NEW YORK (AP) — All Hands & Hearts makes a commitment in large letters on its website homepage: “95 cents of each dollar is utilized for our initiatives.”Thank you for reading this post, don't forget to subscribe!
Like various charitable institutions for years, the Massachusetts-based disaster relief nonprofit feels the pressure to minimize operations as much as possible. Convincing donors and the public of the necessity to invest in operations and shared services has been described as “a challenge for nonprofits” by Izzy Smith, the chief information officer of All Hands & Hearts, an organization that mobilizes volunteers to respond to natural disasters. It is an ongoing challenge.
Smith said, “As a nonprofit, financial instability significantly reduces our effectiveness and efficiency.”
‘Uncharitable,’ a new documentary directed by Stephen Gyllenhaal, the same filmmaker behind ‘Paris Trout’ and ‘Losing Isaiah’, aims to transform that perception. The film narrates the story of Dan Pallotta, a former lawyer who initially conceived the idea of raising funds through cycling events and road races for AIDS and cancer research and treatment. Pallotta has long argued that nonprofits face excessive pressure to decrease salaries, minimize operating costs, and delay long-term investments, all of which hinder organizations from fulfilling their missions.
Pallotta agrees that some philanthropic leaders, including Darren Walker, the CEO of Ford Foundation who appears in the film, have increased funding for general causes. However, he hopes the documentary will reach a broader audience of smaller donors or those who are still undecided.
Pallotta said, “I hope it becomes the climate change equivalent of ‘An Inconvenient Truth.’ It brings attention to the issue on a larger scale so that charities are assessed in a more comprehensive manner. Knee-jerk reactive measures won’t solve problems.”
While his campaign is personal, parts of Pallotta’s argument have received support from nonprofit leaders, activists, and researchers over the years. In 2002, Pallotta Teamworks, a for-profit fundraising company that Pallotta founded, closed down after being sued by some organizations that had hired it to manage fundraising events. The organizations claimed that the company took a large portion of the raised funds.
In 2008, Pallotta published a book with the same title, ‘Uncharitable’, which served as the basis for his TEDTalk and now the documentary.
For almost two decades, researchers and nonprofits have warned about the detrimental consequences of reducing general operating expenses, also known as overhead costs, for nonprofits. A major survey conducted in 2004 by the Urban Institute and several partners discovered that underinvestment in an organization’s infrastructure diminishes its effectiveness. In 2009, researchers at The Bridgespan Group observed that despite these findings, many nonprofit leaders still planned to cut overhead spending.
These studies revealed that rating agencies such as GuideStar (now part of Candid) and Charity Navigator contributed to this pressure by primarily focusing on the financial data provided by nonprofits in their tax returns. In 2013, the three largest rating agencies joined forces to challenge the “overhead myth” and issued open letters to donors and nonprofits. These agencies urged donors to consider the impact and outcomes of their donations when choosing where to contribute, rather than solely focusing on administrative costs and the percentage of revenue spent on fundraising.
In September, Charity Navigator announced a significant overhaul of its rating methodology, including a substantial change in how fundraising and administrative costs are calculated. The revision aims to help potential donors evaluate whether a nonprofit is achieving its mission, according to Michael Thatcher, the organization’s president and CEO.
Thatcher said, “Donors should ask, ‘What does the money do? Where was the money spent?’ Pie charts with percentages are good. They’re easy. But showing the actual impact made is challenging.”
Rating agencies, including Charity Navigator and the BBB Wise Giving Alliance, still recommend that 65-70% of a nonprofit’s revenue should be allocated to programming. The BBB Wise Giving Alliance stated that their opinion research indicates that “financial ratios remain one of the top five trust indicators used by donors, especially among older and wealthier participants.”
Elizabeth Searing, an assistant professor at the University of Texas at Dallas, highlighted how donors and foundations embracing effective altruism serve as an opposing force within the nonprofit sector. Through promoting some degree of efficiency, these donors, using slightly different terms, continue to push nonprofits to reduce their operational costs.
Searing stated, “No one intends to starve a nonprofit, but no one intends to be inefficient either. Consequently, organizations find themselves caught between two strawmen portrayed by the factions in this argument.”
Since the pandemic, many donors, foundations, and nonprofit boards have recognized the importance of retaining funds from year to year to help nonprofits deal with unforeseen circumstances. Similarly, more donors understand the value of providing unrestricted funds, which allow nonprofits to adjust plans, invest in staff, and enhance infrastructure or technology.
AP’s coverage of philanthropy and nonprofits is supported through its collaboration with The Conversation US, with funding from the Lilly Endowment Inc. AP is solely responsible for this content. For the complete collection of AP’s philanthropy coverage, visit https://apnews.com/hub/philanthropy.
Thalia Beatty, The Associated Press