Non-profit board meetings can be very boring for many people. This may explain why some non-profits have trouble maintaining high levels of director attendance. Now imagine a board meeting where Willie Nelson, John Mellencamp, Dave Matthews, and Neil Young show up. We’d gladly pay Ticketmaster’s service charges to attend that meeting. This weekend, Farm Aid proved to be a very interesting charity even without a celebrity board meeting. On the eve of the annual Farm Aid concert, the Chicago Tribune ran a highly....
Photo Used By Permission. All Rights Reserved to Paul Natkin/Photo Reserve Inc. 2004
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critical investigative article focusing on Farm Aid’s finances. J. George, Farm Aid Expenses Eat Away Donations (September 17, 2005). According to the Tribune story, the annual Farm Aid concert does not raise all that much money after all the other expenses are paid despite the hoopla and donated performances. The article attempted to go deeper, failing miserably. The Tribune story provides an important lesson for every non-profit in the country.
Our Handicap. At the outset, we should note that we come to this story with one handicap. The Tribune had the 2004 Form 990 for Farm Aid. At this time, the last Form 990 available on the Guidestar website for Farm Aid is the 2003 Form 990. We will call Farm Aid to obtain a copy of its 2004 Form 990, but the relative numbers do not appear to have changed all that much between 2003 and those reported for 2004 in the Tribune article.
All that the Tribune article ultimately proves is that looking at raw numbers is folly, as we have said time and time again. No one would argue that controlling expenses and cutting fat are unimportant objectives. That is what governing is all about. At the same time, it is important to evaluate a charity’s outcomes rather than focusing on inputs and outputs.
Headline Misleading. The second part of the Tribune article’s headline proclaims, Only 28% of Revenue from Last Year Made it to Farm Families. Had the article been written a year earlier, it could have offered a more extreme number—22.82%. Apparently Mr. George is comparing Line 22 of the 2004 Form 990 (Grants and Allocations) to Line 12 (Total Revenue). The headline writer apparently holds the mistaken belief that every other expenditure reported as part of Form 990 covers fundraising and management overhead. In fact, Farm Aid is in part an advocacy organization, certainly a potentially important and legitimate activity. In fact, the organization actually does report lobbying expenditures (Part VI-A), although those are relatively small and certainly don't necessarily include all advocacy activities. The organization also runs a hotline to assist farmers, an activity that apparently generates a lot of expenses. Unfortunately, Farm Aid does not provide a functional breakout of expenditures related to its activities. In fairness to Mr. George, he does note that analyzing numbers can be tricky, but in the end, that difficulty did not temper the Tribune's newspaper-selling headline.
Grants to Organizations, Not Individuals. Also notable about this headline is its reference to grant money going to farm families. Outright gifts to specific families would likely be problematic under the tax rules. The headline should have referred to "other organzations that assist farm familes" The Attachment to the 2003 Form 990 explaining Line 22 shows grants to organizations for emergency, legal, outreach and educational services. It reports no grants to individuals. For accuracy's sake, the article "corrects" this gloss with several quotes in the body of the article. But why write a misleading headline in the first place?
Why No Comparisions With Local Charities? If Mr. George wants to focus on just the numbers, he should have compared Program Services (Line 13) against Total Revenue (Line 12). For the 2003 fiscal year, this shows 68.44% of revenue going to program services. The article quotes Naomi Levine, an NYU expert on philanthropy, as saying that at least 65% of revenue should be “given away” before a non-profit is considered to be performing adequately. We think that Mr. George misconstrued Ms. Levine’s comments. What Ms. Levine likely meant was that at least 65% of revenue should be devoted to mission rather than fundraising and management. From that standpoint, Farm Aid passes Ms Levine’s benchmark. Museums, hospitals, and public television stations generally don’t give money away. No one would suggest that these institutions are doing a poor job because they don't make grants. The Tribune’s focus should have been on mission—not just grants, which apparently only account for part of Farm Aid’s mission.
To put things in perspective, on its 2003 Form 990, WTTW, Chicago’s public television station, reports that just 67.23% of its Line 12 revenue went to program services. And the 2003 Form 990 for Chicago’s beloved Art Institute reports that just 60.53% of its Line 12 revenue went to program services. Given the Art Institute's size and its importance to the Chicago community, might the Tribune more appropriately investigated the Art Institute’s "efficiency"? And if the Tribune wants to focus on grants, the Art Institute gave just 8.13% of its Line 12 revenue away in the form of grants--it operates a school, so much of that might be in the form of scholarships, but we are only speculating. If charity is just about giving things away, then we will be the first in line when the Art Institute starts to give away some of its signature paintings. Let's see, Gustave Caillebotte's Paris Street; Rainy Day, 1877 might look nice in our dining room--although some cropping may be necessary.
