Overhead Approach Punishes Honest Groups

To the Editor:

I wish to commend the Urban Institute’s Center on Nonprofits and Philanthropy and the Center on Philanthropy at Indiana University for their path-breaking study of the administration and fund-raising expenses of nonprofits (“Study Examines Causes Behind Reporting Errors on Federal Tax Returns,” January 20). The study conclusively establishes what some of us have been saying and writing for the past 15 to 20 years: The use of so-called overhead-cost ratios as the primary measure of efficiency of nonprofits is wrong and misguided.

There are two fundamental problems with the use of overhead ratios to evaluate a nonprofit’s efficiency level. First, practices vary widely among nonprofits as to which types of expenses should be classified as “administrative” and which ones as “fund raising,” allowing much room for judgment and interpretation.

Second, a majority of nonprofits are labor-intensive. On average roughly 50 percent of their expenses are accounted as personnel costs. True and accurate allocation of personnel expenses among various functions requires adherence to an exacting system of timekeeping. Few nonprofits maintain such a system. As a result, some nonprofits use methods that present them in the most favorable light, i.e., low overhead cost.

As long as grant makers, watchdog groups, and government regulators persist in evaluating nonprofits on the basis of their overhead ratios, nonprofits will be induced to show low overhead. This practice punishes the honest nonprofit and rewards the dishonest.

Russy D. Sumariwalla
President
Global Philanthropy & Nonprofits
Medford, Ore.