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Editor's note: This article was updated on July 3.
A donation to your favorite charity is more than a gift or a tax break -- it's an investment. Pick an inefficient charity and your contribution will be eaten by administrative costs and fund-raising expenses. You can attach strings to your gifts, but a targeted gift that misses the mark (or is diverted) will cause you financial grief.
You don't want to end up in a dispute like Bill Robertson's, either. The 58-year-old Naples, Fla., man and his family, heirs to the A&P supermarket fortune, have locked horns in a nearly six-year-long battle with Princeton University that still awaits trial. His parents, the late Charles and Marie Robertson, gave the university $35 million in A&P stock in 1961 to train graduate students to serve as U.S. diplomats. Now the gift has grown to about $880 million and the family claims that Princeton has funneled away millions to support other projects. The dispute, say Princeton officials, boils down to who controls the foundation established to administer the gift.
Although the Princeton case is the largest of its kind, other nonprofit organizations have struggled to account for how donations designated for special purposes are spent. Last year, audits at the University of Colorado Foundation and the University of Wisconsin- Madison found that those organizations poorly tracked the use of restricted gifts. The American Red Cross is investigating more than 7,100 cases of potential fraud in hurricane relief efforts last year. Detroit public radio station WDET, which changed its format from music to news and talk shows, dodged a lawsuit from donors who had given money to support music programming.
Americans gave about $260 billion to charity last year, a 6% increase over 2004 donations, according to the Center on Philanthropy at Indiana University. That's a lot of money, especially when you consider that cynicism among givers runs high.
A Brookings Institution survey found that only 14% of donors think charities do a good job of spending their money wisely. "The era of assumed virtue is over," says Robert Ottenhoff, president and chief executive officer of GuideStar, which monitors the activities and finances of more than 1.5 million nonprofit groups.
Bang for your buck
The important lesson from these horror stories is to look before you give. Examine a charity's finances -- its annual report, audited financial statement and Form 990 (a tax record filed with the Internal Revenue Service). Note that many religious organizations are exempt from filing with the IRS, but reputable charities will gladly provide you with audited financial information. If they don't, give elsewhere. You can find charity ratings and financial information on the Internet.
A charity should keep administrative and fund-raising expenses to less than 25% of its budget. "Most good charities are well below that number," says Trent Stamp, executive director of Charity Navigator, an independent watchdog. The Red Cross spends less than 9% of its total budget on administration and fund-raising. In contrast, the Americans for Prosperity Foundation, which aims to educate the public about economic policy, spends 46% of its total budget on those expenses. If a charity you want to support spends more than 25 cents on the dollar for administration and fund-raising, you need to find out why.
Overhead varies based on the type of charity. For example, the Children's Museum of Pittsburgh spends 16% of its budget on administration, while the Food Bank of Corpus Christi, Tex., uses only 2% of its budget to cover costs. Both organizations have the highest rating -- four stars -- from Charity Navigator because a museum is more costly to run than a soup kitchen. To establish a frame of reference, compare your charity with others like it. Keep in mind that ratings are usually based on the charity's financial statements, which can tell you how efficiently the organization operates but not how effectively it carries out its mission.
Monitor the charity's finances carefully because the organization could go bust. For example, the Foundation for New Era Philanthropy went bankrupt in 1995, but not before it took in more than $354 million from donors and hundreds of nonprofit organizations.
And when it comes to giving money, avoid donating over the phone. Nine out of ten times, the phone solicitor is a for-profit telemarketer who is working on behalf of the nonprofit for a percentage of the take, Stamp says. The cut can range from 50 cents to 90 cents on the dollar.
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