Nonprofit Overhead Cost Study

Can You Teach a Watchdog New Tricks?

posted by
Mark Hager, Ph.D.
,

Associate Professor,

ASU School of Community
Resources & Development

This post is about a bad dog and the role that a class of ASU students is playing in its quest for redemption.

Back in the early 1990s, I had a day job studying nonprofit spending and reporting as part of something called the Nonprofit Overhead Cost Study, a joint project between the Urban Institute and Indiana University. The project grew out of the observation that nonprofits were not tracking their spending very well, and many were putting down some pretty crazy numbers on their annual reports and Form 990s. It seemed that the world wanted nonprofits to spend nothing on administration and fundraising, and many were reporting just that.

Turns out that part of the problem was that many nonprofits didn't understand functional expense accounting or reporting rules. Another part was that many nonprofits didn't have systems in place to track and allocate expenses accurately. However, story after story pointed to pressures from donors for nonprofits to invest as little money as possible in administration and fundraising. After all, people want their contributions to go to programming. The average donor doesn't want to pay for "frilly" stuff like accounting software, talented executives, and fundraising campaigns. So, to conform to expectations, nonprofits had three bad options. One was to keep making necessary investments in overhead and potentially have donors walk away. A second was to trim administrative and fundraising expenses to the bone. The third was to fudge the accounting.

Where do donors get trained to think that investment in administration and fundraising is bad? Well, lots of places. In their quick-takes on "making smart donations," media stories frequently tell donors to pick the charity that spends the least on administration and fundraising. Magazines like Forbes, U.S. News and World Report, and Money routinely publish stories that emphasize program spending and fundraising cost ratios. Federated campaigns often "help" their donors make giving decisions by prominently publishing such ratios next to the organization's names. And those ratios are two of the accountability standards at the Better Business Bureau.

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