August 22, 2002 | Read Time: 5 minutes
The chief executive of United Way of America is warning that the United Way of the National
Capital Area, which is under investigation by a federal grand jury in the wake of allegations of financial misconduct, must quickly clear up the controversy so that Washington donors — and contributors to other United Ways across the country — don’t lose confidence in the integrity of the United Way system.
In an interview, Brian A. Gallagher, who took over in January as head of United Way of America, said that he is planning to recommend to local United Ways an accounting method that, while not directly related to the turmoil at the Washington charity, should help ensure that the public receives an accurate picture of local United Ways’ spending on programs and overhead costs.
The grand jury subpoenaed financial documents from the United Way of the National Capital Area, the nation’s fourth-largest United Way in reported total campaign revenue — $88.5-million in 2000-1. The inquiry comes after newspaper reports first raised questions about the spending of top officials at the organization.
Among subsequent developments:
- Two of eight regional committees that oversee the Washington United Way demanded that the organization’s top executive and other leaders be suspended during the investigation.
- A special committee of community leaders headed by Rodney E. Slater, the former U.S. transportation secretary, is formulating a code of ethics and other guidelines for the charity.
- Corporate supporters met to discuss the troubles at the local charity amid reports that several companies were considering withdrawing from participation in the local United Way. Last week, the Washington Redskins football team pulled out of an annual volunteer work project with the Washington United Way because of its concerns about the organization’s management.
“We are concerned and want this resolved quickly and aggressively,” said Mr. Gallagher, who noted that because United Way of America is located in a suburb of the nation’s capital, the Washington United Way serves his own neighborhood.
“Resolution for us is not, ‘Gee, how do you make the problems go away?’” Mr. Gallagher said. “Resolution is determining what are the issues that need to get resolved and then resolving them. And then, whatever the steps were that got you there, communicate them to the public.”
Mr. Gallagher said that among the serious mistakes made by the United Way of the National Capital Area was its policy, recently made public, of retaining more money from donations than necessary to cover uncollected pledges.
Unpaid Pledges
For years, the charity had withheld 6.5 percent of earmarked contributions that it sent to charities in order to cover pledges that it expected would not materialize. For example, some workers may leave their jobs before making donations that they had agreed to have withheld from paychecks.
But the Washington organization admitted that the uncollected-pledge rate had not been as high as 6.5 percent in more than a decade. In fact, the rate was about 5 percent in recent years, the charity said. That meant that for years the United Way had been keeping too much money in its reserves — more than $1-million — to be used for various expenses and grants.
Every United Way legitimately has an allowance for uncollected pledges, said Mr. Gallagher. “It’s different for different communities,” he said. “If it fluctuates up or down and a trend develops, you’ve got to adjust the allowance.”
In Washington, however, “what they did was wrong because they didn’t change the allowance,” he said. “I don’t think it’s illegal. It’s just stupid.”
The United Way of the National Capital Area also acknowledged that it had taken credit for more than $2.5-million in gifts that it had counted in its fund-raising totals but did not handle, a step that made the charity’s overhead costs as a percentage of total revenue appear lower than they were.
The money was raised by companies from their employees and customers and distributed by the businesses directly to charities without any United Way involvement.
“The United Way had no hand in raising that $2.5-million, so it can’t report that,” said Mr. Gallagher. “It incurred no costs. Therefore, to put it on its top-line campaign number, and calculate its overhead and operating costs against it, is just wrong.”
Accounting for Gifts
Mr. Gallagher said that no United Way should ever engage in a similar practice. But he said other United Ways are asking his office for guidance involving another scenario: A United Way manages a company’s on-the-job campaign; the company reports the total contributions to the United Way; and the company distributes earmarked gifts for charities supported by the United Way, or to other United Ways in the region, through unrelated for-profit “processors” that are increasingly popular with corporations.
Mr. Gallagher said that the position of the United Way of America is that local United Ways can report such contributions in their campaign totals even though the money did not pass through their books. They also can calculate overhead costs against the total, “because the United Way had a direct hand in raising the money.”
But Mr. Gallagher said he soon will propose that United Ways in such situations adopt a method called “unit cost accounting” in which United Ways would more specifically break down the expenses that they incurred in generating contributions and place a cap on the total expenses that they could count.
The approach would ensure that overhead costs of United Ways continue to be accurately reported, he said, especially as more and more businesses turn to outside companies to distribute funds rather than use the United Way for that purpose.
“Our level of accountability and transparency has never been more important,” said Mr. Gallagher. “Folks have recently been wounded and damaged by the lack of honesty in corporate America and in the political world, and we have to understand that we are in that environment.”
