An example of why the percent spent on administration is meaningless
Posted on February 13, 2011 at 11:20 am
I’ve written extensively about why administration cost ratios are a meaningless indicator and how focusing on them can do more harm than good. The World Vision controversy provides a perfect example of this issue. If you need some background, read the post World Vision, the next 100,000 shirts first.
So, World Vision is claiming that the 100,000 pieces of clothing from the NFL are valued at 2,000,000. This means each item is worth approximately $20. I don’t know how they determined this amount and their response to the controversy did not address this issue. But somehow they determined that this was “fair market value.”
In this fundraising appeal they ask for donations to pay for the cost to ship clothes, shoes and medicine. They claim “your gift carries the impact of 11 times its face value.” So they’re estimating that the cost of shipping good averages out to be a 1 to 11 ratio of admin costs to shirt (program) costs.
Going with that average (and knowing that it would vary some depending on what’s being shipped), the cost of shipping a shirt is $20/11 or $1.82 per shirt. Assuming these figures are correct, this is how you would determine the percent spent on administration. World Vision spends $1.82 (admin) to ship a $20 shirt (program). So total amount is $20 + $1.82 or $21.82. Next, to determine the percentage spent on administration, divide the admin cost by the total cost, so $1.82/$21.82 or just 8.3%. Using these numbers, the NFL shirt donation appears to be a very “cost efficient” program.
But this $20 is just an imaginary number because this is a shirt not a twenty dollar bill. The only monetary value it has is tied to what someone is willing to pay for it. So what is the actual value of the shirts? It depends.
According to AERDO standard 3.5, the company must be able to sell the goods independently for the same amount they’re claiming if the goods were sold on the day of the donation.
3.5 Fair Value: GIK donations are to be valued based upon “The price that would have been received to sell an asset or paid to transfer a liability in an orderly transaction between market participants” as of the date of the donation (FASB ASC 820-10-35-2). This is known as an entity’s “exit price.” This assumes the transaction would be an “arms-length” transaction….
So can 100,000 shirts of the losing team be sold at $20 each after the Super Bowl, probably not. According to this article:
As it turns out, misprinted NFL gear doesn’t seem to command much interest from collectors as the league may believe:
Brandon Steiner, founder and CEO of Steiner Sports, tells Minyanville that there’s “not really a market” for the items the NFL makes World Vision keep under lock and key.
“Sometimes people buy them here and there,” Steiner says. “But there’s not much value.”
Even if it was possible to sell that many shirts for $20 each in the US, they’re not allowed to. According to a 2007 New York Times article:
The other set of championship gear — the 288 T-shirts and caps made for the team that did not win — will be hidden behind a locked door at Dolphin Stadium. By order of the National Football League, those items are never to appear on television or on eBay. They are never even to be seen on American soil.
So the fair market value, on the date of donation, in the U.S. is essentially $0. Unless the NFL is willing to change their contracts and licensing agreements, at which point in time they could just donate the shirts locally.
The next question then is what is the value of the shirts in the countries where they will be distributed? Bill Westerly did a great job of explaining how to determine local value in this post. But for the sake of the point I’m trying to make here, let’s say the shirts could be sold on the local market for somewhere between $1 and $10.
If the fair market value of the shirts is $1 then the amount per shirt is $1 (program) + $1.82 (admin) = $2.82. The admin ratio would come out at $1.82/$2.82 or 64.5%. This exact same shirt distribution would now appear to be a horribly inefficient program. In fact they would pay $0.82 more per shirt ($82,000 total) more to import the clothes than to purchase shirts in the local market place.
Now let’s imagine that the fair market value is $10 instead. The amount per shirt would be $10 (program) + $1.82 (admin) = $11.82. The admin ratio would come out at $1.82/$11.82 or 15.4%. Now the shirt distribution appears to have an average cost efficiency.
So, depending solely upon the illusive “fair market value” the exact same program can appear to be very cost efficient (8.3%), horribly inefficient (64.5%), or about average (15.4%). This is why one of my questions to World Vision was – how did you determine the fair market value for the NFL gear? Because it matters.
This example shows how the administration ratio can be manipulated. Placing so much emphasis on this ratio pressures non-profits to chose programs based on their cost ratio and rather than what is most beneficial to the people they’re trying to help.
So simply by revaluing medicine based on the local market rather than the US market, World Vision lost an imaginary $140 million.
Lies, White Lies, and Accounting Practices; Why nonprofit overheads don’t mean what you think they mean.
This 20 page book breaks down the myths surrounding nonprofit overhead. You will never think of nonprofits the same again.
Tracking the World Vision / NFL Shirt Donation Controversy – For links to all 26 posts on this controversy.
The Worst (and Best) way to Pick a Charity This Year - Philanthropy Action
Charitable donations include overheads. Here’s why - Brigid Slipka
The Nonprofit Starvation Cycle - Stanford Social Innovation Review (SSIR)