Professor Richard Steinberg

Professor of Economics, Philanthropic, and Public Affairs at Purdue University

I am a neutral party, paid to analyze the fundraising program of DVNF. I was interviewed for the story (or a related story –the interview was a while ago), but CNN decided not to run any of my analysis, which indicates that CNN is fundamentally wrong in its analysis of the situation. There are many bad charities, but looking at the ratio of expenditures to donations does not tell you whether the charity is good or bad. The reasons are spelled out in my publications in academic journals that have been reviewed by other experts prior to publication and that preceded my engagement with this group. Charity Navigator has been slow to understand the arguments, and retains this misleading statistic in its evaluation process. But others have learned from more careful analyses. Three Supreme Court cases speak to the irrelevance of the “cost ratio” (a rough quote -¬”if the ratio revealed fraud or inefficiency, it would be little more than coincidence”). The Combined Federal Campaign dropped its cost-ratio requirements. The IRS was persuaded to drop the required posting of the cost ratio for the recently revised informational returns filed annually by most nonprofits (form 990). The full argument is too lengthy for this forum, but a couple of points are clear –the ratio confuses popularity and efficiency, ignores future donations resulting from this year’s efforts, and ignores the educational and advocacy benefits stemming from the request for funds.

DVNF was a new charity, and invested heavily in finding new donors. The firm they employed, Quadriga, put its own money at risk, advancing the necessary funds and guaranteeing that in the event the campaign failed to cover costs, the charity would not be liable for the shortfall, because they believed that the long term investment would pay off. You don’t judge an investment by first year returns. Using the early years to follow the net returns and project them forward over the lifetime of the investment, I concluded that DVNF had made a good investment.

Quadriga’s specialty is to include items of value in its solicitation letters –tote bags and the like (“premiums”). This is expensive, but worth the expense if it increases response rates and the amounts donated. The strategy has been adjusted and will continue to be adjusted as DVNF gains experience with the donor pool attracted by the initial solicitations. There is too little data, as yet, for me to be fully confident in my finding here, but I found some evidence that more expensive premiums, on average, more than paid for the added expense in added donations.