[The following letter will be sent to the Public Editor of the Chicago Tribune on Monday September 26, 2005]
September 26, 2005
N. Don Wycliff
Public Editor
Chicago Tribune
435 N. Michigan Ave
Chicago, IL 60611
Dear Mr. Wycliff:
I am writing in response to an article the Chicago Tribune published in its Saturday, September 17, 2005 edition entitled Farm Aid Expenses Eat Away Donations: Only 28% of Revenue from Last Year Made It to Farm Families (Byline Jason George)....
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This article is both misleading and inaccurate. I have written a letter to the editor of the Tribune and sent an e-mail to Greg Kot. I have yet to receive a response to either communication.
Basis for Comments: Personal Background. By way of background, I am both an attorney and a CPA. I hold a Masters degree in Taxation from NYU and a Masters degree in Management from Northwestern University’s Kellogg Graduate School of Management. I am currently completing a 750-page book entitled A Handbook for Nonprofit Boards, Executive Directors, and Their Advisors: Avoiding Trouble While Doing, to be published by John Wiley & Sons in February 2006 as part of their Nonprofit Series. Chapter 13 of that book is entitled “Evaluating Your Organization.” That chapter explores how financial information and metrics can be misleading and misused. Quite apart from those credentials, I have been engaged in one form of financial analysis or other over the past twenty-five years. During the last several years, my work has focused on the charitable sector. Consequently, unlike some other areas covered by the Tribune, this is an area where I have some expertise.
I have been aware of Farm Aid since its inception, largely because of my interest in music. However, I have never donated money to it, attended one of its concerts, or paid any meaningful attention to it. Right or wrong and without any basis in fact, my general view had been that it was probably inefficient and not worth my time or money. In short I am not a spokesperson for Farm Aid and have had no prior relationship with them—although I have now spoken to several staff members this past week.
The Tribune’s Credibility is at Stake. At a macro level, Mr. George’s article undercuts the credibility of every article that runs in the Tribune. As I have noted, charity and financial analysis is something that I know about. Consequently, I am able to identify errors with some authority. The frightening, but logical question: Does the same methodology used by Mr. George in preparing his Farm Aid article permeate the Tribune’s coverage of the war in Iraq, nuclear proliferation, the budget deficit, or stem cell research? How can I now be sure that a Tribune article that suggests that troop levels should be double what they currently are in Iraq or that the National Guard is understaffed is not subject to the same sorts of errors and biases that run throughout Mr. George’s article?
Specific Objections. Now to my specific objections to Mr. George’s article. I assume the editor who assigned the topic to Mr. George thought that the story was timely, given the fact that Farm Aid was staging its annual concert in the Chicago area this year. Fair enough. Given the celebrity power behind Farm Aid, an inquiry into the impact of that celebrity on the charity’s mission also strikes me as a legitimate inquiry. In fact, given recent tragic events in Alabama, Louisiana, Mississippi, and Texas and the heavy celebrity participation in fundraising activities responding to those events, I think an inquiry into celebrity impact on charity is particularly relevant. I do part company with Mr. George and his editor over their execution of that inquiry. Specifically—
The Focus on Grants is Misplaced: In the second paragraph of the story, Mr. George writes
The percentage of funds given away by the group is exceedingly low compared with the money eaten up by expenses or not used.
In the third paragraph, Mr. George introduces the first statistic. This is the 28% number in the headline, which was determined by comparing Grants and Allocations (Line 22) to Total Revenue (Line 12) on Farm Aid’s 2004 IRS Form 990. There are more than a few problems with the ensuing analysis. Fundamentally, it assumes that program-related activities are limited to grant-making activities. Quite frankly, I don’t know how anyone could possibly believe that all charities limit their charitable programs to giving money away. You only need look at Hurricane Katrina to see charities using the money to buy food and medical supplies that do not take the form of grants. Going beyond disaster relief, all you have to do is look at the program-related expenditures of any museum, repertory company, educational institution, social service agency, or any number of other types of charities to see that program-related expenditures encompass far more than direct grants.
