You may have read that Oregon passed a law in June (House Bill 2060) imposing restrictions on nonprofits spending less than 30% of their annual gross income on their charitable mission. This law would remove the tax exemption on disqualified donations and would eliminate any property tax exemptions the organization receives in Oregon, in addition to eliminating other subsidies. Doesn’t that sound great? Let’s punish those darn low percentage performers!
Not so fast…things are not always as they seem.
I believe it is naive to analyze organizational quality simply on one measurement. One has to really look at the financial statements and see where the money is spent, not just pull out a single percentage. That’s like saying “I’m a great money manager because I only spend 30% of my income on groceries”. There is no indication whether I am buying high quality organic produce or a ton of potato chips to feed my kids. Or maybe I’m just not feeding them enough.
Assigning a Value Judgment
Not all financial statements are created equal and percentage of income spent on mission is not the sole indicator of the good work an organization does. This is further complicated by the way expenses are classified. I’ll give you two scenarios:
Organization A: Spends 10% of income on their mission, zero dollars on salaries, and the bulk of their gross income goes back to paying outside fundraising companies for services. The organization reports that their primary program has provided health services for 3,500 uninsured children.
Organization B: Spends 90% of their income on mission, but most of that is actually paid out as salaries to board members. The primary activity of the organization is to pass through donations to other organizations. Most of the expense is reported as program related because the board members sit around and talk about who they write donation checks to. Their tax preparer feels their work qualifies as a program expense. The organization does not report on any program outcomes.
Which organization is better? Can one even draw a conclusion about which is “better” based solely on percentage spent on mission? Is either one being effective? Under the Oregon law, Organization A would face consequences while Organization B would not. Arguably, neither organization is maximizing their donations, but at least Organization A has a reportable outcome.
Turning a Blind Eye
The Oregon law targets organizations using outside fundraising companies because of the way money paid to those companies is accounted for. It winds up on the tax return as a fundraising expense versus administrative or program expense. That expense goes ‘against’ the percentage of income spent on mission.
The quality of outside fundraisers varies, as does the quality and motives of board members. Applying a percentage measurement seems to oversimplify the core issues. It also punishes one group of organizations while ignoring other possibly more egregious abuses of donor funds.
I do think there should be some measurement for effective use of donated funds. I’ll share my riveting thoughts on an alternative assessment next time. I’m sure you can’t wait!
Meanwhile, what do you think? Is 'percentage performance' even something that government should start legislating?