"Charity Cases" Donating to charity is a good thing, but make sure you know where your money goes. Delaware Today, September 2002 Take a dollar bill out of your pocket. Two years ago, that dollar bill was a magic carpet, and Delaware's nonprofits were riding high. The strength of the economy had inspired donors to be a little more generous than in years past. Soon, though, the magic carpet began to lose altitude. The economy slowly buckled. Then came Sept. 11 — the day the magic carpet was yanked out from under them. Donations that Delaware's nonprofits had banked on went instead to the Red Cross and to other charities set up in the wake of the terrorist attacks. Nowadays, it's survival of the fittest, with a lot of nonprofits still wounded by the weak donations from the past year. Nonprofit managers are well aware that charities who handle their finances well are likely to get more support than those who don't. More than $1.5 billion in annual revenue flows through Delaware's 200 highest-grossing nonprofit organizations, with more than $300 million coming from public and government contributions. Because of this, it's important that the public have access to financial information about each nonprofit so donors can assess their functions and their fiscal responsibility. The IRS requires all nonprofit organizations to file a Form 990, the nonprofit equivalent of the 1040 that most tax filers are familiar with. The Form 990 confirms the charity's tax-exempt status and also includes detailed financial information about the organization, including the amount of money spent on program services, administrative fees and fundraising, and also the salaries of the board members, directors and the five highest-paid employees and contractors. The Form 990 is open to public inspection, and nearly all Delaware nonprofits have their Form 990 posted on the Internet at Guidestar.org. Some of the more interesting items listed on each charity's Form 990 include the amount it spends on travel expenses; the names and addresses of its board members; the amount of money it has invested over the past year; and the amount of its total income that comes from public contributions. The Better Business Bureau, in its published Standards for Charitable Accountability, requires charities to spend a minimum of 65 percent of their income on program services, an easy standard to meet. Of the 200 Delaware nonprofits whose IRS Form 990 we surveyed, all but a handful met that requirement. However, Karen Curtis, the immediate past chairwoman of the Delaware Association of Nonprofit Agencies, cautions that nonprofit agencies may not always be able to control how much of their income goes toward programming expenses. "A lot of [nonprofits'] revenue is restricted," Curtis says. Individuals and corporate donors can specify exactly how their donations must be spent, and government grants are very specific about where the grant money goes. In addition, says Judith Scarborough, DANA's current chairwoman, of all the information listed on IRS records, "allocation between programming, administrative costs and fundraising is the softest." When an administrator or a meeting space is used for both programming and administrative services, for instance, the organization itself makes the estimate of how much funding goes toward each. And while estimating which categories expenses fit into is not an exact science, DANA does support financial accountability for its more than 375 member organizations, and in the future, Scarborough says, DANA's board hopes to establish financial accountability standards that every organization must meet. Other legitimate reasons why an organization's programming percentage may seem low include large capital investments like land or building purchases; start-up costs for organizations that are in their infancy (the first three to five years of their life-cycle) and are not yet operating at full strength; or a need for specialized employees like doctors, whose salaries must stay competitive to attract qualified workers. DANA and the Better Business Bureau recommend requesting the nonprofit's annual report and discussing seemingly unusual percentages with the nonprofit to establish context. Delaware Today looked at the IRS records of more than 200 Delaware nonprofits to see how they stack up. These are some of the top performers. "Feeding more people" The Food Bank of Delaware Total 2001 revenue: $17,568,068 Public contributions: $16,314,447 Program expenses: 97.60% Administrative expenses: 1.65% Fundraising expenses: 0.75% Highest salary: $70,033, Patricia Beebe, Executive Director The Food Bank of Delaware distributes about 12 million pounds of food each year to needy families. Food banks with a similar volume of distribution usually have about 40 full-time workers. "We do it with 20," says Jeff Trnka, program development coordinator for the Food Bank. Director Patricia Beebe says the small, tight-knit staff occasionally flips through reports from other food banks across the country and gets a chuckle at how much they spend. Her organization's financial success "really has to do with management philosophy," she says. "I don't like to be behind a desk, and I've had the privilege of attracting people who are the same way." Consequently, money that would typically go toward administrative costs instead gets put toward programs "It's not anything magical," she says. "We're not into a lot of administrative frills." Her desk and furniture? It was donated from a bank executive's office. The Food Bank's classroom