From the May 2008 Watchdog Report
Charities Protest Their F's
AIPs ratings have recently received
wide exposure from Congress and the media; particularly AIPs
appearance on the front page of The Washington Post, on editorial
pages of The New York Times and on ABC and CBS News programs.
This has resulted in loud complaints about AIPs rating system
from a number of veterans organizations. Three of the most vocal
critics have been from the following AIP F rated groups: AMVETS
National Service Foundation, Paralyzed Veterans of America,
and Military Order of the Purple Heart Service Foundation.
The average American believes 22.4%
is a reasonable amount for a charity to spend on overhead and that
a typical charity spends 36.3% of donations on overhead, according
to a February 2008 study by Ellison Research, a marketing company.
Therefore, it is easy to understand why F rated charities do not
like it when AIP points out that they are spending 65% or more on
The major criticism from low rated veterans
charities is the claim that AIPs rating system does not follow
generally accepted accounting principles (GAAP) or rules for reporting
financial information on the IRS tax Form 990. These groups posit
that if AIP took the figures as reported in these financial documents,
their ratings would be outstanding. While GAAP and IRS reporting
rules provide guidelines for a charity to report its financial activities,
these reporting rules do not measure or claim to measure how efficiently
an organization is raising and spending donated dollars.
Charities have wide latitude in how
they choose to report activities even within IRS and GAAP standards.
In addition, a charity can spend as little as 1% of its budget on
its programs and still be in compliance with GAAP and IRS reporting
requirements. Direct mail and telemarketing solicitations that contain
educational messages and other income-generating activities that
accounting rules allow charities to report as program costs, are
not considered to be program services by many donors. For these
reasons we analyze and make adjustments to the audits and tax forms
of some charities for consistency and to better reflect the goals
of many donors who want their donations to be spent on bona fide
Charities poorly rated by AIP for financial
efficiency often cite favorable reviews or ratios from other sources
of charity information. These other sources typically do not perform
AIPs in depth level of financial analysis and may accept a
charitys own reporting without question.
Another criticism by low rated charities
is that AIP does not rate the quality of their programs. While this
is true, it does not negate the value of knowing how efficiently
a charity is spending its dollars. If a charity is spending 75%
of its donors dollars on fundraising expenses, there is very
little left over to dedicate to programs, regardless of their quality.
AIP encourages donors to consider a charitys program accomplishments
in relationship to the resources it receives. Neither AIP nor any
other charity watchdog organization has the resources and expertise
to conduct program evaluations of thousands of diverse nonprofits.
This is something that charities need to be doing themselves, or
if needed, with the assistance of outside consultants who have a
very specific expertise in the charitys program field.
AMVETS National Service Foundation (ANSF)
sent out a press release in November 2007 after ABC News reported
that it and other major veteran charities received an F grade from
AIP. The release said that its tax form stated that it spent 77.2%
of contributions on programs that directly benefit veteransa
big difference from the 29% of fiscal 2005 non-solicitation program
expenses that AIP was reporting for ANSF.
ANSFs tax form and audit reported
its second largest program to be Thrift Stores Operations.
This item was reported as a fundraising expense in its fiscal 1999
audit. During a December 2007 conference call AIP asked ANSFs
executive director Joe Piening why its thrift shop is now being
counted as a program service. Piening offered no reason to count
the thrift shop operation as a program other than to say, if there
is a job opening and a hiring decision is made between two potential
employees with qualifications being pretty much equal
between them, ANSF will choose to hire the vet. Piening admitted
that this is the same policy as the governments. AIP asked
if there was anything else special that the thrifts did for veterans
and he had no response. This is a good example of why it is important
for donors to see and understand the individual items that a charity
classifies as a program in its financial statements and to not blindly
accept the program ratios reported by a charity or other information
sources that do not scrutinize the numbers.
ANSF allocates over $2.5 million or
71% of its joint cost direct mail solicitations to program services.
AIP asked ANSF to explain why so much of its solicitations were
counted as program services. Piening said it was because of his
letter and a decal included in the mailing. Another person in the
conference call said that there was information included in mailings
about ANSF having service officers that can be contacted by veterans
and their families for assistance. Also participating in the December
2007 conference call was Robert Gujral, ANSF Finance Manager and
husband of the president of the firm, Media Response, which has
a $170,000 contract as the exclusive mailing list manager and broker
for ANSF, according to its fiscal 2007 tax form. Gujral said that
the proper accounting rule is followed and that some letters request
that recipients write their Congressman. AIP asked what portion
of ANSFs mailing list was veterans and Piening said 20%. AIP
asked if the program portion of the solicitation was ever sent out
without a request for funds and Piening said no.
Jay Agg, AMVETS National Communications
Director criticized AIP, including calling our rating system bogus
in a December 2007 posting on the organizations web site.
After reviewing the finances of AMVETS, we found that it earned
the same F rating as ANSF. AMVETS poor rating is largely due
to a contract with Xentel, a fundraising company that receives 87%
of the funds raised, according to AMVETS fiscal 2007 audit. AIPs
analysis shows that ANSF as well as AMVETS are both devoting only
33% of their budgets in fiscal 2007 to programs that are not part
of their fundraising pitches. This is interesting because Piening
admitted to AIP that ANSF, unlike AMVETS, does not use a professional
fundraising company because it would not be possible to meet the
65% to program guideline that watchdogs call for.
Paralyzed Veterans of America (PVA)
claims that it invests 73 percent of all donations received
in our veterans. Under nonprofit accounting rules, charities
are allowed to include large portions of the costs related to their
direct mail and telemarketing appeals in this program percentage.
Once you subtract out programs that include direct mail marketing
or other fundraising appeals (over $29 million in 2006), donated
advertisements and other non-cash items (over $17 million in 2006),
PVA spent only 34% of its budget on bona fide programs to help veterans.
One reason PVA may have such high fundraising
costs is that it has locked itself into an arrangement with two
direct mail and marketing firms that requires it to purchase $150
million in products and services from 2004 through 2011, according
to its fiscal 2006 audit. PVA sold these two for-profit firms for
$6.3 million in 2004 and as part of the sale agreed to make purchases
from them of nearly 24 times this sales amount during the next seven
years, according to PVAs audits. In response to AIPs
criticism of this agreement, PVAs chief financial officer
John D. Ring told The Washington Post in a February 2008
article that it would have to spend that money anyway and
preferred to do business with the companies it knew.
Military Order of the Purple Heart Service
Foundation (PHSF) also utilizes the fundraising company, Xentel.
It has filed with Colorados Secretary of State a report on
its contract with Xentel that allows this company to retain 84%
of the money raised from 2006-2011. An official from PHSF defended
its hiring of a professional fundraising business in a letter to
ABC News by saying we believe
donations are best utilized
by providing needed assistance to our veteran community and not
in developing at our cost
an internal volunteer fundraising
program. PHSF also said in its letter that it tries to minimize
fundraising costs and maximize returns.
PHSF raises and controls funds for the
Military Order of the Purple Heart (PH). PHSF, which reports having
over $27 million in unrestricted fund balances in its fiscal 2007
tax form, asked PHs national commander, Henry Cook, to reduce
the budget for his veterans service program by at least $250,000,
while PHSF was holding a $40,000 black-tie dinner for a retiring
official, according to an ABC News story. The story also reported
that PHSF officials were given access to a luxury suite at a Washington
Redskins game for buying commercials during the football broadcast
and showed Cook saying that he was told by PHSF that he could not
bring wounded veterans to the suite and instead was given two tickets
in the stands for them. The complete video, which includes comments
by AIPs president, is posted at charitywatch.org in the "Hot