Group says nonprofits should act more like businesses
It’s conventional wisdom in the world of charitable giving: Good nonprofits spend as little as possible on overhead. Donor dollars, the thinking goes, are best spent on a nonprofit’s charitable mission, not on administration and fund-raising
To Dan Pallotta, that’s ludicrous.
As the head of a rebellious Cambridge nonprofit called the Charity Defense Council, Pallotta has insisted for years that nonprofits should adopt a more corporate model of doing business. That includes spending more on themselves, an expense traditionally viewed by donors and watchdog groups as wasteful.
Now he’s taking his argument to the masses. Along major roadways in the Boston area, including the Southeast Expressway, Interstate 95, Interstate 495, and Route 1, the Charity Defense Council — its motto is “We fight for the people who fight for the people” — recently put up billboards that read, “Don’t ask if a charity has low overhead. Ask if it has big impact.”
“We’re trying to educate people on the notion that maybe the question they’ve been asking all along is the wrong question,” said Pallotta, who contends that nonprofits could do even more charitable work if they spent more on overhead.
“There’s a visceral negative reaction to people in charity taking risks in fund-raising. But if you can’t raise money you can’t grow, and if you can’t grow you can’t solve social problems.”
Pallotta points to the Wounded Warrior Project, a veterans nonprofit that dramatically increased revenue by investing heavily in fund-raising.
Critics, however, accuse it of squandering donations on expensive marketing and high salaries; its fund-raising and administrative costs total more than 40 percent of its expenses, according to Charity Navigator, which evaluates nonprofits. Pallotta praises the Wounded Warrior Project for not being “a slave to that fund-raising ratio” and dismisses its detractors as short-sighted.
“These organizations have no idea how much money they’re leaving on the table by restricting their fund-raising budgets,” said Pallotta, who also makes his pro-overhead argument in his books “Uncharitable” and “Charity Case,” and in a widely watched “TED Talk.”
In the nonprofit sector, the overhead debate has become increasingly vigorous, in part because of the push to measure charities’ efficiency. But “what’s different about what Dan and the Charity Defense Council are doing is they’re trying to take this out on the street,” said Rick Jakious, chief executive of the Massachusetts Nonprofit Network. “They’re going on the offense, and they want the donor who maybe has given a couple hundred bucks or even 20 bucks to an organization to think about this, as well.”
But even some people who share Pallotta’s perspective are uncomfortable with him being a prominent spokesman for the cause. That’s because Pallotta, who lives in Topsfield, has a checkered professional past. He once ran one of the largest for-profit fund-raising firms in the world, Pallotta Teamworks, which created the AIDS Rides and Breast Cancer 3-Day walks. But the company folded in 2002 amid criticism of its high fees and Pallotta’s handsome compensation.
Daniel Borochoff, the president of Charity Watch, which rates nonprofits, said the “dark side” of Pallotta’s pro-overhead campaign is that “the fund-raising companies love him. He’s a hero for them.”
“Rotten charities that waste money point to Dan Pallotta and say, oh, Pallotta says, ‘Don’t look at overhead. It’s not important. It doesn’t matter,’ ” Borochoff said. “But it does matter, because it’s really hard for a charity to accomplish much if so little of its proceeds are going in the direction of programs and services.”
“My biggest concern,” Borochoff said, “is there’s going to be huge waste in the nonprofit field if people buy into his argument and spend unlimited amounts on funding promotion.”
Pallotta says his billboard campaign comes at no cost to the Charity Defense Council, which reported only $11,000 in revenue in its most recent financial filings. He says his for-profit Cambridge company, Advertising for Humanity, designed the billboards for free and Clear Channel donated the space, worth about $66,000 a month.
There is no legal limit on how much nonprofits can spend on fund-raising and administrative costs, which typically include legal services, accounting, and office management. But charity watchdog groups have historically said nonprofits should spend no more than about one-third of their budgets on overhead, and ideally below one-quarter, and use the rest for charitable programs and services.
As a result, many charities are sensitive about overhead and reluctant to spend beyond the norm.
That’s left some of them with outdated computer systems and insufficient staff training, and some resort to accounting manipulations to lower or hide their true overhead costs — despite a Standard & Poor’s study showing that in the for-profit world overhead spending can run up to 50 percent, with the average in the mid-20s.
Tellingly, the do-it-yourself legal website Nolo advises that when it comes to how much nonprofits should spend on operating expenses, “You have two choices: you can spend as much as you need, or as much as looks good.”
Pallotta rails against the latter mindset and is an evangelist in his belief that if charities increase overhead spending, especially on executive compensation and fund-raising, they could bring in more money to do more charitable work.
After all, he said, few for-profit ventures would thrive, let alone survive, without ongoing internal investments.
Pallotta’s argument is steadily gaining allies. The prestigious Bridgespan Group, a nonprofit consulting spinoff of Bain & Co., published a 2009 article titled “The Nonprofit Starvation Cycle” that concluded charities persistently underfund overhead — to their detriment.
In 2013, three groups — GuideStar, Better Business Bureau Wise Giving Alliance — launched a campaign called “The Overhead Myth” that decries the “false conception that financial ratios are the sole indicator of nonprofit performance.”
Instead, they urge donors to “pay attention to other factors,” such as leadership, transparency, and results, even though those are notoriously difficult to measure.
Additionally, the federal government recently issued new rules for how government agencies that contract with nonprofits should reimburse them for their costs.
Basically, it broadens the definition of reimbursable expenses to include certain overhead costs. Overhead spending, the Office of Management and Budget now says, can be a necessary expense that “supports the fundamental operations of the organization.”
Jakious, of the Massachusetts Nonprofit Network, said that overhead costs should be just one of many factors when evaluating how efficiently charities operate.
He also believes that nonprofits should spread the word that overhead is not synonymous with pork barrel spending.
“If it’s an outlier, maybe that’s a flag for donors to want to ask more questions,” Jakious said, “but I don’t think it automatically labels someone as an inefficient or bad organization.”