AIP’s ratings have recently received wide exposure from Congress and the media; particularly AIP’s 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 AIP’s 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 overhead.

The major criticism from low rated veterans charities is the claim that AIP’s 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 programs.

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 AIP’s in depth level of financial analysis and may accept a charity’s 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 charity’s 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 charity’s 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 veterans—a big difference from the 29% of fiscal 2005 non-solicitation program expenses that AIP was reporting for ANSF.

ANSF’s 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 ANSF’s 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 government’s. 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 ANSF’s 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 organization’s 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. AIP’s 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 PVA’s audits. In response to AIP’s criticism of this agreement, PVA’s 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 Colorado’s 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 PH’s 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 AIP’s president, is posted at charitywatch.org in the "Hot Topics" section.