Don't Be Misled by Deceptive Charity Efficiency Claims
As a donor, which of the two claims below would be more likely to persuade you to make a charitable contribution?
- "85 cents of every dollar spent goes to our charitable programs."
- "85 cents of every dollar donated goes to our charitable programs."
Maybe to some donors, there's no discernible difference in these two claims. You see "85 cents" and "programs" and figure the charity probably is worthy of a donation. Other donors may pick up on the use of the words "every dollar donated" in the second claim versus "every dollar spent" in the first claim and think that the second claim is more persuasive. Either way, perhaps most of you are thinking: Why does it matter? Don't both of those claims essentially mean the same thing? And the answer is: They certainly don't mean the same thing, and here’s why.
Charities often try to encourage donations by making claims related to how much they spend on the programs that support their mission. This makes sense, especially for charities that can tout a high percentage of program spending, since studies show that donors prefer giving to charities that spend considerably more on programs than on fundraising and general administrative functions. CharityWatch usually doesn't have a problem with charities that cite a high program spending for fundraising purposes, as long as the program percentage used is accurate and doesn't mislead donors. The trouble is that there are a few ways that program percentages can be misleading, and one of the ways is when charities claim that a certain portion of every dollar "donated" goes to programs, when in actuality, the percentage cited is the portion of every dollar "spent" that goes to programs.
The basic difference in claiming "every dollar donated" versus "every dollar spent" is that in the first case, the program percentage is based on the ratio of program spending relative to the charity's inflow of total donations while in the second case, it is based on the ratio of program spending relative to the charity’s outflow of total expenses. Those two ratios will yield different (sometimes vastly different) percentages almost all of the time, with the exception being in rare circumstances where a charity raises only unrestricted donations that are equal to (or almost equal to) its total expenses for the year.
41¢ (not 80¢) of Every Dollar Donated Goes Directly to Wishes
The Make-A-Wish® Massachusetts and Rhode Island (MAW-MRI) chapter claims on its website: "Eighty cents of every dollar donated goes directly to wishes." This statement is misleading and incorrect as worded, based on CharityWatch's analysis of MAW-MRI's most recent audit and tax filing, but it would be more truthful if it instead read: "Eighty cents of every dollar spent goes to wishes" (emphasis added). The portion of every dollar donated that goes towards MAW-MRI's wishes program actually is more along the lines of approximately 68 cents, 12 cents lower than the 80 cents being claimed on MAW-MRI's website. However, both of the calculations that yield the 80 and 68 cents do not adjust for the over $1.2 million of in-kind (non-cash) contributions received by MAW-MRI. Considering MAW-MRI's claim says "every dollar" donated (or more accurately, spent), in-kind items should be deducted before the ratio is calculated, as is CharityWatch's normal practice, which would yield a lower ratio of 75 cents of every dollar spent or about 62 cents of every dollar donated that goes to wishes.
CharityWatch also thinks that it is misleading for MAW-MRI to use the words "goes directly to wishes" in its claim. The ratios discussed above are based on MAW-MRI's total program services expenses, yet MAW-MRI's audited financial statements categorize its program expenses by "Wish granting" and "Program-related support" functions. According to the audit notes, Program-related Support includes expenses for activities such as identification of wish candidates and development and delivery of each wish, but it does not include the activities performed for the literal granting of each wish since those expenses are categorized separately. If only MAW-MRI's Wish Granting program expenses are used (less the related in-kind contributions) to calculate the above ratios, the results would be even lower at 49 cents of every dollar spent and about 41 cents of every dollar donated that go directly to granting wishes. Therefore, MAW-MRI is misleading donors in more than one way by stating that 80 cents “of every dollar donated goes directly to wishes,” including by using the word "donated" instead of what would appear to be the more accurate "spent" and by using the words "goes directly to wishes."
Further complicating the "every dollar donated" calculation could be common scenarios such as when portions of the donations received in a year are temporarily restricted for spending in later years or required by donors to be held in perpetuity with the charity only being allowed to spend the income from the related investment. Another common occurrence is the receipt of multi-year pledges or grants, the total value of which has to be accounted for as contributions in the year received. If a certain amount of donations received in one year can't be used until future years, none of that amount can go to programs in the current year and technically should be removed from the "every dollar donated" calculation. Also making difficult any attempt to calculate a valid percentage of "every dollar donated" that goes to programs is that many charities also provide some program services that generate associated revenues and expenses. Since the expenses related to such revenue-generating program services are included in a charity’s total program spending, and the associated revenue can be used, along with donations, to fund all of the charity's programs, it would be virtually impossible to determine the actual percentage of "every dollar donated" that goes to programs. Another calculation problem exists in circumstances when a charity with surplus funds and/or other income sources has total program spending that exceeds the inflow of donations during the year. Mathematically, the percentage of every dollar donated that goes to programs in such circumstances would calculate to over 100%, but obviously, the charity will have fundraising and general administrative expenses during the year that also need to be funded. Therefore, claiming that 100% of donations are going to programs would be misleading.
The American Red Cross is another example of a charity that has made misleading claims related to a portion of "every dollar that you donate" going to programs, and in the Red Cross' case, it also is a charity that provides revenue-generating program services and has total program expenditures that far exceed its inflow of annual contributions. Accordingly, it would be extremely difficult for the Red Cross to try to calculate the portion of every donated dollar that goes towards it programs, yet as recently as November 2014, the Red Cross was claiming on its website: "An average of 91 cents out of every dollar that you donate goes to fulfill our humanitarian mission." It turns out that the Red Cross spends about 90% of its total cash budget on program services, based on CharityWatch’s analysis, but considering that we’ve calculated that it costs the Red Cross $18 to raise every $100 in cash donations, there is no way that $91 out of every $100 raised could go towards program services. The Red Cross has since removed the "91 cents out of every dollar you donate" misleading claim from its website. (For more related to the Red Cross’ 91% claims see here and here from ProPublica’s website.)
The above examples show that donors should beware when charities tout program percentages, especially when worded as a percentage of dollars donated versus dollars spent. In most cases, it would be difficult for a charity to accurately calculate the portion of every dollar donated that goes to programs. Therefore, don’t be misled by such claims related to program services and understand that not only is there a difference between "every dollar donated" and "every dollar spent," but often times when a charity uses the percentage or cents of "every dollar donated goes to programs" wording, what really is being reflected is the portion of every dollar spent, not every dollar donated.