Monday, February 10, 2014

Charity evaluation update - more on the overhead myth


I noted in my September 2013 blog post that three leading charity watchdogs in the USA, which collectively advise millions of donors annually, had not only rejected overhead ratios as the prime indicator of a charity’s reliability and effectiveness, but they had also launched an active effort to bust the “overhead myth.” 

Recently, a financial publication called “Main St.” published an article called The Overhead Myth and Charitable Giving, which supports this effort to better evaluate charities on the basis of their overall business practices, their effectiveness and their transparency – rather than an over simplistic overhead or administrative ratio. Located on Wall St. in New York City’s financial district, the publication’s parent company called “The Street” offers financial insight and advice through its consumer websites and subscription investor services.

It is interesting to see that those who make critical financial evaluations regarding the personal and business investments of clients also agree that a solid business platform within a charitable foundation helps ensure an effective use of a donor’s philanthropic investment in their community.

It is also becoming increasingly evident that sound business practices represent important criteria for donors in making their giving decisions, and add to the donor’s trust and confidence levels as they develop their charitable relationships.

I hope these factors will be publically recognized by more financial experts and media - and that standards of efficiency, effectiveness, transparency, impact and return-on-investment continue to replace the simple calculation of overhead cost.

Dan Ross

Friday, January 10, 2014

Charity lotteries – a business model with a cause

A recent survey of Canadians by the Muttart Foundation (TalkingAbout Charities 2013) found that “Almost nine in 10 (86%) think running a business is a good way for a charity to raise money it can’t obtain from other sources, while eight in 10 (79%) think charities should be able to earn money through any type of business activity as long as the proceeds go to the cause.”

While we know that Canadians are supportive of charities running businesses activities in order to raise funds, why do we see continued debate about the charities being in the lottery business? Perhaps it is because some news media and charity watchdog reports unfortunately treat lottery ticket purchases as charitable donations.

Let’s be clear. Although the net revenues from lotteries are vital to supporting the charities that run them, lotteries are a business activity. While knowing that the net proceeds go to a particular cause may be a factor in which lottery a purchaser chooses to support, making a “donation” is not their primary motivator. Most ticket buyers are hoping for the big win. Canada Revenue Agency is clear that ticket purchases are not the same as donations and prohibits the issuing of charitable receipts for lottery purchases. The reasoning is simple - the buyer is receiving value (the chance at winning prizes) in exchange for the money spent. In other words, it is a business transaction.

We have received great support through lotteries and it really is a win, win, win scenario. Dream Lottery, in which we participate, has bought millions of dollars in prizes regionally thus contributing to the local economy. Prize winners tend to come from our region meaning local residents benefit directly, and those that need the services of our regional hospitals benefit since we gain millions in net profits to support great patient care, medical research, innovation and education at those institutions.

Even with tickets paying for the prizes, administration and marketing, many charity lotteries still net 20-30 per cent for their cause. Historically, Dream Lottery has been one of the best in the country for maximizing net profits. Any business that can consistently perform at these profit levels would usually gain praise for efficiency. Instead, critics say that it would be more efficient to support a charity with a direct donation rather than a “donation” through a ticket purchase.

While we agree that direct donations ultimately contribute a greater net to the cause, we don’t agree that buying a ticket is the same as a donation. And our experience shows that conducting a lottery does not diminish direct donations. In the years directly after our Foundation began participating in a fall lottery (in addition to one in the spring), our donation levels actually rose. This rise could be partly attributed to lottery advertising raising awareness of our cause. Also, there is no indication that ticket buyers convert their purchases to donations when a lottery is cancelled. They simply buy tickets in a different lottery.

Charity lotteries are generally self-supporting - and our lotteries have been completely self-supporting. Yet, in their reports, some analysts insist on blending the approximately 70 percent cost of the lottery business model with the relatively low costs required to encourage, administer and steward direct, charitable donations. This can mislead the public into thinking lottery costs impact direct donations; that charities spend large amounts of money from direct donations on lottery overhead when those costs are actually fully-covered by lottery ticket sales alone.

For our Foundation, the cost of direct donations has historically been 15 cents per dollar - with or without running a lottery. Since some analysts insist they will not stop the practice of blending costs in their reports, the only way that our Foundation will ever look good in their eyes is to eliminate the lottery altogether. While the critics would then happily report a lower cost-per-dollar ratio for our Foundation, our Hospital and its patients would simply lose the benefit of millions of net dollars from lottery sales.

We cannot ignore our Foundation’s mission to raise funds that support the great patient care and outstanding medical education, innovation and discovery at London Health Sciences Centre. Too many patients and their families rely on our hospital to save or improve their lives. So, instead cancelling a business activity that contributes significant net revenue to the benefit of those patients and families, we will continue to bring balance to the debate about lotteries.

We will leave it to our supporters to choose the way that they want to contribute and that best suits their giving style; whether through direct donations, lottery ticket purchases, participation in a community event, attendance at one of our signature events, through gifts made through their estate or insurance, or a combination of any of these methods.

Whichever way they choose to support us, they can be assured that their contributions are being put to good use by physicians, researchers and staff at our hospital, to the maximum benefit of patients and their families, and to create a healthier future for our community.

Dan Ross