Limits on Charities’ Overhead Expenses Dropped in Federal Fund-Raising Drive

The federal government has changed key rules that govern the charity drive for federal workers. The most controversial change, which eliminates a restriction on the overhead expenses of charities, was made despite the opposition of many charity officials.

Charities raise a significant sum each year through the Combined Federal Campaign: In 2005 the drive brought in $268.5-million.

The U.S. Office of Personnel Management, which oversees the campaign, announced that it is dropping a requirement that charities must spend no more than 25 percent of their total revenue on administrative and fund-raising expenses to qualify for the Combined Federal Campaign.

Under the old rule, any organization that exceeded the 25-percent limit could participate only if it could explain why such expenses were reasonable and submit a formal plan to reduce them.

Opposition to Change

The government’s decision to drop the overhead requirement angered some leaders of organizations that assist charities in soliciting through the Combined Federal Campaign.

“They’ve removed the primary means of sorting out the good guys from the bad guys,” said Don Sodo, president of America’s Charities, a Chantilly, Va., organization that represents national charities that participate in the federal drive. “Individual donors trust their employers to protect them from charities that don’t meet accepted standards of behavior. Job one for an employer is to eliminate the possibility of unscrupulous or badly managed charities from participating in a campaign in the first place.”

In explaining the change, which covers charities applying to participate in the 2007 campaign, the Office of Personnel Management said that the overhead limit had caused an “administrative burden” on its staff because of the “subjective nature” of deciding whether a charity’s explanation of high overhead costs was reasonable and whether its formal plan to reduce the expenses had merit.

“Much of the litigation affecting the CFC in the past several years has centered on this issue, resulting in a substantial resource drain on OPM staff, including the Office of CFC Operations,” it said.

For example, last year the Make-a-Wish Foundation of America, in Phoenix, won a fight for its national organization to participate in the Combined Federal Campaign after the federal government first said that the organization had been spending too much money on overhead costs and did not qualify for the 2005 campaign (The Chronicle, September 1, 2005).

At a court hearing, a federal judge urged the government and the Make-a-Wish Foundation to settle the case. In response, the Office of Personnel Management agreed to allow the charity’s national organization to participate in the 2005 drive.

In its announcement, the Office of Personnel Management said it also “believes that federal donors should have an opportunity to donate to a wide range of charitable organizations and should not be limited in their choices to those charities with administrative and fund-raising rates of a specific rate, so long as the [overhead-costs] information is available to them to make an informed decision.”

The government said it would continue its practice of calculating overhead costs of all participating charities and publishing the figures in its annual brochure of eligible charities provided to federal donors.

What’s more, the government will add a statement to the brochure that says that the Office of Personnel Management and nonprofit officials remain concerned about excessive overhead costs, and that the “philanthropic community at large” generally considers overhead costs above 35 percent “to be problematic.” The brochure will urge potential donors to make sure they “fully understand” the overhead expenses of charities before contributing.

Complaints Expected

The Office of Personnel Management said a “significant majority” of comments it received on the issue of overhead expenses — which were submitted in response to a draft of the rules released last summer — opposed its plan to eliminate the 25-percent requirement.

Many of those who commented called on the government to increase the cutoff to 35 percent, and some argued that eliminating the overhead requirement would result in a large increase in the number of organizations that apply for the campaign each year, which would cost the government more money to handle.

Mr. Sodo of America’s Charities said that most workers do not have the time or information to determine on their own whether a charity is well run.

In the end, he said, the change will increase rather than decrease the burden on the Office of Personnel Management, because when employees learn that some of the charities they have supported are spending significant sums on overhead, they will call the agency to complain.

But others praised the government’s decision.

“OPM recognized the intelligence of federal contributors,” said Patrick Maguire, president of Maguire/Maguire, a consulting and marketing company in Corte Madera, Calif., that works with 15 organizations representing national charities that participate in the annual federal fund-raising campaign.

Mr. Maguire said donors pay close attention to the overhead-expense figures of charities that are listed in the government’s annual brochure of participating groups.

“Our experience is that donors punish agencies with higher overhead: If an organization’s overhead jumps, their CFC income goes down,” he said. “Federal donors have the opportunity to make comparisons, and, boy, do they ever. The marketplace actually is a better enforcer than OPM could ever be, being second-guessed by the courts.”

In addition, Mr. Maguire said that the new language about the potential dangers of high overhead expenses that the government plans to put in the brochure is a “powerful warning flag” for federal workers.

“The OPM is serving donors well,” he said.

The rules governing the Combined Federal Campaign appeared in the November 20 Federal Register and are available online