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Emerging issue: fundraising costs

February 28, 2001

Fundraising costs: A game of one-downmanship?

This article is excerpted from the September/October 2000 issue of Advancing Philanthropy.

By James M. Greenfield, ACFRE

One thing people in the fundraising community hate to talk about -- but always have an opinion on -- is fundraising costs. As the stream of letters over several issues in our Give & Take column reveals, there's little consensus about whether cost-of-fundraising standards are good for the charitable sector and what exactly those standards, if any, should be. The 'how to' calculate fundraising costs is part of the problem -- there is no FASB or AICPA guidance except on the issue of joint cost allocation (which applies to direct mail almost exclusively).

A May 18, 2000, article in the Chronicle of Philanthropy, 'Charities zero sum filing game," sheds light on a new aspect of the fundraising cost issue: whether or not some charities have any fundraising costs. The Chronicle found that nearly a quarter of the organizations it investigated that received more than $500,000 in private gifts in 1996 reported no fundraising costs on their Form 990.

Some of those organizations doubtless had legitimate reasons for reporting no fundraising costs. But most charities are either misinformed about the reporting requirements or are misleading the public and potential donors about the effectiveness and efficiency of their fundraising programs by failing to report the percentage of donated funds spent.

A need to mislead?

Most fundraisers would scoff at the notion of a typical charity saying it has no fundraising costs. But it isn't difficult to understand why an organization might want to downplay its fundraising costs. With the rapid growth in the number of charities over the past 15 years, competition for the charitable dollar has become fierce. Couple this trend with the increase in disclosure requirements and the wide availability of financial information about charities, and it's easy to see why most charities are trying to make their fundraising costs appear minimal.

If your organization is one of 10 charities working on Cause A and you report the highest level of fundraising expenses, you're at a disadvantage. You don't want your donors to feel that their contributions are going to fund solicitation efforts rather than necessary services. Of course, if you lower your costs, other groups might do the same, and the whole process spirals downward -- which might be a good thing as long as real savings are occurring and inefficiencies are being eliminated. But not if it becomes a game of reporting one-downmanship.

At this point, many readers may be thinking that there's more to making an informed giving decision than looking at fundraising costs, and that the Form 990 is not the best tool for donors to use when they're deciding whether or not to give. You're absolutely right, and both of those issues deserve their own articles. But fundraising costs do often play a role in the decision to give, and it's the responsibility of the organization -- and its fundraisers -- to ensure that those numbers are reported fairly and accurately.

Black and white and read between the lines

As you might expect, AFP's Code of Ethical Principles and Standards of Professional Practice is straightforward on this issue. We can look to Standard 5: 'Members shall comply with all applicable local, state, provincial, federal, civil and criminal laws.'

Standard 7 is also helpful: 'Members shall take care to ensure that all solicitation materials are accurate and correctly reflect the organization's mission and use of solicited funds.' While some might point out that the Form 990 is not a solicitation device, others would argue that any material prepared by a charity that a donor might use in making a decision to give is a form of solicitation. Given the ease with which donors can now acquire an organization's Form 990, fundraisers would do well to begin thinking of it from that perspective.

A few readers might also argue that fundraisers should not be responsible for the accuracy of information reported on the Form 990. After all, that's the job of the chief financial officer or a similar official. That's true to a certain extent, but the chief development officer of an organization ought to be reviewing that document (or, at the very least, skimming it for key items) before it is finalized. A fundraiser who isn't catching reporting errors or who fails to bring them up is as guilty as someone who simply writes in 'zero' for fundraising costs.

Of course, the issue isn't really whether or not the AFP Code covers such conduct. Everyone agrees that fundraising costs should be reported accurately. But, again, charities want their costs to be low. We all know that our organizations do great work, regardless of the costs. What harm can come if we fiddle a bit with the numbers or 'forget' to fill in that line on the Form 990? The IRS doesn't seem willing to investigate organizations simply because they report their fundraising costs as zero. Besides, we know that great things will happen if donors give to our organizations.

And great things probably will happen, but bad things may happen, too. When reporting inaccuracies come to light, they shake public trust in the entire sector. Can you afford to have a local newspaper run a story on how your charity hides its fundraising costs? Do you want to try to explain to a major donor why an Internet search revealed no fundraising costs on your Form 990? Misstating fundraising costs gives the sector a black eye and causes donors, regulators and the public to lose confidence in our desire and ability to be accountable.

We need to take the high road when it comes to costs. An efficient fundraising infrastructure is necessary to support philanthropic causes. That's a fact. We've become almost afraid to talk about fundraising costs because they can be so difficult to explain, but underreporting does nothing to address the issue. The profession needs to openly examine why costs can be so difficult to measure.

Only when the public becomes aware of what it takes to raise money will they really appreciate what we do and be less wary of helping us defray expenses. That's not going to happen until all organizations accurately report all their costs.

James M. Greenfield, ACFRE, is senior associate/vice president of The Alford Group, Inc. in Newport Beach, CA.

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