Unrealistic View of Event Costs and Donor Demands for Premiums. Mr. George seemed to be very troubled by the fact that in 2003, the
Farm Aid concert took in $1,013,087 and had $853,833 in expenses, leaving just
$159,254 for Farm Aid's efforts. He quotes one expert as saying, “That’s not
good. If I go to a concert, I would not like that at all.” This
expert is naïve if this is what she truly believes. We suspect that if people looked at the net income for many
charitable balls, the actual net take is at best breakeven,
particularly if the auction for donated goods is disregarded. While the return doesn't provide breakdowns by events, the 2003 Form 990 for Chicago's famed Lyric Opera shows special events revenue on Line 9a as $1,432,827 and associated expenses as $1,641,722, producing a net loss from these special activities of $208,895. It should be noted that the Lyric is reporting $1,627,934 of associated revenue on Line 1a as charitable contributions. The loss appears to be the excess of the cost of staging the events over the value of goods and services provided to attendees. In one sense, these activities produced an economic profit if the charitable element is treated as event revenue. On other other hand, the Lyric appears to be running the actual event as a loss leader.
We have one friend who always encourages us to attend a winter benefit at a swanky Chicago hotel. “It’s a great deal. For a $150 contribution, you get an incredible dinner, special desserts, and a night of dancing—plus it's tax deductible.” Well people may deduct the full $150 ticket price as a matter of practice, but the full amount clearly is not tax deductible as a legal matter. So is Willy Nelson’s Farm Aid concert really all that different in terms of attendee motivations? They want to see a concert. Our friend wants us to eat and dance.
And let’s return to the Art Institute. At the core, those blockbuster shows are fundraisers, driving sales of memberships. Sadly, many people want something tangible in return for a charitable contribution. What about the people who require a telephone call to contribute money? In some cases up to 90% of the contribution is paid to the private telephone solicitor. While Farm Aid is hardly a paradigm for staging an event that nets large amounts for the organization, it clearly isn’t alone when it comes to what can be viewed as inefficient fundraising.
At this point, we should note that many events are not staged for their direct contribution to the bottom line. They do promote awareness, loyalty, and goodwill. That awareness, loyalty, and goodwill may pay dividends down the road in the form of volunteer work and large contributions. Charities are not to blame for the extravagances that they often must utilize to raise funds. They are just marketing to a public that isn’t as charitable as some would like to believe.
And for a final example: Year after year we have seen WTTW on-air fundraisers where for a contribution of $300, the donor receives what would seem to be $100 or $150 in DVDs, books, and CDs. We don't know what WTTW nets after paying for these premiums, but we assume there is some cost. Now that would be an interesting story for the Tribune.
Discussion of Investments is Unfair.
We do note that the article comments on how Farm Aid has invested its
endowment. Rather than investing in companies that develop alternative
energy, Farm Aid's portfolio is quite tradtional, including a blue chip
financial institution and integrated-oil company. This is presented as
being counter to Farm Aid's mission. Quite frankly, we applaud the
Farm Aid board for adopting an investment policy that apparently
stresses overall return and prudence rather than investments of
hard-earned endowment in so-called socially-responsible causes. "Use
the man's profits to change the man," so to speak.
By the way, the Nature Conservancy has employed a "partnership-with-big-business" strategy for years. [Our assessment of the investment practices is based solely on the Tribune account rather than a review of the actual investment portfolio]. Mr. George notes that banks foreclose on farmers. He fails to note that banks also provide financing for many more family farmers than they foreclose on.
Celebrities Lack Power and Influence. If anything, the Tribune article proves that our much vaunted celebrities are not as effective at changing society as they might wish or believe they are. If Willie Nelson and his friends deserve any criticism, it is for not being able to convert their star power into a bigger movement on behalf of farmers after twenty years of efforts. But that can be said of many charitable organizations. We don’t have any trouble with the Tribune article to the extent Mr. George and the Tribune were trying to make that point. We do have trouble with the fact that they misused numbers to create a sense of accuracy that is not supported by the raw numbers or by appropriate comparisons to many other charities, including those with marquee names.
Farm Aid Needs More Transparency. We do, however, criticize Willie Nelson and his friends for not putting together a Form 990 that provides more information regarding Farm Aid's successes. We have said it time and time again; charities must recognize that the Form 990 is a public document. Certain information must be included in a certain format, but nothing prevents a charity from including additional information that explains its numbers and accomplishments. We are also disturbed that Farm Aid does not post its Form 990 on its own website. Transparency counts.
Conclusion. To summarize, we are troubled by the tone of the Tribune article. It leads with a big punch and misuses financial information, but acknowledges that things may not be as bad as the big punch suggests. That strikes us as sloppy, if not outright unfair reporting.
In the interest of full disclosure, we have never been to a Farm Aid concert and have little interest in the organization or its efforts. We do own four Willie Nelson CDs and may buy several more today. He is excellent.
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