The Senate Singles Out WWP For Bad Practices That Also Occur At Other Charities
Posted on August 14, 2017
Many of us were appalled by the image of the (now former) Wounded Warrior Project (WWP) CEO rappelling down a building, spotlighted for all the WWP employees to see. Little did they know that not too long thereafter, it would be WWP’s use of donor funds in the spotlight of the media.
In early 2016, multiple media outlets, including CBS News and The New York Times, accused WWP of wasting donations on “lavish” spending, such as pricey travel, food and drink, and conferences for WWP employees. The U.S. Senate Judiciary Committee took notice of the news reports and as a result, questioned WWP concerning its alleged “questionable spending practices.” “WWP has a duty to be as open and transparent as possible” given its tax exempt, public charity status and its mission to serve U.S. veterans, the Judiciary Committee wrote in its March 18th, 2016 correspondence to WWP’s Chairman. About a year later, after WWP’s responses to the Senate Judiciary Committee were analyzed, a report issued by Chairman Charles E. Grassley, Senate Judiciary Committee Member, Senate Finance Committee, dated May 24, 2017, (“the Senate Report”) has rained some harsh criticism down on WWP. CharityWatch has reviewed the Senate Report, and donors should take note because the criticisms are not necessarily unique to WWP.
“Inaccurately Inflated” Program Percentages
CharityWatch has long been advising donors to be leery of a charity’s self-reported program spending ratio, which, if high enough, often is published in an eye-catching way on its website and in direct mail solicitations. There are at least two reasons why donors should be skeptical: (1) the charity may be inflating how much it spends on its programs by including a dollar valuation for donated non-cash (or “in-kind”) goods and/or services; and (2) the charity may be including costs related to combined educational campaign / fundraising solicitation activities (or “joint costs”). CharityWatch believes that donors should be informed as to how efficiently a charity is using cash donations raised towards bona fide charitable programs. A charity does not accurately reflect that efficiency when it includes either in-kind goods and/or services or an allocation of joint costs in the calculation of its program percentage.
The Senate Report criticizes WWP for publicizing “inaccurate” program spending efficiency. In this criticism, the Senate shows how the inclusion of in-kind services and joint costs can artificially inflate a charity’s program percentage. During the media firestorm over WWP’s alleged wasteful spending, WWP repeatedly defended itself by proclaiming that “80.6% of total expenditures went to provide programs and services for wounded service members, their caregivers, and families.” The Senate Report, however, concludes that “WWP does not actually spend 80.6 percent of its donations on program services for veterans,” and states that “this percentage was inaccurately inflated by inappropriately categorizing certain services.” Those inappropriately categorized services, according to the Senate Report, include donated media and advertising, for which a value of over $80 million is included as program services in WWP’s calculation of the 80.6% for its fiscal year 2014. As a result, the Senate Report criticizes WWP as follows:
[B]y including donated media in program expenses, WWP inaccurately reports that it spends a greater percentage of donor funds on program expenses that directly benefit veterans. These inaccuracies add up to serious overstatements about WWP’s commitment to supporting veterans and understates the actual amount of money that WWP spends on program activities in pursuit of its mission [emphasis added].
In contrast to the 80.6% program spending ratio vehemently proclaimed by WWP, the Senate determined that WWP’s program percentage would have been about seven percentage points lower, at approximately 73.5%, if the value of donated media and advertising had been excluded from the calculation.
The Senate Report also points out that WWP’s program percentage “would fall further” if the joint costs allocated to program are excluded. The use of joint costs, although allowable under current accounting rules, essentially lets a charity report certain costs related to direct mail, telemarketing, and other solicitation activities as program rather than fundraising expenses. WWP’s joint costs in fiscal 2014 totaled almost $41 million, representing over 25% of its total cash-based program expenses that year. In response to WWP’s use of joint costs, the Senate Report states:
In reviewing the examples of material that WWP considered to be jointly allocated, there is reasonable concern that it is more fundraising in nature than a legitimate program expense. […] Although the tax code allows WWP to claim these engagements as program expenses on behalf of veterans, the endeavor is actually more fundraising in nature than a benefit to veterans. As such, its use skews WWP’s reported program expenses [emphasis added].
