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Animal Protection Charity Issued a Decade of 'F' Ratings

   Aug 12, 2021
CharityWatch began warning donors over a decade ago about the low program spending and high fundraising costs of the animal welfare charity SPCA International (SPCAI), assigning it "F" ratings for each year we have rated the organization since fiscal 2009. Journalist Dan Spinelli of Mother Jones interviewed CharityWatch Executive Director, Laurie Styron, for an update on SPCAI's financial activities for 2019, the most current financial reporting available from public sources as of the time of this post.

As quoted in the article:

"Laurie Styron, executive director of CharityWatch, says 'there's clearly a disconnect' between how SPCAI markets its services and 'what they're spending most of their money on.' Her organization has evaluated SPCAI seven times since 2009 and each time has given it an 'F,' the lowest rating possible."

"'Donors may as well just skip the donation to SPCAI and put the money directly into the pockets of its professional fundraisers,' Styron told me. 'It would make little difference.'"

SPCA International experienced an increase in its net deficit balance in 2019. At December 31, 2018, its total net deficit, or the amount by which its total liabilities (amounts owed to outside parties) exceeded its total assets, was $58,028; at December 31, 2019, its net deficit was $668,916. While that is a dramatic increase in absolute terms, it's less dramatic in consideration of SPCAI's size. SPCAI reports approximately $14.2 million in cash expenses in 2019. A deficient net fund balance of $668,916 therefore is equivalent to less than 5% of its annual cash expenses. While a charity could not continue on this kind of trajectory of continuously spending more than its annual revenue each year without digging itself deeper and deeper into debt, relative to its size, this deficit balance is not so large that SPCAI would be unable to recover from it. SPCAI does not have a "Going Concern" audit for fiscal 2019, which is the status a legal entity receives from its auditors when they determine that it is in danger of liquidation within the next year.

Of bigger concern are the activities on which SPCA International spends its resources. SPCAI has received an "F" rating from CharityWatch every year that we have rated the organization, starting in fiscal 2009. The underlying reason is always the same: SPCAI spends the majority of its annual cash expenses on fundraising and other overhead and very little on its programs. If a donor were to view SPCAI's 2019 financial reporting and take it at face value, they would get the impression that it spent about $14.4 million of its total expenses of $21.9 million on its programs that year, or about 66%. But what most donors want to know is how efficiently a charity will use their cash donations. Charities are allowed to include the value they place on the donated goods they receive and distribute, and report this value in their financial statements together with their cash spending. When CharityWatch analyzed SPCAl's cash spending for 2019, we determined that it spent only about $6.7 million of $14.2 million in cash expenses on its programs. And of that $6.7 million, over $4.3 million is described in its audit as "Marketing and media costs," or "joint costs" from a combined educational campaign and fundraising solicitation. In layperson's terms, what this means is that SPCAl considers the solicitations it sends to donors to be a form of education and call to action, and reports the associated expenses in its financial statements as program expenses on this basis. Once this joint costs spending reported in programs is excluded, SPCAI spent only about $2.4 million of its total cash expenses of $14.2 million on programs in 2019, or 17%. Of this $2.4 million, its only cash grant expenses consisted of $273,465 of "OMP grants" and $760,964 of "Shelter grants," according to its 2019 audited financial statements. 

[Note:  In Note 1 of SPCA International's fiscal 2019 audit, OMP is described as "Operation Military Pets." In its IRS Form 990 tax filing, SPCAI reports grants to domestic organizations and individuals of $145,050 and $273,465, respectively. It also reports $8,275,776 of grants and assistance to foreign organizations or individuals. However, according to SPCAI's audit, $7,659,852 of its program spending consists of "In-kind donation - veterinary supply aid." Meaning, most of the grants it reports in its Form 990 and audit are not cash grants.]

What most donors don't realize is that there are no laws mandating that a charity must spend a minimum amount of the donations it receives on its programs. So even if a charity hasn't broken any laws or reporting rules and is current on all of its government filings, this is no endorsement that the charity is operating efficiently or effectively. In their tax Forms 990 charities are allowed to mix the donated goods they receive together with their cash donations in their financial reporting and inflate their reported program spending in the process. As long as certain minimal criteria are met, charities are also allowed to include millions of dollars of expenses paid for telemarketing calls, direct mail fundraising letters, and other solicitations and say that these activities are "educating" the public and are therefore program expenses. Bear in mind that a charity reporting its expenses this way is permissible under Generally Accepted Accounting Principles (GAAP). It's not a case of bad reporting, but of inadequate reporting rules. This is a great example of why donors should not rely on a charity's self-reported financial information, or simplistic charity ratings posted in online databases that are based on this information, when making their giving decisions. Getting the real story about how charities spend donors' contributions requires adequate, and often time-intensive, financial analysis.

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