If we were talking about corporate foundations, Mr. George’s view of programmatic activities might provide a reasonable benchmark. I note that the Robert R. McCormick Tribune Foundation made close to $71 million in grants in 2003, despite only having just under $50 million in total revenue. But Farm Aid is not a corporate foundation. Interestingly, despite having over $10 million of total revenue in 2003, the Cantigny Foundation made no grants or allocations during 2003. Does that mean the Cantigny Foundation should be subject to a similar expose in the Chicago Sun Times? Absolutely not. It isn’t a grant-making foundation.
Mr. George—or at least the headline writer—was misleading in suggesting that a certain percentage of Farm Aid’s money should go directly to farm families. This headline is inconsistent with the Attachment to the Form 990 listing the grantee organizations. No individuals are listed. That doesn’t mean that Farm Aid does not support farm families, but its approach seems to be make grants to intermediary organizations. Presumably these intermediaries are more in touch with local needs.
Mr. George should have taken a look at the BBB Wise Giving Alliance standards, a widely-respected set of standards that an affiliate of the Better Business Bureau has developed to assist donors in evaluating charitable efficacy. To the extent these standards rely on a numerical metric, they compare program related expenses to total expenses, suggesting that program-related expenses be at least 65% of total expenses. Assuming that is the relevant metric, Farm Aid is at 76.40% for 2004 and was at 74.22% for 2003. I personally prefer a comparison of program expenses to revenue, which for 2004, would have produced a 64.60% number and for 2003 would have produced a 68.44% number, because that metric forces me to focus on whether revenue is being spent currently or saved as part of an endowment. Of course that raises more questions, but that is exactly what any numerical analysis is supposed to do. In any event, you will notice that the BBB Wise Giving metric is just one of 20 standards it uses in rating charities. Many of those standards have nothing to do with financial metrics, but focus on questions of governance and ethics.
The juxtaposition of the 28% number against an expert’s reference to a 65% benchmark is particularly misleading. Specifically, Mr. George writes:
Last year, Farm Aid donated less than 28 percent of its revenue, according to a review of the non-profit's records and policies. An organization should be giving away at least 65 percent of its revenue to be considered performing adequately, said Naomi Levine, a New York University expert on philanthropy.
The problem with this passage is that it totally ignores all other expenditures on Lines 23 to 43 that are included under Column B of Part II of the Form 990. I can all but assure you that if you were to call Ms. Levine and inform her that Farm Aid engaged in other activities besides grant making, she would be the first to tell you that the comparison of the 28% number and her 65% benchmark is misleading.
The Criticism of Investment Policies is Inappropriate. Mr. George criticized Farm Aid regarding its investments in what I will term “blue chip” stocks apparently some of these companies (i) don’t support the development of alternative energy, (ii) foreclose on farms, and (iii) produce “conventional” food. That all may be true, but as an initial matter, I—and I think most people who study governance—would prefer to see prudence and diversification rather than programmatic investments when it comes to an organization’s endowment. You might take note of Section 4944 of the Internal Revenue Code, which imposes an excise tax designed to preclude private foundations from making investments that could jeopardize their charitable purpose. While Farm Aid is not a private foundation, the objectives underlying Section 4944 carry through to the investment standards that would be applied under state law to the relation between endowment assets and programmatic investments. In fact, in 2004 the Illinois attorney general brought a suit against the directors of an Illinois foundation over investment-related decisions—although this lawsuit is not a dispute over “socially responsible” investments. To pursue the path that Mr. George suggests could subject directors of any charity to a suit by a state attorney general if those programmatic investments placed the charitable assets and mission in jeopardy.
While I have not seen the documentation surrounding the assets in question, in all likelihood these assets are subject to significant restrictions. No one should criticize Farm Aid’s stewardship of these assets without first reviewing the relevant documents, or at least asking questions. It may simply be that Farm Aid is precluded from investing these assets in anything but a diversified portfolio of “blue chip” stocks.
