Ever since the popular veterans charity Wounded Warrior Project (WWP) was accused of wasting donations on lavish spending in reports by CBS News and The New York Times in early 2016, WWP’s program percentage (i.e., the portion of WWP’s expenses used for its veterans programs) has drawn particular attention from many. Even Senator Charles Grassley of Iowa, Chairman of the Committee on the Judiciary, is questioning the level of WWP’s program spending. CharityWatch’s “C” rating of WWP is based in part on our calculation that WWP spends 54% of its cash budget on programs. Some of the other program ratios we have seen being bandied about range from about 60% to the 80.6% that WWP has vehemently defended.
How can the calculation of what is supposedly the same ratio result in several different answers? At the simplest level, a charity’s program ratio is calculated by dividing its total program service expense by its total expenses. Although this calculation may seem straightforward, depending on the complexity of a particular charity’s financial reporting and organizational structure, a program ratio can be calculated in a number of different ways. Some items that may cause variance in a program ratio calculation include:
The receipt of donated in-kind (non-cash) (“IK”) goods and/or services;
The reporting of joint costs from a combined educational campaign and fundraising solicitation (“joint costs”); and
Consolidated financial statements that eliminate inter-organizational related party transactions otherwise reported separately on each organization’s IRS Form 990 filing.
In WWP’s case for its fiscal year 2014 (“FY’14”), all three of these items exist and therefore, a different program ratio will result depending on how each item is treated.
Illustrating the possible variances noted above, some of the program percentages that have been calculated by WWP, CharityWatch, and/or other third-parties are summarized in the table below.
Technically, all of the ratios in the above table can be described as a program spending percentage for WWP. However, there is obviously a significant difference between supposedly spending 81% on program services (WWP’s claim) versus spending only 54% (CharityWatch’s rating). So as a donor, which of these program ratios for WWP should you consider the most informative?
The three items below summarize why CharityWatch’s published 54% program percentage for WWP differs from the others on the table.
(1) Excluding Donations of In-Kind Goods & Services (including Media & Ads)
CharityWatch publishes its ratings to help donors understand how efficiently their cash donations are being raised and spent by charities. This is among the reasons why we exclude from our ratio the value of in-kind (non-cash) goods and services reported by charities. Another reason we exclude IK items is that IK reporting and valuation methods can be subjective and may vary significantly from one charity to the next. Therefore, by adjusting out the IK valuations reported on a charity’s financial statements, CharityWatch’s program ratios are calculated on an apples to apples basis, regardless as to if or how a charity reports IK goods and services.
(2) Reallocating Program Joint Costs to Fundraising Expenses
Under current accounting rules, a charity that includes an “action step” in its phone or direct mail solicitations can claim that it is “educating” the public, which allows the charity to report much of the cost of these appeals as a program rather than a fundraising expense. Such “action steps” are typically relayed to potential donors through for-profit professional fundraising companies hired by charities to broadly solicit the public for donations. Moreover, the “educational” component is often information that is common knowledge or that could otherwise be distributed to the public using a far more targeted method than broad-based solicitation campaigns.
CharityWatch believes that most donors do not consider such joint solicitation/educational activities to be equivalent to the substantive programmatic activities (e.g., assisting injured veterans) they are intending to support with their charitable donations. For this reason, CharityWatch treats a charity’s reported program joint costs as fundraising by reallocating them from program services to fundraising expenses. Activities that are purely educational and do not contain a fundraising component are not considered joint costs and therefore, will remain in program services expenses for CharityWatch’s calculations. (For donors who do consider direct mail, telemarketing, and other joint cost solicitation activities to be true charitable programs, CharityWatch also publishes unadjusted efficiency ratios that do not reallocate program joint costs included in solicitations to fundraising expenses. These unadjusted ratios, however, do not factor into CharityWatch’s letter grade ratings.)
(3) Using Consolidated Audited Financial Statements
Some of the charities rated by CharityWatch are more complex in their organizational nature and publish consolidated or combined audited financial statements that include more than one related charitable entity. In such cases, it generally is not sufficient for CharityWatch to rate only one entity of an organization that has multiple, related entities. This is because some charities, for example, may use one entity primarily to raise funds and pay overhead costs, while granting funds to a related entity whose activities primarily consist of conducting program services. Calculating separate financial efficiency ratios for each entity in this example would make the fundraising entity appear highly inefficient and the programmatic entity highly efficient, which is why the finances of the two must be analyzed together in order to understand whether or not the total resources of the organization as a whole are being used efficiently.
For this reason, whenever practicable, CharityWatch ratings make use of the consolidated or combined audited financial statements that include all of the related entities of a charity. Such an audit eliminates inter-organizational transactions among the related entities and allows CharityWatch to determine how efficiently an organization is operating on the whole. This provides donors with a more complete picture of the total resources a charity controls than if the individual IRS Form 990 filing of each related entity is used on a stand-alone basis.
With this “behind the scenes” glimpse into CharityWatch’s calculation of a charity’s program percentage, we hope that you better understand why we believe our program percentages to be the most helpful from a donor’s perspective.
Even given the many ways in which a program ratio can be calculated, it is not always the case that such a wide range of possibilities will result as with WWP. It just so happens that the dollar values associated with the three items described above represent relatively high proportions of WWP’s reported total program services expenses for FY’14 (approximately $242 million, based on its consolidated audit). The relevant reported dollar values were as follows:
(1) In-kind media & advertising at over $80 million, plus in-kind goods at approximately $6 million;
(2) Program joint costs at approximately $41 million; and
(3) An inter-organizational program grant in the amount of $28 million that gets eliminated upon consolidation in WWP’s audited consolidated financial statements, but is reported as a program services expense on WWP’s individual IRS Form 990 filing.
Each of the above items, which total approximately $155 million, also are mentioned in Senator Grassley’s May 2016 letter to WWP, which states: “… it appears that approximately $150 million of it [the $242 million WWP spent on program expenses in FY’14] was not actually spent on veterans by WWP and a large portion of it was in-kind donations. This calls WWP’s claim that it spends 80.6% of its donations on veteran programming into question.” When it comes to determining WWP’s program percentage, it appears that Senator Grassley shares CharityWatch’s methodology.
WWP provides a great example for why donors need to know how a reported program percentage is being calculated. With this knowledge, donors can then judge just how meaningful that program percentage actually is before deciding to give. Rest assured that you can always count on the program percentages CharityWatch calculates for its ratings to provide a more complete picture of how efficiently a charity spends your cash donations on bona fide charitable programs.