Aid Charity’s 95% Program Claim Is ‘Unfair and Deceptive’
Posted on July 13, 2018
The California Attorney General (OAG) has accused Food For The Poor (FFP) of using an “unfair and deceptive” program percentage statement in its fundraising solicitations. In that “95% Statement,” which per the OAG, “created a likelihood of confusion or misunderstanding in the minds of potential donors,” FFP touted: “Fundraising and other administrative costs comprise less than 5% of our expenses; more than 95% of all donations go directly to programs that help the poor.” The accusation against FFP was made as part of a March 12, 2018 Cease and Desist Order filed by the OAG in which FFP is ordered to “immediately CEASE AND DESIST from including the ‘95% Statement’ in its solicitations to California donors (or other percentages of combined cash and non-cash donations used for programs).” The allegations included in the Order cover two issues of continued concern to CharityWatch: the valuation of donated gifts-in-kind, and the use of joint solicitation costs.
Food For The Poor, an international aid charity, ranks among the largest nonprofit organizations in the country in terms of annual revenue, reporting over $948 million in total support and revenue on its 2017 audited financial statements. Included in that total, however, are donated non-cash goods (or gifts-in-kind) on which FFP placed a value of approximately $800 million, representing more than 84% of the $948 million. Despite what FFP’s name might imply, food items do not make up the majority of the value of the gifts-in-kind FFP receives each year. Rather, it is donated pharmaceuticals and medical supplies that have historically comprised the bulk of the value.
According to the Order filed by the OAG: “The 95% Statement was deceptive because it included both cash and noncash donations. But noncash donations, including Food for the Poor’s overvalued pharmaceuticals, did not pay for any overhead or fundraising; only the cash donations did.” As mentioned in this statement, the Order also alleges that FFP has been overvaluing the pharmaceutical gifts-in-kind it receives and then distributes overseas. The OAG asserts that “[e]ven though the [donated] pharmaceuticals were prohibited from being distributed in the U.S.,” FFP used “very high” U.S. market prices to value them. As a result, the “appropriate international prices for most of the pharmaceuticals at issue were a fraction of the values Food for the Poor reported,” according to the OAG. One example of FFP’s “overvalued” pharmaceutical donation transactions included in the Order alleges that for a shipment to Guatemala in 2013, FFP valued the antibiotic Ciprofloxacin and the painkiller Tramadol at $553,627 (total) using U.S. prices; using the “appropriate international prices,” the total value was “less than $46,000.” If FFP is overvaluing its pharmaceutical donations, as alleged, it would serve to make FFP look larger and more financially efficient than it actually is.
In addition, the Order claims that Food For The Poor is improperly “shifting” fundraising costs to program expenses by inappropriately applying the accounting rule related to joint costs from a combined educational and fundraising solicitation (“joint costs”) in its financial reporting. (For more on joint costs, see Accounting Rules Allow Nonprofits Discretion in the Reporting of Joint Costs.) The OAG asserts that FFP failed to meet the “audience” criterion required to apply joint costs accounting because FFP “has admitted that it selected the recipients of its solicitations ‘[b]ased on prior giving history.’” In 2016, FFP “shifted” approximately $4.8 million from fundraising costs to program expenses in connection with joint costs, which represented about 5.2% of its total cash-based program spending that year, according to CharityWatch’s analysis.
The OAG is seeking penalty payments from Food For The Poor totaling $1,088,000 related to the alleged violation of certain California state charitable solicitation laws, according to the Order. FFP appealed the Order in a filing dated April 10, 2018. FFP claims in its appeal that its “solicitation materials did not contain any misrepresentations,” and that “[t]he program expense ratio highlighted in FFP solicitations is true and accurate when FFP’s expenses are viewed as a whole.” FFP’s appeal also states that its financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP) by an independent certified public accountant (CPA), and asserts that FFP has valued its pharmaceutical gifts-in-kind and allocated its expenses associated with joint costs in accordance with GAAP.
After the cease and desist order, Food For The Poor slightly changed the “95% of all donations” statements on its website to specifically mention donated goods: “… more than 95% of all donations, including donated goods, go directly to programs that help the poor” [italicized emphasis added]. Sometime between June 8th and July 9th, 2018, however, it appears that FFP removed the “95% of all donations” language from its website. For example, there are no longer any “more than 95% of all donations” claims on FFP’s “Frequently Asked Questions – FAQs” webpage, when there had previously been at least three, and the “About Us” section now touts that FFP is “one of the largest international relief and development organizations” in the U.S., rather than the 95% claim. Nonetheless, on its “Financial Information” webpage, FFP still displays its program services spending as 94.5% in the pie chart graphic for its 2017 financial activity.
Those familiar with CharityWatch’s rating methodology know that in our calculations of a charity’s Program Percentage and Cost to Raise $100, we adjust out the value of the gifts-in-kind received and distributed by a charity. The Order against Food For The Poor highlights two of the primary reasons our ratings exclude the value of gifts-in-kind: (1) we want to help donors understand how efficiently their cash donations are being raised and spent by charities; and (2) the reporting and valuation methods related to gifts-in-kind can be subjective and may vary significantly from one charity to the next. In addition, our ratings adjust for a charity’s application of joint costs, or as described in the Order, the “shifting” of fundraising costs to program expenses. CharityWatch believes that most donors do not consider such joint solicitation/educational activities to be equivalent to the substantive programmatic activities (e.g., providing aid to the poor) they are intending to support with their charitable donations. Therefore, we treat a charity’s reported program joint costs as fundraising expenses for the purposes of calculating the financial efficiency ratios that factor into our letter grade ratings. These adjustments CharityWatch makes in its ratings for gifts-in-kind and joint costs allow donors to compare charities on an apples to apples basis.
CharityWatch’s rating for Food For The Poor underscores the allegedly “unfair and deceptive” nature of FFP’s “95% Statement” described in the Order. CharityWatch gives Food For The Poor a “B-” grade, based on a $29 Cost to Raise $100 and a 65% Program Percentage in 2016. Therefore, while FFP may have claimed that “more than 95% of all donations” go directly to programs that help the poor, CharityWatch’s analysis lets donors know that FFP’s program spending was actually only 65% on a cash basis. This 30 percentage point difference, accounted for by gifts-in-kind and joint costs adjustments, illustrates the usefulness of CharityWatch’s methodology for measuring the financial efficiency of the many charities like FFP that report substantial amounts of gifts-in-kind transactions and/or significant joint costs. Furthermore, CharityWatch is the only major watchdog organization that provides donors with charity program percentages and fundraising ratios that are adjusted to exclude the valuation of in-kind donated goods. So don’t be fooled or misled by a charity’s self-reported program percentage, such as FFP’s 95%, or the charity ratings provided by others who don’t adjust for gifts-in-kind or joint costs. Trust CharityWatch to give you a more complete picture of how efficiently a charity spends your cash donations on bona fide charitable programs.