Last week, the New York Attorney General’s office released its most recent “Pennies for Charity” report, which seeks to educate donors about “where your money goes” when you give to a particular nonprofit.
State officials also described the report as a call to action for donors and boards to be vigilant about raising flags when organizations are spending a significant portion of raised funds on the cost of raising them, encouraging donors and board members to seek out information on the Pennies for Charity database, which reports on the money raised by professional fundraisers, the people a nonprofit hires to solicit funds on its behalf, not its staff members.
As an advocate for strong ethical oversight by boards of directors, I am generally a proponent of transparency. In this case, however, I believe it is actually very problematic.
Why? Because the “Pennies for Charity” report and database are predicated on a number of assumptions about fundraising and fundraising strategy that are quite flawed.
Assumption 1: The less an organization spends on fundraising, the more effective that organization is.
Reality: The percentage of budget spent on fundraising may be a measure of how effective an organization is at fundraising, but it is not a measure of how effective it is as an organization. It is a measure of fundraising efficiency, which — while relevant to overall organizational efficiency — tells you absolutely nothing about the scope, quality, or effectiveness of an organization’s work.
Assumption 2: It’s always better to spend less on fundraising.
Reality: The phrase “It takes money to make money” isn’t often applied to nonprofits, but that doesn’t mean it isn’t true. Nonprofit organizations need raised funds to support the important work that they do, and — to succeed in the long-term — they need to invest in building a strong, effective, and resilient fundraising program. It costs money, whether in the form of smart strategic fundraising staff, thoughtful donor cultivation and stewardship tactics, or the counsel and expertise of external paid, professional fundraisers.
In fact, it’s possible for an organization to spend too little on fundraising. The evidence of this — while not often named as such — can be seen across the nonprofit world. When organizations falter, or even go under, as a result of losing one big grant or donor — or when they simply can’t raise enough money to build or strengthen their programs — there’s a good chance that it is due, at least in some part, to an underinvestment in fundraising.
BoardSource, the organization I head, created Measuring Fundraising Effectiveness in partnership with the Association of Fundraising Professionals, BBB Wise Giving Alliance, and GuideStar to provide nonprofit boards, staff, and donors with greater understanding of these dynamics. This includes highlighting the risks associated with underinvesting in broad-based fundraising tactics, which can leave an organization dangerously dependent on a few large donors.
Assumption 3: Each individual fundraising tactic is designed to drive as much money as possible into the organization.
Reality: Some smart fundraising strategies and tactics expect to make very little money, or even lose some. This is especially true of broad-based fundraising efforts that are focused on introducing new, smaller-dollar donors to an organization. Those efforts are long-term investments to bring new donors into the organization, with the understanding that — over time — that will pay off with a stronger pool of donors that is not only broader and more inclusive but also more resilient as donor interests shift and change. As such, some fundraising tactics break even — or even lose money — but are still “successful” based on their stated goals.
Assumption 4: Donors have a right to ensure the majority of their donation will go to support the organization’s mission.
Reality: This is much more nuanced than most assume. Because different fundraising tactics can have different purposes within a larger fundraising strategy, it’s simply not helpful to focus on following an individual donor’s contribution through the organization. Instead, donors (and regulators and watchdogs, for that matter) should seek to understand how — in aggregate — an organization is using the dollars it raises in pursuit of its mission.
Which brings me to the Pennies for Charity database. Because it focuses solely on dollars raised by professional fundraisers (meaning nonstaff fundraisers working on a contract basis for an organization), the New York Attorney General’s Office is reporting on what is, for the vast majority of nonprofits, just a portion of their fundraising strategy. This is dangerous and misleading.
Consider the following hypothetical scenarios:
| Raised $50,000 by a professional fundraiser who was paid $49,000 | Raised $50,000 by a professional fundraiser who was paid $49,000 |
| Also spent $25,000 to raise $300,000, mostly from donors whom paid professional fundraisers first had solicited in previous years | Raised no other dollars |
| Actually spent on programs: 79% | Actually spent on programs: 2% |
| What ‘Pennies for Charity’ would report: 2% | What ‘Pennies for Charity’ would report: 2% |
The first organization is successfully investing in high-cost donor-acquisition strategies as a part of a strong, strategic, and efficient fundraising strategy. The second is, at best, extremely lacking in fundraising knowledge and expertise. At worst, it is a fraudulent front that exists for the express purpose of generating revenue for paid professional fundraising firms.
The challenge, of course, is that in the Pennies for Charity database, these two organizations would appear to be identical. And board members and donors of both organizations are being encouraged to consider these organizations to be “sham charities,” as the report itself repeatedly warns against. For boards, it is possible that this data could prompt valuable reflection and inquiry, provided they have a good level of fundraising literacy.
But for donors and the broader public, who are likely consuming this data as though it painted a full picture of an organization’s fundraising efforts, this database poses a very real problem. And I fear that organizations that are doing good work and are responsibly stewarding donor resources are being unfairly maligned and penalized as a result.
Transparency is good. But transparency that is incomplete or lacking the context needed to meaningfully interpret the data can be dangerous. Unfortunately, the Pennies for Charity database is just that.
Anne Wallestad is chief executive of BoardSource, an organization that works to strengthen nonprofit boards.