computers? They were donated by Syngenta. And whenever the organization needs supplies, it shops around, hoping to get them free, but "settling" for a discount. The thrifty approach is present in all aspects of the organization; they even took a no-frills approach to their annual dinner. "We held it right here in the warehouse," giving donors a better sense of where their contributions go, Beebe says. Money also gets spent responsibly because the Food Bank keeps a lot of its projects in-house. The marketing, grant-writing, trucking — it's all done by Food Bank staff, not outside contractors. The Food Bank has managed its funds so wisely that it received 21 out of a possible 21 commendations in its past two audits from America's Second Harvest, the national food distribution organization that unites food banks across the country. "A proven strategy" YMCA of Delaware Total 2001 revenue: $20,941,499 Public contributions: $1,150,389 Program expenses: 92.84% Administrative expenses: 7.16% Fundraising expenses: 0% Highest salary: $146,742, Michael Graves, President Lou Coxe, vice president of finance for the YMCA of Delaware, lays his organization's winning financial strategy out on the table, clearly and simply. "We budget administrative costs as a percentage of the previous year's income," he says. It's a simple strategy, says YMCA of Delaware's president Michael Graves, but it's one he thinks contributes to the leanness of the Y's administrative costs. Instead of projecting the current year's income, then basing an administrative budget off that projection, Coxe explains, the YMCA budgets itself using concrete numbers. If the current year brings in the same income as the previous year, then the system works perfectly. But what about in periods of rapid growth, where the income grows but the administrative budget remains tied to the previous year's earnings? "It puts a strain on us," Coxe admits, "but it's a healthy strain." It forces senior-level managers to budget frugally and creatively. Conversely, when in periods of financial decline, the administrative budget gets cut to balance things out, Coxe says. On top of this successful financial strategy, Graves says, the YMCA differs from many other nonprofits because of its level of decentralization. Less than 5 percent of the company is considered director-level management, he says, which contributes to the YMCA of Delaware having lower administrative overhead costs than similarly-sized YMCAs across the country. Both the board and the management of the organization use a system of simple checks and balances to make sure employees are being paid competitive salaries but aren't being overpaid. Most employees' salaries are based on three criteria, Graves says: "Know-how, problem-solving and accountability." If a person's job requires special skills — for instance, a computer programmer — or if a person is financially accountable for income-producing programs, the salary is upped according to a formula. "But the big question, especially with senior management, is, 'Are they being overpaid?'" Graves says. To ensure that management-level salaries don't become extravagant, the board members and the human resources department compare salaries with other YMCAs when it decides salary. "Clearing its name" United Way of Delaware Total 2001 revenue: $29,269,614 Public contributions: $28,305,350 Program expenses: 88.62% Administrative expenses: 5.00% Fundraising expenses: 6.38% Highest salary: $170,000, Charles Anderson, President Ten years ago, the United Way of Delaware fell victim to a case of mistaken identity. In one of the most publicized scandals in the nonprofit world, William Aramony, president and CEO of United Way of America, was fired and later convicted of 25 criminal counts, including fraud and falsifying tax statements. His crimes maimed the United Way of America and seriously tarnished the reputation of nearly 1,400 nonprofit agencies that had little in common with Aramony's organization except the United Way name, says Charles Anderson, president of the United Way of Delaware. The United Way of America, Aramony's organization, is only a trade organization, Anderson says. More than a thousand localized, independently run United Ways belong to the United Way of America, but it does not act as a parent organization, he says. Despite having nothing to do with the financial improprieties that dogged the national organization, the United Way of Delaware saw a drop in annual donations from $18 million to $16 million during the first two years after the scandal. "Those of us who made a career in this field felt terrible that our name was stained," Anderson says. To combat the negative public perception, the United Way of Delaware had to reassure donors that their money was being well-spent. Full-time staff was reduced by nearly half, dropping the organization's overhead costs from 15 percent to about 10 percent. "Today we ask [employees] to do the work of two or three people," he says. "There really are some pretty smart people spending long hours to figure out how to distribute our money wisely." Over the past eight years, the United Way of Delaware regained its footing, and donations rose to well above $18 million, hitting $28.3 million in 2000. The effects of the Aramony experience have shown Anderson and his staff that their organization, which receives more than 96 percent of its income from public contributions, must be always ready to demonstrate the high standards the community demands. Shaun Gallagher is Delaware Today's managing editor.