The Senate Report agrees with CharityWatch’s belief that joint cost activities are not equivalent to substantive programmatic activities conducted by veterans service charities, such as providing assistance to injured veterans.
CharityWatch excludes the allocation of joint costs and the value of in-kind items from the calculation of the program percentages we use to factor into our letter grade ratings. Under our methodology, we calculated WWP’s program percentage to be 54% for fiscal 2014. Therefore, the exclusion of in-kind media and advertising (as well as other in-kind goods) and joint costs from WWP’s program expenditures resulted in a program percentage of over 26 percentage points lower than the 80.6% repeatedly publicized by WWP.
While the highly inflated program spending ratio reported by WWP may be one of the more extreme cases, it certainly is not an uncommon one. Many charities include items such as in-kind goods and services and joint costs in their publicized program percentages. For this reason, donors should keep WWP in mind as a great example for why it is important to use a critical eye when it comes to a charity’s self-reported program spending ratio.
Excessive or Irresponsible Program Spending
Another thing donors should keep in mind when seeing a high program percentage being touted by a charity is that a program percentage does not take into account the effectiveness of a charity’s program spending. In other words, there may be some careless or excessive spending by the charity that, although technically may be categorized as program spending, is essentially wasteful. A charity may also be using donations on programs in a way that could be considered irresponsible if certain aspects of those programs are not fully aligned with the charity’s mission.
WWP seems to be guilty of excessive and irresponsible program spending, in some cases, according to the Senate Report. For example, “WWP spent excessive amounts of donor funds on employee travel expenses,” the Senate Report states. An independent review conducted on behalf of WWP’s Board of Directors after the negative press hit in January 2016 found that WWP spent about $2.2 million on domestic and international first or business class travel from August 3, 2010 to March 23, 2016. This was done despite WWP’s travel policy stating that the “approved class of transportation for all team members is coach.” Five percent of the total number of flights, including flights taken by wounded warriors and their caregivers, (or 1,872 out of 38,112 flights) were for first or business class travel, according to the independent review. Of those tickets, the Senate found from WWP’s documentation that 43 cost over $5,000, and some cost over $10,000, including the most expensive at $12,137 for a first class flight. “These costs are exorbitant,” the Senate Report declares.
The memorable news clip images of WWP’s former CEO making “expensive and grand entrances” into employee meetings by rappelling down a building, riding a horse, and cruising on a Segway were from WWP’s annual employee “All-Hands Huddle” events. WWP describes these events as organizational-wide team meetings held to promote strategic growth and team building. The “All-Hands Huddle” events, however, are an example of both excessive and irresponsible program spending on the part of WWP. The independent review found that the cost of the “All-Hands Huddle” events increased from $129,460 to $987,209 between 2011 and 2014, with the average cost increasing from approximately $1,177 to $2,379 per employee. The 2014 event was held at a resort in Colorado (WWP is headquartered in Jacksonville, FL) and was attended by 415 employees. The WWP documentation even shows that WWP paid a guest speaker at the 2014 event over $32,700 for his speaking fee and incidentals.
WWP’s leadership and most of its employees defend the value of the “All-Hands Huddle” events, and even the former CEO’s “dramatic entrances,” which he and the former COO explained as a demonstration of WWP’s “commitment to ‘fun’ as a core value,” according to the independent review. While such spending may be acceptable in the corporate world, charities have no business using tax-subsidized donations given to help disabled veterans on lavish employee events. (WWP’s CEO, Steven Nardizzi, and COO, Al Giordano, were fired in the wake of the spending scandal.) On a positive note, WWP had represented to the Senate that it cancelled its 2016 “All-Hands Huddle” event and does not have plans to hold that type of event in the future.
