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The American Institute of Philanthropy (AIP) is now CharityWatch. Updated ratings for charities mentioned in CharityWatch archived articles can be found in the current Charity Rating Guide & Watchdog Report.


From the April/May 2009 Charity Rating Guide & Watchdog Report

Charity Questions the Value of Donated Goods

How $118,000 Shipment May Be Worth Less Than $7,000 to Recipients

Feed the Children (FC) is practically a household name thanks to its celebrity endorsers and television infomercials featuring malnourished children in impoverished areas of the globe. The charity claims on its web site that it spends 83% of its budget on its programs. What some donors may not realize is that hundreds of millions of dollars worth of donated goods are included in this high program percentage, some of which are "worthless to most people" according to one Oklahoma based charity, Mission Shawnee (MS).

FC receives a large share of its donations from its "corporate partners," such as Avon, Frito-Lay, ADM Co., Coca-Cola, among a long list of other companies. Companies have incentive to give in-kind donations of what FC refers to on its web site as "unsaleables, overages, and dated products" to charities such as FC in exchange for the lucrative tax deductions such donations may generate. In fact, FC lists tax savings as the first reason companies should consider donating, touting that companies "can receive up to twice the cost of the products you donate," and that FC works to "maximize benefits to your company."

Unfortunately, not all of the items FC accepts and later distributes to its partner charities are in usable condition or appear to be worth the value that FC is placing on them. MS received a shipment from FC late last year that included 265 cases of canned goods, most of which were "severely dented or rusted," or "without labels" and had to be thrown away, according to MS president, Dr. Robert Dawson. This shipment, which also included 1 pallet of containers, 72 cases of bottled water, 50 bags of flour, and 1 case of discount pharmacy cards, was valued by FC at $118,932.61, according to the "Certificate of Donation" FC provided to MS. This amount seemed extremely high to Dawson, who later contacted FC for a breakout of how the different items were valued. He discovered FC was valuing the pharmacy cards at "about $23 per card," accounting for about $112,000 of the shipment's total value, according to Dawson.

In its 2007 tax form FC reports accepting donations of pharmacy cards worth over $22.4 million, but does not provide a breakout of the amount it distributed to other charities or, more importantly, explain how it determined that the cards are really worth this amount. Similar cards are readily available for free through numerous web sites and organizations. At least some of the pharmacy cards were initially donated to FC from marketing services company Vertrue Inc. According to the informational material attached to the pharmacy cards MS received, people using the cards may "save an average of 20% on prescription drugs." Dawson said he was not able to distribute any of the pharmacy cards he received from FC due to lack of interest because they cannot be used in conjunction with any other discounts, such as with a person's health insurance. "If one side were blank we could use them for scratch paper," said Dawson, referring to the cards.

While it does appear that some cardholders may be able to take advantage of drug discounts by using the pharmacy card for certain purchases, AIP questions the high value FC is placing on the cards. Charities have incentive to inflate the value of the in-kind items they receive and distribute because they can take credit for the value of these goods in their program percentages. This can have the effect of making a charity appear to be operating efficiently even if very little of the cash donations it receives are being used for its charitable programs. According to FC's Board of Directors Meeting Minutes of April 11th, 2008, the charity's own auditors flagged how FC values its noncash goods as one of its "material weaknesses," specifically naming the "Vertrue pharmacy card situation."

This is not the first time AIP has caught a charity using donated cards of questionable value to puff up its program percentage. Help Hospitalized Veterans (HHV) took credit for $18,750,000 worth of "phone cards" it received and passed through to its related charity Coalition to Salute America's Heroes (CSAH) in fiscal 2006. These "phone cards," which were distributed to overseas military personnel by CSAH, were not for soldiers to call home to their family but rather to make free calls for sports scores with ads provided by a company called EZ Scores. HHV and CSAH, who share the same president and founder, each counted $18,750,000 of the sports score cards as a contribution and program expense in their respective fiscal 2006 financial statements. These sports score cards and $2 million in donated public service airtime accounted for 85 percent of CSAH's total program expenses reported in its 2006 financial statements.

MS received only one shipment from FC prior to the one containing the mostly unusable items. It included a large volume of items for infants and toddlers, most of which MS was able to distribute to the needy and were "very useful" according to Dawson. However, it can be expensive for some small groups to request items from FC since it requires charities like MS to pick up the tab for any costs to transport available donated items from its warehouse. "We have to get ahold of a refrigerated truck to pick up the items," said Dawson, who cited this as the primary reason why MS did not regularly request additional goods from FC after the first shipment. He said that arranging transportation for the items was costly and that the goods made available to his charity by FC were not always items his small charity could easily use or what was most needed. "Usually we have limited use for a half a train car of pickled beets," he added.

Since FC does not purchase the donated goods that it distributes, nor does it pay to deliver goods to its recipient partner charities, donors who contribute to FC may be wondering what happens to their cash donations to the group. About 60% of FC's cash was spent on "television and radio" and "direct mail" in 2007 according to the group's audit reporting of the same year. AIP determined that in 2007 FC spent only 18-19% of its budget on its programs once noncash items are excluded.

As of publication FC has not responded to AIP's requests for comment on this story.

 
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