Overhead Overdone? - LawNow Magazine

Overhead Overdone?

NotforProfitDuring my youth collecting hockey cards was a rite of passage – and a few of my contemporaries continued to amass collections into adulthood. I am not a hobbyist by nature, but I do collect junk mail from cable companies. That’s because I so frequently hear complaints about the number of direct mail charity solicitations that people receive, or that charities don’t spend enough of their resources on programming and services. Such complaints are apt to lead into a rant about the fundraising and administrative costs of voluntary sector organizations.

People often remark that such spending is wasteful. The reason I collect the cable TV offers, which arrive every couple of weeks or so, is that I know they are wasteful. Since I don’t own a television, it is rather unlikely I’m ever going to subscribe to cable. So those for-profit companies are incurring unnecessarily high administrative costs – and some of those glossy marketing efforts must be quite pricey – in the vain hope of winning me over as a customer.

And when my friends and family raise the issue of charities not devoting all their resources to front-line work, I have a ready answer.

Sometimes it is suggested that charities, because they are exempt on tax on their income and because their donors can receive tax credits or deductions for contributions to them, ought to be more prudent in the use of their resources. It is said that we all bear the cost of charities’ administrative expenses through the tax system.

But under the Income Tax Act (ITA), cable companies can write their marketing costs off. Section 18 of the ITA provides for deduction of expenses “incurred by the taxpayer for the purpose of gaining or producing income from the business or property”. So their wasteful spending is a tax expenditure too.

All this is brought to mind by two recent media reports. In one, British philanthropist Gina Miller called for a cap on the amount charities can spend on administration (including fundraising). She also took aim at what she considered high salaries in some organizations and said the sector had too many “careerists”.

Meanwhile, an Edmonton group announced a for-profit initiative to offer back office services to charities at lower cost than their current administrative spending. The initiative is to be called NPO Zero.

This name plays on the unfortunate but widespread public misconception that charities can achieve zero spending on administrative costs. There are certainly groups that claim to spend nothing on back office work, and in the case of small all-volunteer organizations that might be true, but those are few and far between.

More common are medium-size or large organizations that – under accounting and Canada Revenue Agency rules – can understate or ignore their administrative costs because they are covered by in-kind corporate or personal donations. And sometimes groups simply misstate their administrative costs as program expenses. If you look hard enough, it is always apparent that someone is paying to keep the lights on.

Rather than play into misconceptions about costless administration, sector organizations and the public can take concrete steps to reduce unnecessary costs and promote a more accurate notion of the overhead entailed in running an effective charity.

Among the measures that could be taken:

  • encouraging donors to make fewer, but larger gifts (since it usually costs charities the same amount to administer a donation whether it is $25, $100 or $1,000);
  • encouraging adoption of standardized government and/or foundation reporting mechanisms (by having foundations such as Ms. Miller’s require the same information from grant recipients, charities’ paperwork could be reduced); and
  • discouraging the practice of charities under-reporting their administrative costs (so that the public develops more realistic expectations about overhead expenses).

More difficult, perhaps, is tackling the idea that charitable work ought to be predominantly, if not exclusively, the province of volunteers. The starkest argument cited against such an approach is the suggestion that by giving a donation directly to the beneficiary, rather than the charity, one can be certain of the entire amount of the gift going to the end user, rather than being eaten up by a charity’s overhead. Few people think that is an adequate solution to addressing complex social problems. There are no administration costs but there is also no value-added.

The alternative – developing sophisticated, multi-faceted organizations dealing with issues pro-actively and holistically – necessarily entails incurring overhead costs, and yes, may be more effectively accomplished by people who have made a career in the field and are remunerated in keeping with their skills and experience. Such organizations ought to be expected to keep administrative costs reasonable, but not to make a fetish of them.

Because charities’ traditional reporting through the T3010 and their financial statements can give a distorted picture of their operations, and downplay organizational accomplishments that may not be fully reflected in the numbers, charities also need to be encouraged to present a fuller picture of their work to the public, so they can be judged on more than their inputs. Imagine Canada’s recently launched Charity Focus provides charities with the opportunity to upload success stories and other details about their activities.

As I read the two news reports, I couldn’t help thinking how those in the sector are often told to act more like their counterparts in business. That led me to wondering what the overhead costs of the new Edmonton initiative would be. But then that wouldn’t be the sole criteria one used to decide whether it would be a good investment, would it?

Authors:

Peter Broder
Peter Broder is Policy Analyst and General Counsel at The Muttart Foundation in Edmonton, Alberta. The views expressed do not necessarily reflect those of the Foundation.
 


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