It’s a calculation often touted as the best measure of a charity’s effectiveness, showing how much of its spending is tied up in costs such as employee pay and benefits, office expenses and fundraising. Plenty of people use it when they’re making decisions about where to give their money.
A charity generally should spend no more than 35 percent of its total expenditures on overhead, leaving at least 65 percent for services, according to the Better Business Bureau Wise Giving Alliance’s Standards for Charity Accountability.
The Herald’s financial review of 40 of the Tri-City area’s biggest and best-known nonprofits found the vast majority were within that standard.
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Still, a growing number of nonprofit leaders — including from the BBB — are warning of an over-emphasis on the calculation. In a recent open letter to “Donors of America,” the CEOs of the BBB alliance, GuideStar and Charity Navigator — three charity watchdog groups — called the overhead ratio “a poor measure of a charity’s performance.”
Many charities actually should spend more on overhead, the CEOs argue in the letter, saying investing in training, planning, evaluation, internal systems and fundraising allows charities to sustain themselves and make improvements.
“When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called ‘The Nonprofit Starvation Cycle.’ We starve charities of the freedom they need to best serve the people and communities they are trying to serve,” the letter says.
The CEOs also reference statistics that hint at the sometimes imprecise nature of overhead calculations — a reality that can complicate charity-to-charity comparisons.
The Herald ran up against that comparison issue in its financial review. Reporters over the last several months gathered Form 990s, which provide a picture of a nonprofit’s finances in a given year, including the amount spent on program services versus overhead.
The review found that more than three-quarters — 31 of the 40 nonprofits — reported spending at least 80 percent of their total expenditures on services on average over three years, meaning that no more than 20 percent went to overhead.
Of those, about a quarter spent at least 90 percent on services, according to information in the financial records. But the review also revealed differences in the way the nonprofits reported what they spent on services and overhead — something that’s not surprising given the nature of 990 reporting.
It’s not an exact science.
For example, of the 40 nonprofits the Herald reviewed, many counted at least some employee expenses as service expenses — something they’re allowed to do if the employee duties directly relate to program services.
But not all did.
There were other variances too.
The St. Vincent de Paul Society in Pasco, for instance, counted its 2011 office expenses — totaling $2,048 — as a service expense. But the Tri-Cities Food Bank during its 2010-11 tax year counted its office costs — $3,737 — as overhead.
Both groups had among the lowest overhead in the Herald’s review.
Another nuance: some local nonprofit foundations that support parent organizations, such as the Lourdes Foundation and Tri-Cities Cancer Center Foundation, have a significant portion of their overhead covered by that parent entity — something that’s not necessarily clear when examining the 990s. When that was considered, their overhead ratios dropped.
The knowledge and experience of the person who fills out the forms can make a difference too.
The bottom line is, “you don’t always get uniformity” when it comes to the Form 990s, said Scott Brunson, a certified public accountant with Christensen King PC in Richland.
He and a colleague told the Herald donors should be careful about using 990s to compare charities.
The forms do contain information that can be valuable when making decisions about giving. For example, the section asking for a statement of program service accomplishments is a good way for the nonprofit to tell the public about what it does, said Caryle Brown, a fellow CPA with Christensen King.
In their open letter, the three CEOs — Art Taylor from the BBB Wise Giving Alliance, Jacob Harold from GuideStar and Ken Berger from Charity Navigator — don’t discount the overhead ratio altogether. They say it has a role in evaluating charities, noting it can help root out fraud and poor financial management.
They also suggest paying attention to other factors, namely a nonprofit’s transparency, governance, leadership and results.
Since their letter came out last month, others in the nonprofit world have sounded off in support. However, there’s been dissent, too, with some warning that other methods of evaluation — such as by trying to measure a charity’s impact in a community — can be even more unreliable.
When it comes to making decisions about giving, John Neill of the Tri-Cities Food Bank said he personally feels better about supporting groups with a high percentage of costs going to services instead of overhead expenses.
Other local charity and foundation leaders mentioned having conversations with charity leaders and examining the charity’s track record in the community when deciding where to give.
“I would want to know their reputation in the community, their longevity. Are they a nonprofit? Does (its mission) align with (the donor’s) values?” said Connie Gillispie, chief development officer of Lourdes Foundation in Pasco.
Brown, the CPA, suggested making a trip to the charity’s home base. In her view, “the best way to see if your charity is doing what you want is to go visit them,” she said.
Reporter Kristi Pihl contributed to this story. Sara Schilling: 582-1529; firstname.lastname@example.org; Twitter: @saraTCHerald