nonprofits intentionally keep overhead costs as low as possible, which can cause adverse effects. One organization that researchers visited had a leaky roof. Another had mismatched computers that repeatedly crashed. According to Rooney, more nonprofits need to invest in planning activities to better serve their constituents. “Part of overhead cost is planning and budgeting, but if you don’t do these things you’re missing opportunities,” he said.
The researchers presented the study to the nonprofit sector and policy makers to help make them aware of these issues. “Hopefully they will move forward,” Rooney said.