Balancing the Mission Checkbook

Wouldn’t every nonprofit, and the nonprofit sector overall, love to be able to increase contributions by 50%? No problem!

I don’t actually have the magic trick to make more dollars come in the door. The big increase in contributions is already in our hands in the form of volunteer labor. It’s a fact. When the value of volunteer labor is included, the total amount of contributions to US nonprofits increases by over 50%.

Here’s the data in a nutshell: The Corporation for National and Community Service just released their annual Volunteering in America study. They report that 61 million Americans volunteered in their communities in 2007, donating 8.1 billion hours of service worth more than $158 billion. The recent Giving USA survey for 2007 reported that cash contributions exceeded $300 billion for the first time. This includes individuals, bequests, corporations, and foundations. The actual value of charitable giving, when donated labor is included, is over $450 billion.

Think about that – 8.1 billion hours is roughly equivalent to 4 million full-time employees. Wow.

Where does this $158 billion calculation come from? Every year, Independent Sector calculates an hourly equivalent for volunteer time. The current value is $19.51 per hour, which is reportedly based on the average hourly earnings of all production and non-supervisory workers on private, non-farm payrolls as determined by the Bureau of Labor Statistics. Independent Sector takes this figure and increases it by 12% to estimate for fringe benefits. (I will leave for another discussion the fact that many employees of nonprofit organizations earn less than this amount.) I encourage every nonprofit with volunteer labor to calculate this value for themselves.

Unfortunately, it’s too easy for this important economic information to be lost because of accounting rules. Most of this economic value is never reported in audited financial statements or IRS 990s. The applicable accounting rule, FASB 116: Accounting for contributions, limits the recognition of the financial value of volunteers to a very narrow definition. Because of this, the actual economic profile of many nonprofits is skewed. When comparing nonprofits to for-profit enterprises, we usually dwell on the role of contributed income and subsidy. The importance of contributed labor is easily lost. I understand why the accounting profession is concerned about accuracy and reliability when recognizing the value of volunteers. However, it’s time to revisit these accounting rules. We’ve been willing to overlook this financial under-reporting for years, but I think the importance and value of volunteers is becoming too significant to ignore for much longer.

End note: There’s a bit of local pride to be found in the new volunteering study. Minnesota ranks #3 by state and the Twin Cities is #1 for large cities in the percentage of the adult population who volunteer. Learn more about how to make the most of volunteers from Hands On Twin Cities.

Continuing a theme from last week, during this year-end fundraising season I’ve come across quite a few “tips” for donors about how to select charities to support. Universally, every list includes advice to review the portion of expenses devoted to program compared to administration and fundraising. The responsible advisors generally suggest that program expenses represent at least 70% of the dollars. While I wish that we could move away from using this ratio as a primary measure, I agree that program expenses should dominate any budget. I have a problem, though, when the advice goes further and characterizes administrative and fundraising costs as a poor use of resources. This is especially important when, at the same time, we see more and more opinion pieces that demand greater openness and measurement of impact and effectiveness. The Wall Street Journal published one the other day, December 10th. The writer chastises charities for failing to disclose and share information about their financial activities and the impact of their work. She suggests better use of websites, annual reports, and evaluation and measurement systems and reports, all of which I wholeheartedly support. However, these critics need to understand that you can’t have it both ways. If donors and the public want nonprofit organizations to be accountable, transparent, well managed and governed, then we need to spend some money to build and maintain staff and systems to accomplish these important goals – and these costs are administrative costs.

In the same issue of the Wall Street Journal was an accompanying article, “Checking on Charities,” which offers advice about how to evaluate a charity, including the comment “Let’s start with how much the charity spends on its work.” Communication and disclosure activities would not be considered by our accountants to be part of our “work,” so when we build good systems for measuring and communicating impact, then we will spend more on administration, not less. I fear that we could feel a backlash as the expense ratio inches up.

Part of the problem probably lies in definitions. An outside donor likely has his or her own idea or impression of what is considered “administration,” but the actual expense classifications are dictated by FASB (Financial Accounting Standards Board) and IRS rules. Nonprofits Assistance Fund has prepared a short summary of these rules, Overhead Costs. As an example, here are some of the expenses we classify as administrative at Nonprofits Assistance Fund:

• Completing the financial audit and 990
• Organizational communication, including annual report and website
• Planning evaluations
• Consultants to create a system to monitor evaluation results and impact
• Submitting information to the state attorney general, Guidestar, and other watchdog agencies

We are committed to strong infrastructure and greater disclosure and accountability, and our administrative expense percentage has increased as a result. We also do great work in the community. We can certainly do a better job to educate our donors on the value of our administrative costs and how these best practices allow us to do our “real work” most effectively. And I do worry about the impact of the contradictory clamor.

Are you also concerned about this double bind – do you hear more demand for disclosure and information at the same time that administrative costs are criticized?