WWP’s spending on its “Alumni Association” program represented the largest portion of its total program spending in fiscal 2014, at almost $38 million in expenditures, according to WWP’s tax filing. WWP describes its “Alumni Association” program as one that “offers assistance and communication for wounded warriors as they continue life beyond injury…[and] a wide range of activities including educational sessions and sporting and social events that provide individuals a chance to connect with other wounded warriors.” The Senate Report notes that WWP categorized about 71% (or 3,197) of its program events held in 2014 as alumni events. In terms of both dollars and number of events, WWP’s alumni programs make up a large portion of its total programs. But just because money is being spent on program events, that doesn’t necessarily mean the money is being spent responsibly. In WWP’s case, the Senate Report questions the utility of certain WWP alumni events, including an October 2013 “Alumni-CA-Food & Wine Festival;” a March 2014 “Alumni-Family-VA Wine and Design;” numerous alumni “Texas Hold’em” poker and casino events; and an August 2013 “Alumni NY Midnight Pool Party.” In reference to these “program” events, the Senate Report states:
[P]aying for or otherwise supporting activities that include gambling and alcohol for veterans and WWP staff is problematic. Without additional information on the utility of the events, it is impossible to determine how these events are in line with WWP’s mission and purpose to provide rehabilitative services and support to wounded warriors.
The questionable nature of some of WWP’s program events should caution donors to the possibility of irresponsible program spending by charities – spending that may just be wasteful, or worse yet, counterproductive to a charity’s mission.
Program Exaggerations and Embellishments
All donors should want to know what a charity does with its donations, and usually, donors must get that information from the charity itself. This can be challenging since charities that want your money may have a financial incentive to overstate their case to impress donors. As a result, charities may exaggerate the impact of their programs in an effort to woo donations. This may be done by exaggerating program service volume, such as the number of animals rescued, the number of meals served to the hungry, or the number of vaccinations administered. Charities may also embellish the nature of their programs, claiming to provide more charitable services, or to spend more money on their programs, than they actually do.
Intentionally misleading donors about charitable programs can lead to fines, or more serious penalties, but only if charity regulators find out and take action. For example, after raising millions from unwitting donors over 20+ years, in December 2015, the National Children’s Leukemia Foundation was shuttered by the attorney general of New York for soliciting donations for non-existent programs. Additionally, in a May 2015 landmark joint action by the Federal Trade Commission (FTC), the District of Columbia and all 50 states, the long-running Cancer Fund of America and three of its related charities were shut down following allegations that included deceiving donors about their cancer patient program services. However, given the relative risk/reward trade off, some charities may feel that it is worth it to include some exaggeration when describing their programs, perhaps not fully realizing the harm they may be doing to the public’s trust in all charitable organizations.
As the largest veterans charity in the U.S., WWP should take very seriously its responsibility to be truthful and transparent with donors. Instead, WWP’s program advertising was misleading, according to the Senate Report. To tout its spending on veterans, WWP ran an advertisement that claimed: “In the first 18 months alone, WWP has spent $65.4 million on long-term support programs.” The ad appeared to be describing the Wounded Warrior Project Long Term Support Trust (the Trust), a related but separate public charity entity established by WWP in September 2013 “as a resource to assist severely injured veterans and service members in maintaining their quality of life and independence by providing resources and support…particularly after the loss of their caregivers.” However, when the Senate asked WWP how much money had been spent from the Trust, instead of responding $65.4 million (or more) to coincide with its ad, WWP responded that actually, zero dollars have been distributed.
