Middle TN charities confront ‘overhead myth’

Sep 22, 2013 by

As the leader of one of Nashville’s best-known charities, Danny Herron knows the importance of watching every penny.

The more money a charity spends on overhead, the less it spends on helping people.

That’s why about 85 percent of the revenue from the $14 million budget at Habitat for Humanity of Greater Nashville goes into program expenses. Those include everything from the salaries of construction supervisors to the cost of two-by-fours.

Administration, marketing, finance and development costs all get classified as overhead. Like other nonprofits, Habitat tries to do more with fewer people, said Herron, who is Habitat’s president.

“I’d rather give you a raise and ask you to take on something more than hire a new person,” he said.

Middle Tennessee charities such as Habitat spend most of their revenue on program expenses, according to a Tennessean review of the latest tax returns for more than 250 local nonprofits with more than $500,000 a year in revenue. Those charities took in more than $1.1 billion in revenues. More than $835 million of that, or 74 percent, went to programs.

Local charity leaders say they work hard to spend donations on their charitable missions — not on overhead.

But some charity watchdog groups worry that trying to operate on a shoestring budget is actually bad for some nonprofits. They’ve started a campaign called the “Overhead Myth,” which argues that effectiveness matters more than efficiency. They want donors to remember that doing good work is expensive.

Opposite effect

For Habitat, the Great Recession was a double-edged sword. The downturn made it harder to raise money. But the sluggish housing market made it easier for the charity to cut costs, Herron said.

Before the recession, the charity paid up to $40,000 to buy a lot and get it ready to build a house on. But when the housing market dropped, so did the price of land. Habitat saved nearly $2.5 million by buying up lots that were ready to build on for as little as $15,000.

With an average Habitat house costing about $120,000 to complete, the savings meant the charity could help more families.

“That’s an extra 20 houses,” said Herron, a former banker who’s been president of Habitat since 2010.

In the for-profit world, he said, doing more business often means a company makes more money. The opposite is true for nonprofits: Doing more means spending more.

“When we build more houses, that does not mean we have more money,” he said.

But having a larger budget can help a nonprofit be more efficient.

That’s the case at Catholic Charities of Tennessee, which had $13.8 million in total expenses for fiscal 2012, according to its latest tax return. Overhead made up 2.1 percent of expenses.

In 2003, the charity had about $6.7 million in expenses, with about 5 percent going to overhead.

“There’s an economy of scale,” said Executive Director Bill Sinclair. “It’s less expensive to have a program that’s a little larger.”

The overhead myth

Being efficient with donated money is a good thing, but it’s not always a measure that a charity is doing good work, said Jacob Harold, president of GuideStar, a charity watchdog group.

Guidestar and several other groups are working on a campaign to overcome the overhead myth — the idea that efficiency is the best measure of a nonprofit’s success.

“We say it’s fine if Fed­Ex has overhead,” he said. “But it’s not if the Red Cross does.”

Guidestar, which publishes nonprofit 990 tax returns on its website, Guidestar.org, has made it easier for donors to review nonprofits’ finances.

Harold, along with the leaders of Charity Navi­gator and the Better Business Bureau, says keeping an eye on a charity’s finances is important.

In rare cases, he said, charities have spent too much money on overhead and fundraising, and looking at a charity’s expenses can help expose that.

But having low overhead “tells us nothing about who is being effective at serving their communities,” Harold said.

It’s hard to do good work on a shoestring budget, he said, so charities must spend money to find the best strategies for fulfilling their missions.

“It comes down to this,” he said. “Social change is hard. Serving a community is complicated — and so you have to invest in the process of knowing why the things you are doing are going to make the world a better place.”

Bill Sinclair of Catholic Charities agrees. He said donors give to charities because they trust them to do a good job at their missions.

“We try to look at every program each year and say, ‘What can we do to help people change their lives for the better?’ ” he said.

Weigh the factors

Ellen Lehman, president of the Community Foundation of Middle Tennessee, says donors should consider a variety of factors when deciding what charities to support.

That’s one reason the Community Foundation runs GivingMatters.com, a database of more than 1,300 charities in Middle Tennessee.

The site features financial information on each charity, including the amounts that go to programs and overhead. Profiles also include an overview of each charity’s program and, in some cases, a video about its work.

Lehman said different information matters to different donors, and efficiency is only one factor. Some people give to charities because they know someone on the board, while others give because they have a personal connection to a cause.

“People who are older generally give out out of a sense of allegiance or a sense of obligation or because of who asked them to give,” Lehman said. “Younger generations are not driven out of a sense of allegiance or obligation. They are driven by issues and the chance to make a difference.”

No donor is wealthy enough to do everything, she said. Lehman believes donors are happier when they are proactive about their giving. Instead of waiting to be asked, she said, donors should decide what issues matter most to them and then find a charity that fits.

That turns giving into a positive experience, rather than a response to guilt.

“Think about what is going to make you feel good about what you are doing — instead of feeling bad about what you are not doing,” she said.

Middle TN charities confront ‘overhead myth’ | The Tennessean | tennessean.com.

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