Claims made in charity solicitations and marketing materials that promise 100% of your donation will fund charitable programs certainly sound enticing as you consider which nonprofits will use your contributions most efficiently. While most people realize it is not possible to run a charity without spending some money to raise funds and manage an organization, some charities are very skilled at using semantics or creative accounting to convince donors otherwise in an effort to boost public image and fundraising dollars.
American Association of State Troopers Scholarship Foundation (AASTSF) comes close to promising that 100% of your gift will be spent on charity. Its website states that "97% of your donation will be deposited directly into our Scholarship Foundation account, which is used to provide college scholarships to children of our members," and explains that the remaining 3% is used to pay the administrative costs of processing your donation. It would be easy for donors to interpret this language to mean that $97 of each $100 they donate will be used to fund scholarships. Sadly, this is not the case. Based on an analysis of this organization's audit and tax form for 2009, the most current available, AASTSF spent only 34% of its budget that year on scholarships. $214,000 of the $317,000 it raised was spent on fundraising.
A charity may solicit contributions for a specific program, and then separate the donations it collects for that program into a different account or fund within the charity. Out of this account it incurs expenses related to operating that program, which can include program costs, as well as management & general and fundraising costs. So, a charity saying that 100% of what you donate will be deposited into a particular fund is not the same thing as it saying 100% of your donation will be spent exclusively on charitable programs.
On its website Kids Wish Network (KWN) says that all donations directed to its Guardian Angel Fund "directly support program services, ensuring that 100% of your contribution benefits the children we serve. To our knowledge, Kids Wish Network is the only wish granting organization that offers donors the ability to direct 100% of their contribution to program services." While it may be the case that the donations KWN collects for this specific fund are used exclusively for programs, this does not change the fact that, overall, KWN uses the vast majority of the donations it receives to pay its many for-profit fundraisers. The charity's fiscal year 2010 tax form shows that fundraisers brought in $14.4 million from the donating public for KWN's ten largest fundraising campaigns. The charity received just under $1.6 million of this amount, with fundraisers taking fees of $12.8 million. KWN earned an F rating from AIP for inefficient fundraising and for spending only 18% of its total expenses on its programs to help sick and dying children.
A charity might separate the donations it collects into one fund that will be used exclusively for program expenses, and another fund that will be used to pay for overhead. This is similar to a person having one bank account that she uses to pay for utilities and groceries, and another bank account she uses to pay bigger expenses like college tuition and mortgage payments. Regardless of how many different bank accounts a person opens and deposits money into, the money in the accounts still belongs to the account holder. A charity may set aside funds in one account which it uses to pay for overhead so it can claim that any money you donate will be put into a different account that is used only for programs. While this is a great fundraising pitch, it ignores the efficiency with which a charity uses its donations overall. If your spouse squandered away all the funds in your tuition and mortgage account, and justified this by saying that she spent 100% of the funds from the other account only on utilities and groceries as she promised, you would unlikely be impressed.
To think of it another way, imagine receiving a charity solicitation that flips the language and says "100% of what you donate will be used on overhead so that donations we receive from our founders and loyal supporters can be used exclusively on programs!" Would you be enthusiastic to give or throw the solicitation away? A charity's promise to spend 100% of your donation on overhead or 100% on programs is irrelevant. It is the charity's ability to keep its total overhead spending low that determines the level of resources available for its programs.
AIP has previously reported on Smile Train, a charity that helps children with cleft lips and palates, and that claims in its direct mail solicitations that "100% of your donation goes toward programs - 0% goes toward overhead." The charity says: "All non-program expenses, such as overhead and fundraising, are paid for with start-up grants from our Founding Supporters." While Smile Train may split up its resources into different internal accounts that it uses for different purposes, this is not the same thing as it having no overhead. In 2009 Smile Train spent 30% of its total expenses on overhead, and 70% on programs -- not 100%.
Sometimes even a highly efficient charity may use the 100% claim to overstate how efficiently it uses contributions. Charity: water (aka Charity Global) earns Top-Rated status and an A rating from AIP based on 2009 financial reporting for spending 83% of its expenses on programs to bring clean drinking water to people in developing nations. "100% of public donations go directly to water projects," the charity states on its website. It explains how this is possible by saying that "All operating costs are covered by a group of private donors so every dollar you give can go to people in need." Any charity can ask a portion of its loyal supporters to contribute money to a specific fund to cover overhead costs so it can claim that whatever you and others donate will be used only for programs. While appealing for fundraising purposes, such a tactic unfortunately does not cause overhead costs to disappear.
Donors need to be realistic and understand that charities must incur reasonable expenses to raise donations and provide proper oversight of their activities. In fact, a charity with no overhead expenses might not be operating with proper accountability or a competent staff. Charities need to allocate a portion of employees' salaries toward the management of the organization and spend some funds on accounting services, banking fees, government filing fees, and other management functions. The expectation should not be for a charity to have zero overhead, but rather that it be transparent and reasonable about its overhead spending. (AIP Top-Rated organizations generally keep overhead down to 25% or less.)
Charities that make "100%" claims should stop using creative accounting or semantics to fool donors into thinking that the overhead expenses they pay out of a separate fund somehow do not eat into the resources available for their programs. Doing so only serves to confuse donors about what it costs to operate an efficient and effective organization, and encourages more nonprofits to use such tactics to falsely appear more efficient than other charities with similar overhead costs.