It turns out that WWP’s advertised $65.4 million spent on “long-term support programs” mostly consisted of $55.1 million in funds that were merely transferred from WWP to the WWP Long Term Support Trust. Those transferred funds sit unused for veterans even though approximately 251 injured veterans and service members pre-qualified for the Trust as of June 2016, according to WWP. The remaining $10.3 of the $65.4 million was spent by WWP, but it was not spent by the Trust. Rather, WWP told the Senate that the $10.3 million was used for WWP’s “Independence Program,” which although it provides support and training for veterans and service members with moderate to severe brain/spinal cord injury or other neurological conditions, is separate from the Trust. Given the true nature of the $65.4 million in program “spending” WWP was advertising, the Senate Report is highly critical: “…[T]he advertisements were at best misleading because $65.4 million was not actually spent on veterans. Rather the money was simply transferred to the Trust. Misleading advertisements undercut the public’s trust in any organization.” WWP has informed the Senate that “on or around August 22, 2016” it stopped using the $65.4 million long-term support programs spending advertisement. That ad, however, was an inexcusable $55 million overstatement of WWP program spending on severely wounded veterans.
WWP also seems to be exaggerating the impact of its program events, including its “critical” alumni events. The Senate determined from WWP’s documents that WWP held over 5,800 alumni events between fiscal 2013 and 2014. The Senate Report notes, however, that “the events often had low rates of participation, sometimes one to two participants.” Supporting this, an analysis of the WWP events listed in exhibits to the Senate Report performed by the News4Jax I-TEAM (of Jacksonville, Florida) found that of the “more than 7,500” total program events WWP held in fiscal 2013 and 2014, 18% had just one participant, and nearly 50% had five or fewer participants. Additionally, the Senate Report states that a “significant portion of WWP’s alumni events were ‘sporting events’ with in kind ticket donations [e.g., for NFL, MLB and NBA games].” (WWP reported receiving over $1.3 million in donated event tickets in each fiscal 2013 and 2014.) The Senate Report also recalls that “it has been reported the WWP often invited the same veteran to multiple sporting events, but reported the activity as supporting multiple veterans.” Therefore, although WWP’s alumni program appears to be one of its major program accomplishments, WWP seems to have exaggerated the number of program events held and the number of “alumni” impacted by the events. Regarding WWP’s alumni program, the Senate Report concludes that it “Lacks Proper Oversight and Requires Additional Changes to Ensure Efficiency.” Unfortunately, since charities rarely have their program accomplishments scrutinized by outside authorities, it is likely that many other charities are also exaggerating their accomplishments.
WWP Is Taking Action, But What About Others?
As a result of the Senate investigation, WWP has taken action to address some of the problems that were identified. For example, in addition to pulling the misleading ad about its long-term support programs spending and representing that it will no longer hold “All-Hands Huddle” events, the Senate Report notes that WWP has revised its travel and spending policies; implemented additional protocols to monitor and prevent improper spending of expense accounts; and “taken other steps to mediate waste.” Additionally, WWP states that it will no longer include the value of donated ads and media in its reported program percentage; it intends to increase its program investments in mental health care and long-term support; and it has cut its executive staff by 50% and begun to reduce administrative costs. Michael Linnington, WWP’s new CEO as of July 2016, has told the Senate that “he recognizes the importance of improving transparency and accountability by clear reporting and being accountable to the wounded warriors and their families.” This aligns with the conclusion of the Senate Report, which states that WWP can begin to improve and restore the public trust “by being transparent and honest about the use of donor contributions and program activities that provide real benefits to veterans [emphasis added].”
It is encouraging that WWP has been open and responsive to the Senate’s criticisms and is making changes in an effort to correct problems and improve its efficiency. But what if the media had never exposed the allegations of WWP’s “lavish” spending? It is highly likely that WWP would still be operating at its former status quo, and none of the recent corrective actions it has been undertaking would be in the works. It should not have to take media exposés for charities to be held accountable to donors.
The Senate Report closes by noting the “integral role” that charities serve in our society and the “tremendous responsibility” they have “to be a force for good.” It then finishes with: “WWP should continue to strive to increase transparency and accountability to set a good example for others in the non-profit field.” CharityWatch hopes that other charities do take heed and make every effort, if they are not doing so already, to be as transparent and accountable as possible with the donating public.