Charitable Giving: Eyes on the Wrong Metrics?

By: Randy Fox, Two Hawks Consulting

Key Takeaways

• Can pure financial metrics tell you how many dollars it takes to change a life, feed a child or cure a disease?
• Charity is voluntary giving—income tax is mandatory giving. How would you rather get your money to the causes you care about most?
• Maybe it’s time to empower yourself and direct your funds with more determination and purpose to create the world you want to live in.

More causes need more money right now, than ever before. But before giving, many people, specially Millennials, worry about the overhead expenses that charities rack up. The concern is that some non-profit organizations spend their dollars inefficiently--or less efficiently than others--and, therefore, can’t be trusted to steward our donation dollars.  That’s not the right conversation to be having. Instead, all not-for-profits need gifts that have impact. And we need to develop metrics that accurately measure the impact of those gifts. The right metrics should answer questions like these:

• How many dollars does it take to change a life, feed a child, cure a disease?
• Did Organization A spend less money to get the same results as Organization B did?
• What’s a worthwhile cause anyway?
• Who needs symphonies and art museums when there are homeless people sleeping in the doorways of those same institutions?

We live in an age of Big Data. It’s tempting to turn to sites like Charity Navigator to tell us whether or not a charity is worthy of our philanthropy. The site has a robust series of benchmarks that it uses to assess the financial health, transparency and accountability of thousands of charities. It also categorizes charities by type, the financial needs of a community foundation, for instance, are very different from an art museum’s. While these ratings are helpful, they speak only to metrics and not to the heart--which is how many donors make their giving decisions.

Certainly, we want to be assured that the charity receiving our clients’ funds is viable and that the funds are being deployed wisely. However, should this be our standard of comparison?

Are we focusing on the wrong metrics?

Charities are not the enemies of other charities. Nor should they necessarily be the bellwethers. We should not use for-profit corporations to gauge the operations of the non-profit world either. Instead we should consider using government balance sheets as the benchmark. If you think about it, federal, state and local governments do work that is similar to what charities do. In fact, charities are intended to fund services that governments are unable to offer on their own.

Site like Charity Navigator measure things like financial efficiency and financial capacity, citing various metrics before it assigns each charity a financial “score” and overall rating. The site analyzes transparency and accountability by reviewing the charity’s IRS form 990, the independence of the board, the potential diversion of its funds and a number of other factors. All of these items are compiled into a final score (1 to 100) and star rating (up to 4 stars). If you and your client need more financial scrutiny before you make a gift, the data is available—something you’re not likely to get from our government agencies.

Just must remember that people who give to charity, do so voluntarily. Hopefully, they give because something about a certain organization makes them feel better in some way. By contrast, we pay taxes because we have to, not because we necessarily want to. We don’t focus much time on what our government dollars cost us, but very few charities are as inefficient as our government organizations. Don’t believe me? Below is a breakdown of how $100,000 of a taxpayer’s federal income tax would have been spent in 2018. This does not include what happened at the state, county, or city level. This table can’t tell you how much actually went to government “overhead,” but it is telling, nonetheless.

Real world example

Here's an example of a different way of helping our clients gain more perspective and clarity about their philanthropy. Jim and Karen are considering giving some of their low-basis, appreciated securities to a local homeless shelter—to the tune of $100,000. They’ve volunteered at the shelter for a number of years and they truly want to see the facility have a stable program and continue to thrive in the community.

Jim and Karen made a few small gifts to the shelter in the past, but they’ve always wanted to give more. Their gift of $100,000 in stock could go a long way to helping the shelter continue its good work. But how do they know this is the right thing to do? We spend the time reviewing the financials of the shelter and see that its overhead is in the same range as comparable shelters. Then, we look at the breakdown of the numbers in the table below. If we paid the government $100,000 in income taxes, only $207.59 of that amount would be directed to homeless grants. While that shouldn’t be enough data alone for Jim and Karen to make a decision about the gift, it should, at least, be added to their thought process.

As a fun exercise, review the allocation of your tax dollars (i.e. “mandatory giving”) and think about how your involuntary philanthropy is being spent. Perhaps, these goals align with your own. If not, then maybe it’s time to empower yourself and direct your funds with more determination and purpose to create the world you want to live in.
Going forward, we should consider using this as our metric for efficiency and impact:

2018 Federal Income Tax Receipt
April 15, 2019

Conclusion

Giving is a mixture of emotions and economics. Currently there is a lot of emphasis on the economics and accountability of each charitable recipient. That’s all part of responsible giving, but to be fair, we should offer an array of comparisons, not just to for-profit businesses and other non-profits, but to the alternative of letting the government re-allocating our tax dollars to various causes as it sees fit.

Charitable giving will beat paying taxes every time.

Randy A. Fox,  CFP, AEP  is the founder of  Two Hawks Consulting,  LLC.  He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker. He is currently the editor in chief of  Planned Giving Design Center, a national newsletter and website for philanthropic advisors. He is a past winner of the Fithian Leadership Award by the International Association of Advisors in Philanthropy.