Big Seattle charity cuts its bogusly high efficiency claim–a bit

This morning, Seattle-based United Way of King County, the nation’s largest United Way unit by donations, updated a display on its Web site. Aside from color, see if you can spot the change:

YesterdayUWKC screenshot 2 130227Today

UWKC screenshot 2 130228Yes, UWKC slightly lowered its financial efficiency claim, from “more than 98 cents” of each donated dollar to “more than 97 cents.” In my judgment–as a journalist I’ve been writing about charities for a long time–both numbers are bogusly high. Using the standard formula in the nonprofit sector–or even the method prescribed by the parent organization of all United Ways–UWKC’s true real charitable commitment ratio, as this measure of financial efficiency is called, is just 91 cents on the dollar, or 91%.

Now in the world of charity 91% is a perfectly acceptable financial efficiency, but apparently not acceptable enough for UWKC. As I see it, the agency is playing games with its numbers–essentially leaving out inconvenient truths–hoping to impress ignorant donors. Its leadership made up a calculation so invalid in its methodology that its own auditors declined to sign off on it. In effect UWKC is asserting it has just one-fourth the average overhead of the country’s other 1,200-plus United Ways–which all pretty much operate in the same manner, raising money through workplace deductions.

I wrote about this last fall after UWKC posted online its annual financial statement for the fiscal year ending June 30, 2012. The unaudited part of the statement–the portion that the auditors disclaimed all responsibility for–calculated a charitable commitment ratio of 97.9 cents on the dollar, or 97.8%. That by definition is less than 98 cents. Yet until this morning, UWKC was still claiming “more than 98 cents,” the number from the previous fiscal year, when the actual calculation was 98.1 cents, or 98.1%. I have been advised the delay in updating to the lower number on the Web was due solely to the time it takes to prepare the PR-ish annual report.

It was in a July 24, 2012, press release that UWKC announced it had ended its fiscal year by “raising $103 million.” So was that big, impressive number later used somehow in calculating charitable commitment? Nope. About $8 million of that was grants, corporate sponsorships and donated labor. UWKC needed to include that largess in its press release to stay in sexy, nine-digit fundraising territory. But that chunk carried $1 million of overhead, suggesting a charitable commitment ratio of just 87.5%.  UWKC couldn’t get to an overall super-super-high efficiency with that drag. So it simply ignored the $8 million and its attendant $1 million of overhead.

This is also called cherry-picking. And that wasn’t the only fruit UWKC handled.

The UWKC financial statement clearly showed that $10 million was spent in fundraising and certain overhead, known colloquially in the charity world as “the bad stuff” because donors hate to see their gifts spent that way. Ignoring the $1 million associated with the grants, corporate sponsorships and donated labor brought the bad stuff down to $9 million. Not counting the $1 million of depreciation on equipment used in fundraising and certain overhead functions brought the bad stuff down, with rounding, to $7 million.

Then, UWKC took $5 million it received from a separate endowment originally funded by the Gates Foundation and, rather that calling it gifts or even investment revenue, simply used it to reduce the remaining bad stuff down to $2 million. This is called “netting” and is a characteristic of some very dubious charities.

Dividing $2 million into the $95 million of donations it decided was good enough to count, UWKC calculated a “net operating ratio” of 2.1%. Subtracted from 100%, that produced 97.9%, the basis for the better-late-than-never “more than 97 cents” pronouncement put up today.

My calculation of charitable commitment used a much easier formula that is by far the most common among charity watchdogs: charitable activity expenses ($100 million) divided by total expenses, including the fundraising and certain overhead ($110 million). Result: 91 %. Because almost everything that came in was spent, the ratio worked out to be pretty much the same even if the denominator instead of total expenses was total donations, the way United Way Worldwide crunches the numbers. The Washington Secretary of State’s Office, with 2011 data and the same formula I used, figured 92%. That’s a lot closer to me than to UWKC.

I have shown the UWKC financial statement with its efficiency calculation to accountants who specialize in nonprofits, and they simply cannot believe the agency gets away with it. Nor is it every day that you see an auditor stick it to a charity client as accountancy Moss-Adams LLP did to UWKC. The operating ratio calculation, Moss-Adams declared up front on page 2 of the financial statement,  “has not been subjected to the auditing procedures applied in the audit of the financial statements, and accordingly we do not express an opinion or provide any assurance on it.” I think this is polite accountant-talk for, “You’re full of it!”

In its defense, UWKC details its methodology for calculating charitable commitment. But what it doesn’t say as it publicizes “more than 97 cents” is how, ah, unusual its formula is to start with.

I invite anyone to chime in below with comments or observations on my two cents about UWKC’s nearly three cents.

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