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Follow the Money: Beware of Groups that Pass Your Donations to Inefficient Charities

Published 06/03/2016

Say that you hear on a news report that a veterans charity has a program percentage of 96%. You think, “Wow, I’m going to donate $50 because almost all of it will be used for the needs of veterans,” and so without further thought, you go ahead and make a $50 donation that day. It turns out, though, that instead of about $48 of your $50 going to veterans services, only about $25 was used for such programs. If the charity really spends 96% on programs, how is that possible?

A charity’s reported program percentage can sometimes vary greatly from the portion of donor funds that actually end up being used directly for charitable services, and that is very much the case with Disabled American Veterans Charitable Service Trust (the Trust). CBS News referenced that the Trust “spends 96 percent of its budget on vets” when it was comparing some veterans charity program ratios as part of its coverage in early 2016 concerning accusations that the popular Wounded Warrior Project (WWP) was wasting donations on lavish spending. The Trust did in fact spend 96% of its budget on grants to veterans organizations, according to its 2014 IRS Form 990 filing, but comparing the Trust’s program spending to that of WWP (which was 54% in fiscal 2014, based on CharityWatch’s calculations) was rather unfair given that WWP operates its own veterans service programs and the Trust does not.

Even for charities in the same category, charitable program services can be substantially different depending on each charity’s individualized mission. Essentially all of the Trust’s program spending goes towards grant-making to other charitable organizations. In contrast, WWP runs a variety of its own programs for veterans, including an “alumni association” that offers educational sessions and social events; a combat stress recovery program; and many “physical health and wellness” activities and events, while less than 15% of WWP’s cash-based program spending went to grant-making in its 2014 fiscal year. When a charity does not conduct its own programs but instead makes grants for other organizations to conduct programs, a high program percentage should be expected. That is why when evaluating charities such as the Trust, where grant-making is the primary charitable program, it is important for donors to look more closely at the grantee organizations to assess how they are actually using the donor funds that have essentially been passed-on to them in the form of charitable grants.

In other words, given that almost all of the Trust’s spending has consisted of grants made to other veterans organizations, some important questions are:  (1) Which veterans organizations receive grants from the Trust, and (2) How efficiently do those grantee organizations spend their funds on charitable veterans services? Unfortunately for donors to the Trust, a review of the Trust’s grantees indicates that a large portion of its funds actually end up getting spent much less efficiently than donors might have expected based on the Trust’s extremely high program percentage.

It is not a coincidence that Disabled American Veterans Charitable Service Trust shares the beginning of its name with another tax-exempt organization, Disabled American Veterans (DAV). The Trust was set up in 1986 by leaders of the Disabled American Veterans National Organization, and both DAV and the Trust share the mission of empowering veterans to lead high-quality lives with respect and dignity. Although the two entities operate separately under their own respective bylaws, they are related in that some members of the Trust’s board of directors also serve on the board of DAV, and DAV personnel assist the Trust on a limited basis in administering its business operations, fundraising, and grant programs, according to each organization’s audited financial statements, which DAV’s audit notes: “puts DAV in the position to influence operating policies of the Trust.” In light of this relationship between the Trust and DAV, it should not come as a surprise that about one-half of the funds that the Trust granted between 2013 and 2014 went to DAV. Therefore, with DAV being a primary recipient of the Trust’s grants, DAV’s financial efficiency should be of particular interest to the Trust’s donors.

It turns out that DAV’s program spending is significantly lower than the 96% that the Trust reports spending on grants to veterans organizations. DAV spent only 50% of its cash budget on programs and had a $56 cost to raise every $100 in funds, based on its 2014 operations, yielding a “D” grade from CharityWatch. Similarly, DAV’s program percentage was just 49% in 2013. Therefore, although on its financial statements the Trust may seem to be spending donor money extremely efficiently, the reality is that a material portion of that money is handed over to DAV where only about 50% of cash expenditures go towards veterans program services.

Furthermore, an additional 12% of the Trust’s grants during 2013-2014 went to another related DAV organization, DAV National Service Foundation (the Foundation), which makes grants to DAV Departments and Chapters. DAV, in addition to the funds it received directly from the Trust, also received about 30% of the Foundation’s total grants in 2013-2014. Another issue of note is that the Foundation is sitting on over $115 million, which is an astonishingly excessive amount of available funds that equates to about 35-years’ worth its annual budget of approximately $3.3 million at year-end 2014. In other words, the Foundation has already accumulated enough money to be able to fund its operations for about 35 years. Despite this, the Trust granted the Foundation an average of over $760,000 a year from 2011-2014. Donors to the Trust may not realize that some of their contributions may end up among the funds being stock-piled by the Foundation.

Just like with the Trust, DAV’s board of directors also serve on the board of the Foundation, and DAV provides services to the Foundation. Therefore, as noted in DAV’s audit, DAV is in the position to influence operating policies of both the Trust and the Foundation, the two related DAV entities from which it receives grant money. All three DAVs also share the same office address in Cold Spring, Kentucky. The grant-making relationship among the three DAVs is illustrated below:

 

 

In addition to the Trust reporting an exceptionally high program percentage that can easily attract donors, it is also the only one of these three DAVs organized as a 501(c)(3) public charity. The Trust, therefore, naturally benefits from receiving donations from corporations, donor advised funds (DAFs), foundations, and even individual donors that are more likely to give, or have policies mandating that they give, to public charities. However, due to special rules created for veterans organizations, donations to DAV (as well as the Foundation) also are generally tax deductible even though they are not organized as (c)(3)s under the tax code. Therefore, whether intentional or not on the part of the DAV organizations, their related-organization grants could almost be compared to a “bait and switch” on donors who are motivated to give to the much better looking Trust, which happens to also be a public charity, with the Trust then proceeding to pass-on a significant amount of those funds to its related organization, DAV, which CharityWatch grades a “D”. It is highly unlikely that the Trust would generate the same amount of donations if donors knew that such a large portion gets sent to the poorly-rated DAV. (Note: CharityWatch does not give a letter grade rating to the Trust or the Foundation primarily because their sole activities consist of funding DAV and other veterans organizations. We believe donors should avoid the costs of such intermediaries by giving directly to the charities that they want to support.)

Theoretically, any inefficiently run charitable, social welfare, or veterans tax-exempt organization can spin-off a better-looking, related public charity in an effort to more successfully attract donations from unsuspecting donors. There is then nothing to stop the related public charity from passing-on those donations in the form of grants to the inefficiently run related organization, as long as their missions are aligned. This is why it is important for donors to look at the big picture by scrutinizing all of a charity’s related entities, as well as the organizations that are the primary benefactors of charities whose programs consist largely of grant-making to others.