The pie graph showing Operation Blessing International’s expenses (above) is almost completely bright blue. Just two tiny slivers show that less than 2 percent of its budget goes to administrative and fundraising costs.
Those slivers make up the ministry’s overhead—a necessary component of charity work that has long been questioned by donors and downplayed by nonprofits.
But new metrics from Charity Navigator, the country’s top charity-rating site, represent ongoing efforts to de-stigmatize overhead in favor of a broader picture of financial health.
Operation Blessing is a humanitarian aid group with a budget of $250 million. Like most nonprofits, it emphasizes efficiency and assures donors it will “leverage every dollar of support to bless as many people as possible.”
That reassurance is necessary because a third of US donors believe charities can’t be trusted to handle money well, according to a Chronicle of Philanthropy poll.
Donors are most concerned that nonprofits spend too much on themselves. In the 2015 poll, 40 percent said leaders are paid too much; 37 percent said too much was spent on salaries or other administrative costs. And though 68 percent said they gave based on a charity’s effectiveness, half said they preferred organizations with low overhead.
But the negative perception of overhead spending has started to shift. Philanthropy experts have backed away from the longtime go-to measure of nonprofit financial health. And the country’s largest charity-rating system recently adjusted its financial metrics, including reducing requirements for administrative expenses.
“Overhead does matter, but it shouldn’t be the only thing that donors look at,” said Sandra Miniutti, spokeswoman for Charity Navigator. “You can’t expect a charity to spend 100 percent on its programs. It’s unreasonable.”
Charity Navigator still lists program expenses as the top financial performance metric for each charity’s profile. But its new metrics do away with a requirement that in order to have a perfect score in the administrative expenses category, organizations must eliminate overhead. It now allows for a range of overhead costs depending on a charity’s particular work. Food banks, for example, should spend less on overhead than Christian radio, which has to use expensive airtime to raise funds.
So which expenses count as overhead? That’s still not clear-cut, said Dan Busby, president of the Evangelical Council for Financial Accountability. Building upkeep, office supplies, and administrative staff typically get designated as overhead, but there isn’t a precise way to delineate program expenses from “support” expenses.
“The difference between [two charities’] overhead may be a difference of accounting,” he said. “It’s an upside-down system.”
In 2013, Charity Navigator partnered with fellow rating sites GuideStar and the BBB Wise Giving Alliance to campaign against the “overhead myth."
Looking at administrative costs “can be a valid data point for rooting out fraud and poor financial management,” the three organizations wrote in an open letter to donors. “In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance does more damage than good.”
Many charities should actually be spending more on overhead, they wrote. “Overhead costs include . . . investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs.”
When charities “starve” themselves to please donors, they lose “the freedom they need to best serve the people and communities they are trying to serve.”
The rating sites released a second open letter to charities in 2014, asking them to fight the stereotype by understanding—and telling donors—how much their results cost.
“You know as well as we that nonprofits are . . . prone to the ‘Nonprofit Starvation Cycle’: a spiral of donor demands, underinvestment in core costs, and limited results,” they wrote. “This starvation cycle hurts nonprofits and donors, but, most important, it hurts our shared work for a better world.”
Judging a charity by its overhead is “like rating a pastor by the color of his suit,” said Bruce Wydick, a University of San Francisco economist who evaluates charities’ measurable impact on poverty. “It’s really an accounting measure. We should be looking at the impact or benefit of every dollar.”
Jessica Jackley, the Christian co-founder of Kiva, told CT last year that high overhead is sometimes worth it. Kiva spends about 18 percent on overhead and scored 97 out of 100 on Charity Navigator’s 2016 ratings.
“I don’t think there should be a magic number, like you can only have 10 percent overhead,” she said. “But if an organization is transparent and getting the job done—for instance, if an organization has 50 percent overhead but they’re curing cancer—I’ll happily send them a donation.”
Charity Navigator’s new measures changed the star ratings for more than a quarter of the 8,000 US groups on its site—but not because of overhead costs.
Operation Blessing and Compassion International were among 8 percent of charities that lost a star for failing to score high enough on a new metric that pits the money organizations have committed to spend each year (liabilities) against their existing financial resources (assets).
“An unintended consequence of . . . this new calculation is that it affects charities such as Operation Blessing that have significant non-cash assets and liabilities” like gifts-in-kind inventory, said spokesman Chris Roslan. “Operation Blessing is the same strong organization with the same strong balance sheet it has held for many years.”
The liabilities-to-assets ratio indicates whether in a worst-case scenario—if funding disappeared—an organization could continue to pay its obligations, debts, and ongoing expenses.
As a child sponsorship organization, Compassion says it doesn’t run the same risk of being unable to cover costs without stowing away cash. There’s a direct correlation between its funding and its core programs: The more or fewer people sponsor children, the more or fewer grants it distributes.
“We don’t keep large cash reserves,” said Todd Dodge, Compassion’s vice president of finance. “With our donors, we want to take their money and get it to the field.”
