Private companies make big profits raising money for nonprofits
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Nonprofit charities in the Golden State should have been raking in the cash in 2004. Gracious Californians gave $60 million more toward fundraising campaigns that year than they did in 2003, totaling almost $293 million. The following year, donors gave even more: $332 million.
Yet despite the increasing generosity of Californians, the percentage that nonprofits actually took away from those campaigns steadily decreased from 2003 to 2005.
Most of the gains went to private, for-profit fundraising companies hired to conduct telemarketing services and coordinate special benefit events like gala dinners, rodeos, and variety shows.
Such companies charge steep fees and commissions that frequently leave charities, especially smaller or less experienced ones, with little or even nothing at all, according to state disclosure records.
Commercial fundraisers collect millions each year relying on the public image of selflessness projected by nonprofits devoted to promoting cultural literacy, saving lost or exploited children, finding cures for deadly diseases, or improving the welfare of defenseless animals.
Some desperate nonprofits elect to allow commercial fundraisers to take a percentage of the money they raise, at times as much as 80 to 90 percent. Alternately, larger charities may agree to set costs and fees associated with the campaign, but that strategy can also prove costly.
For example, the San Francisco Museum of Modern Art hired the Los Angeles company SD&A Teleservices in 2004 for a phone solicitation campaign that raised $12,000. But because the company's fees were greater than the contributions received, the museum had to pay $19,854 more to cover the venture. Similarly, the San Francisco Ballet lost $3,400 in 2005 to the same company after SD&A raised $12,745 from donors, thousands less than what it charged.
Several people we interviewed said the benefits of a fundraising campaign might not materialize until later if contributors eventually become long-term supporters. But unless the typical donor has time to find out how much ultimately makes it to the cause they care so much about, they're unlikely to be aware of the extraordinary costs involved in nonprofit fundraising.
"The charity agrees to it because they want the easy money that they don't have to do any work for," Daniel Borochoff, president of the American Institute of Philanthropy in Chicago, told the Guardian. "Then the person goes out and spends $1 million to get that $200,000, and the charity tries to rationalize it by saying 'Well, it's money we wouldn't normally have. We don't have staffing for fundraising.' But they're ripping off the public and disrespecting the intentions of the people who gave that money."
The Los Angeles Times published a months-long investigation July 6 that examined required forms submitted to the California Attorney General's Office showing the total revenue generated from 5,800 nonprofit fundraising campaigns and how much of that money went to the charities.
Between 1997 and 2006, the paper discovered, 430 campaigns raised a total of $44 million but in each case, every dime went to the fundraising company. Charities lost money in 337 more cases. In hundreds of instances, charities entered into contracts that assured them only 20 percent or less of the funds raised, regardless of how successful the campaign turned out to be. The AIP recommends spending no more than 35 cents on each dollar raised. The Times also pointed out that donors enjoy tax deductions from their contributions, even if huge portions go to for-profit companies.
"Nonprofits spend a lot of money attracting donors and then they fall away the next year, so they have to reach out and attract even more donors," Elizabeth Boris, director of the Center on Nonprofits and Philanthropy in Washington, DC, told us. "So there's a lot of churning that goes on, because a lot of the same people don't give to the same organization year after year. It is an expensive process of getting the names and contacting people."
Because California is behind in processing the required disclosure forms, the Times had to specially request records from 2006, meaning more recent figures aren't available. The Guardian took a far less extensive look at the records, but we still found plenty of examples of charities earning astonishingly low rates of return.
In 2004, Campbell-based TBS Productions raised $418,377 for the San Francisco Police Officers Association and its annual "Parade of Stars" event held at the Palace of Fine Arts. But just $87,094 made it into the union's nonprofit Community Services Fund, which redistributes it in small increments to a variety of causes.
"I've wrestled with this since I've come on," said POA President Gary Delagnes. "There are two ways of looking at it. Do we really want to lend our name to an outfit that's taking 80 percent off the top? ... The decision we made was: you know what, we're to do so much good with the charitable money that it's worth it to us."
That same year the Oakland Police Officers Association also hired TBS for its "Cavalcade of Stars" event. The company raised $402,515 on behalf of the East Bay union for charitable purposes, but only $88,603 remained after covering the event's costs, a return to the union of 22 cents on the dollar.
That year, TBS coordinated events for at least 16 groups across the state representing law enforcement and emergency personnel, from the San Jose Firefighters Burn Foundation to the Fresno Deputy Sheriffs Association. But almost no one received a better return rate than 20 percent, and two raised just 15 cents on the dollar after accounting for the for-profit company's take. No one at TBS was available for comment when we called.
More than 250 fundraising campaigns in California netted 20 cents or less from each dollar raised for charities in 2004, according to figures maintained by the state.
Rich Steinberg, a longtime scholar of nonprofits at Indiana University, said several factors mitigate all this. He explained that the United States Supreme Court has been reluctant to permit heavy regulations on charity fundraising because a seemingly poor cost ratio isn't necessarily bad for a nonprofit.
"Big charities could do everything wrong but still have a good cost ratio" because their support is widespread, Steinberg said. The San Francisco Ballet and SFMOMA, for example, have done much better in some telemarketing campaigns, earning from 54 percent to 81 percent in return rates despite other times losing money.
Could it be that there are too many small, inefficient nonprofits with similar missions, each created in the belief that government wasn't filling some need? Perhaps. But attempting to curtail them could undermine the democratic spirit that leads to their creation.
"We should make it legitimate for any group of idiots to get together and try to do something good," Steinberg said.
If they want to succeed, he said, charities should not accept terms that give fundraisers a percentage of the donations. Instead they should establish fixed fees so that every dollar beyond that amount goes toward services. Second, to ensure more favorable rates, they can require competitive bidding among fundraisers.
Ken Larson, director of public policy for the California Association of Nonprofits, said that few of the tens of thousands of charitable organizations registered in California use commercial fundraisers to attract donors, a fact confirmed in reports compiled by the attorney general. Many hire full-time professional fundraisers to seek foundation and government grants or relationships with repeat donors, intangible benefits that can go beyond immediate fundraising goals.
As for telemarketing, Mike Smith, chief operating officer of New Jersey-based Charity Navigator, suggests that when donors receive a call, they can just hang up and cut a check directly to the nonprofit.
The debate over nonprofit fundraising costs is nothing new, but with information increasingly available on the Web, consumers are in a much stronger position to give wisely.
The San Francisco AIDS Foundation publicly and angrily parted ways with its commercial fundraiser, Pallatto Teamworks, in 2001 due in part to a dispute over how much the company charged to operate the California AIDS Ride. The charity has since created its own fundraising arm, steadily improving its rate of return from an average of 54 percent over the past seven years to 66.5 percent last year.
The foundation uses another company, MZA Events, to manage its annual AIDS Walkathon, which has averaged a healthy 63 percent return since 1999 with improved results over each of the last three years.
But officials with the SF AIDS Foundation believe telemarketing has enabled it to achieve greater public awareness. It also began moving the task in-house during the past six months and anticipates greater savings.
"Every dime we save in production is a dime that can go to our clients and our programs and our services," said Dave Ellison, spokesperson for the foundation. "We're always extremely aware of how important it is to keep the costs down because we see the benefits every day in the lives of our clients."