Critics Dispute Claim That Charities Lose Money on Special Events

The average organization spends more to plan and stage walkathons, galas, and other special events than they raise,

according to a new study by a charity-watchdog group.

But the methodology used by Charity Navigator, in Mahwah, N.J., to come up with that allegation has been questioned by nonprofit leaders who say the study doesn’t come close to quantifying the true amount of money raised by charities through special events. As a result, some nonprofit leaders say they are worried that the watchdog group’s findings unfairly paint their organizations as inefficient.

A review of informational tax returns found that charities spent $1.33 on average to raise each dollar they received from special events. By comparison, those charities spent an average of 13 cents on the dollar on their overall fund-raising efforts, taking into account direct marketing, online appeals, and other techniques, as well as special events.

“It’s clear most charities are losing money on these events,” says Trent Stamp, president of Charity Navigator. “They’re spending more than a dollar to raise a dollar.”

Findings Disputed

That statement, however, is disputed by those who say the study’s methodology does not count all the money charities generate through special events.

The study bases its efficiency ratings on the amount of donations organizations receive as the result of special events.

It does not, however, include the gross revenue listed on the informational tax returns that charities submit to the Internal Revenue Service. Many charities use that category to count sponsorship income, admission fees, and income generated through special events, rather than the line that asks charities for their “direct public support,” or donations.

While tax experts say the IRS rules are clear on how charities should report special-events income, organizations use different criteria for choosing which line on the 990 form to report such income. By focusing on only one line on the 990, Charity Navigator might be providing “an incomplete measure,” says Celia Roady, a Washington lawyer who represents tax-exempt organizations.

Drastic Differences

In some cases, the difference between special-events revenue and direct contributions is drastic.

The Arthritis Foundation’s Michigan chapter, in Troy, Mich., for instance, listed its special-events revenue as $399,828 on its 2004 tax form — nearly three times the $137,264 it reported that it spent to play host to special events that year.

Charity Navigator, however, based its efficiency rating on the $270 in direct contributions the charity reported it had received as a result of special events — a number that represents a small fraction of what the nonprofit group actually raised.

Based on that formula, Charity Navigator says the chapter spent more than $216 for every dollar it raised through special events in 2004 — making the chapter by far the least efficient nonprofit group in the study. The chapter was among five charities singled out by Charity Navigator for inefficiency — all of which used a similar technique for reporting special-events revenue.

That distinction is merely the result of how the chapter reports special-events income on its tax form, and is not a reflection on the efficiency of its special events, says Michelle Glazier, the chapter’s chief executive. The charity, which plays host to an array of fund-raising walks, dinners, golf tournaments, and “fun runs” each year, does not hold events unless they net at least $50,000.

“To look at this report, it does not justify what we’re doing in dollars and cents,” Ms. Glazier says.

The Maymont Foundation, which operates a historic mansion, park, gardens, and other facilities in Richmond, Va., also scored low on the Charity Navigator efficiency scale — spending $88.28 per dollar raised, based on the watchdog’s determination that it spent $648,825 to raise just $7,350 in contributions. The foundation, however, reported gross special-events revenue of $885,334, a figure that is more than 120 times higher than the number Charity Navigator used in its study.

Widespread Discrepancies

Discrepancies also surround some of the charities listed as most efficient. The Hartford Symphony Orchestra listed its special-events expenses at $174 and reported $123,705 in contributions on its 2004 tax form — making it the most efficient organization on the Charity Navigator list. On its 2005 report, however, the organization listed its special-events expenses as $103,911 and its contributions as $251,100. Based on the more recent figures, the orchestra spent about 41 cents for every dollar raised through special events.

Mr. Stamp, for his part, says the study does not reflect all of the benefits of special-events fund raising. Such events have countless unseen benefits — such as raising awareness, rewarding members, and cultivating long-term donors.

The watchdog group’s study also shows that, for some charities, fund-raising events are lucrative. The American Cancer Society, for instance, spends just 11 cents to raise each dollar through special events such as its Relay for Life race, Making Strides Against Breast Cancer walks, and a college-basketball event called Coaches vs. Cancer.

The same is true for other health-related charities such as the Muscular Dystrophy Association, which spent nearly 21 cents for every dollar raised, mostly through its annual telethon featuring Jerry Lewis.

But the survey also found many instances in which organizations trying to emulate the success of profitable special events are falling well short of their goals, Mr. Stamp says.

“Groups that have been successful have in some ways encouraged others to follow their lead,” he says. “It has convinced a lot of lesser charities with lesser connections to hold lesser events — and a lot of them have lost money.”

As a result, Mr. Stamp encourages those who read the report to think about whether the events they host or support are worth the costs.

“I hope board members and charity leaders would reassess their fund-raising methods and see if there is a better way,” Mr. Stamp says. “For most groups, this is not an efficient way of raising money.”

But David Hessekiel, president of the Run Walk Ride Fundraising Council, a Rye, N.Y., group for fund raisers who plan athletic events, says the complexity of reporting special-events revenue makes it difficult to draw that conclusion. Events such as charity dinners and golf tournaments tend to run under different cost structures than running races and bike rides. As a result, he cautions against paying too much attention to the cost per dollar raised when evaluating events.

“Efficient is a purely mathematical formula, and there are true benefits that aren’t going to be reflected in that efficiency number,” Mr. Hessekiel says.

“I don’t say that as a way of letting fund raisers off the hook for producing well-managed events. But it is part of the equation.”

A free copy of the survey results is available online from Charity Navigator’s Web site.