Tuesday, November 18, 2014

Charitable Giving

The adults in the ERJ extended family no longer exchange gifts at Christmas.  We already have too much "stuff".  For the last several years we have been pitching the money into a jar and "Grandpa" decides where to send that money.

I suspect that other's thoughts also turn to charitable giving at this time of year.

Person-to-person, focused or umbrella

Amish and others in the Mennonite tradition have a strong belief in person-to-person service as charity.  It is their belief that charity is a Biblical directive that is too important to delegate.  Further, the risk in paying others to perform your charitable duty is that the donator will feel "superior" to or "separate" from the recipient.  Person-to-person is the ultimate of focus.  The downsides are the limits on how far one can project one's charity, the limits on the skill-sets (and ultimately the problems that can be solved), and the risk of getting bamboozled by a con artist. 

Focused Charities
A focused charity is a charity with a very clear and limited scope of action.  Examples include pet rescue organizations (Example), homeless shelters (Example), community organizations (Example) as well as organizations like Scouting,  Big Brothers and Nature Conservancy.

Umbrella Charities
Umbrella charities present the donor with a dilemma.

At their best, they are low overhead operations due to the huge revenue the fixed costs are amortized over.  They have the ability to "pull" a dizzying array of skills and talents.  They hold assets in reserve for events like earthquakes and tornadoes and epidemics.

At their worst they are unfocused and they subsidize activities that are repulsive to specific donors.  Peoplen who are pro-life are horrified to learn when a portion of their donations subsidize abortion clinics.  Or monies might go to "community activists" who organize and participate in anti-business protests. Another downside of umbrella charities is that they can become over-focused on fund raising.  The flip size of this downside is when the recipient organizations loses sight of their core constituents as they try to mold themselves to be more attractive to the umbrella funders.

At their most disingenuous, umbrella charities offer a "designated giving" campaign where they sell the illusion that your donation will "go" to the charities of your choice.  If questioned further, they will tell you that your dollars will be the "first ones allocated".  What they really don't tell you is that the organization will then "top off" the funding of the charities to the levels predetermined by their board.  That is, your designation makes no difference in the net funding.  Your "designated" charity will simple receive less from the commingled funds and the one(s) you find odious will receive more.  In the reality of net funding, your dollars were commingled and supported the charity you found despicable.

Due Diligence

There are several websites dedicated to helping donors sort through public charities.

It is still a case of "let the buyer beware."

You might go to a site like Charity Navigator  and use their handy-dandy ratings.  While that is certainly easy you may still be misled and waste money.

For example: 
You might compare The Southern Poverty Law Center (Financial score of 83) with Cross International (Financial score of 72) and conclude that TSPLC is significantly more efficient from a financial perspective than Cross International.

You would be wrong.

The actual where-the-rubber-hits-the-road number, the percentage of revenue spent on "programs" is 65% for The Southern Poverty Law Center and it is 95% for Cross International.

---Full disclosure---
I have been unable to replicate the Charity Navigator's financial ratings using the Charity Navigator's published methodology.  I calculated Financial scores of 74.5 for TSPLC and 78 for Cross International) using the data and methodology published by Charity Navigator.
---End Disclosure---

Poking around in the fine print of their published methodology (as opposed to the one they actually use) reveals that just over half (57%) of the variable* portion of the financial score is due to efficiency measurements.  The Charity Navigator double-counts fund raising efficiency so even that calculation can be gamed by shifting headcount from "fund raising" to administrative.

Approximately 30% of the financial score is due to growth metrics....or increasing popularity, if you prefer.

The remainding 14% of the score rewards inefficiency in applying donations to their intended purpose.  That is, an organization that raises funds but does not disperse them receives a higher score than an organization that quickly injects those resources into their intended targets. 

Charity Navigator gives TSPLC the highest score possible because it has over seven years of working capital squirreled away.  Cross International is given the lowest score possible because it disperses checks as soon as the donations clear the bank and has no liquid assets on hand.

Two final observations

Some of the umbrella charities receive substantial funding from governmental units.  An example would be the unaccompanied minors that were coming from Central America.  The Federal government vendored out the "placement" and care to existing human services charities because they have the infrastructure.

That can place charities with a religious affiliation in a political bind, especially those with a medical or human services ministry.  Mammon vs. God.

Defunding by the Feds, a likely outcome in a highly politicized environment, will cream the financial rating score due to the 30% growth metric component.  The less diligent researchers will dismiss some very fine charities because they let somebody else do their thinking for them.  That is, if they mindlessly accept the Charity Navigators composite score.

The other consideration is that internet rating services do not canvas every charity.  Many charities choose to not spend administrative resources on asking to be rated or in filling out the necessary paperwork.

A portfolio approach

It is my opinion that all components in the charitable landscape: P-2-P, Focused, Umbrella, can work together in a dynamic ecosystem.

The P-2-P helps us become better, more empathetic human beings.

The Focused not only fill a charitable need but can be fine social organizations.  They also serve as a signal to the Umbrellas.  They provide information to the Umbrellas that help them adjust their allocations.

The Umbrella charities extend the reach of the little guy.  I will never go to Africa and drill a well.  But I can help pay for one.

*Charity Navigator spots every charity 30 points on their financial score.  Only 70 percent of the score is variable.  

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