The Criticism of the Annual Benefit Concert’s Net Contribution Lacks Insight into Fundraising Practices. Mr. George criticized Farm Aid because the 2003 Farm Aid concert earned $1,013,087 but had $853,833 in expenses, resulting in what Mr. George apparently views as too small of a profit. Given the fact that many fundraising events turn out to be net money losers for charities, the fact that Farm Aid made any money at all is probably notable. More to the point, Mr. George assumes that fundraisers are designed to make money from the event. In some cases that is true. In other cases, the event is more akin to business entertainment, designed to cement relationships, make people feel like they are on the A-List, and build goodwill. While the ticket price covers the direct costs and may contain a charitable element, often the charity is really looking for that big contribution sometime in the future or for volunteer service. In Farms Aid’s case, the concert also serves the function of increasing public awareness, a legitimate educational function.
As Neil Young pointed out in an interview with the Chicago Sun-Times, Mr. George’s comparison to Mr. Young’s annual benefit concert for the Bridge School is misplaced for several reasons. See, A. Golab, Farm Aid Singer Rips Up, Stomps on Newspaper (September 20, 2005). While I am not specifically familiar with the benefit concert for the Bridge School, my impression is that it is much more of a fundraiser. Farm Aid apparently shifts its location each year, in a very deliberate effort to bring, over a number of years, the message to people throughout the country. I assume that if Willie Nelson wanted a free facility, he has enough clout with people in certain locales that he could probably build a more permanent and less costly facility into the program structure, but that would likely mean fixing the concert’s location, and thereby defeating part of Farm Aid’s grassroots advocacy objectives.
I should note that I received an unsolicited e-mail from one West Coast advisor to non-profits who is known and highly-respected throughout the country. He objected to the comparison to the Bridge Concert because he believes the expenses for the donated goods and services should not be netted against the corresponding amount of revenue, thereby forcing the analysis to properly account for these expenses. The theory behind his comment is too complex for this letter, but I can assure you he is absolutely right from the standpoint of financial statement presentation, management decisions, and economics. In short, he was indicating that the Tribune simply was not making a meaningful or appropriate comparison between Farm Aid and the Bridge concerts.
If Mr. George is going to blame anyone for the concert’s small profit, he should blame the public. If each person were willing to donate the ticket price to the cause without demanding a concert in return, all the money would go to the cause. Unfortunately, the public is often not as generous as many would like to admit. Many people want something in return before they will open their wallets. Providing that something costs money, as far too many charities know all too well.
Tribune has Wasted Resources on Farm Aid. Farm Aid is a relatively small charity. If I had been assigned the story by Mr. George’s editor, my initial hypothesis would have been: Is this all these celebrities have been able to do after 20 years? This organization basically takes in $1.5 million per year in revenue (with the concert included on a net basis). As a resident of Chicago, I want to know why the Tribune didn’t investigate WTTW, the Art Institute, or the Lyric Opera, three organizations that are far more relevant to me and many of the Tribune’s readers who live in the metropolitan area.
If you want to focus on events, why not focus on Lyric’s special event revenue? According to its 2003 Form 990, it lost $208,895 on its special events. As is typical, care must be taken in interpreting that number. The revenue number doesn’t include $1,627,934 of charitable contributions related to those events, but this number does at least suggest that the admission fees aren’t covering expenses—more investigation would be required before any conclusion could properly be drawn. Or consider the Art Institute of Chicago. It only used 8.1% of its revenue for grants, according to its 2003 Form 990. Now, let’s look at the Art Institute on a more relevant basis. It only expended 60.53% of its revenue on program activities during the period covered by its 2003 Form 990. WTTW did a little better, at 67.24%. This is not to suggest that any of these organizations is poorly run. But if raw numbers are so relevant, why the focus on Farm Aim and not on local organizations with far more impact on the Chicago community?
I enclose a copy of an article that ran two weeks ago in the Chronicle of Philanthropy, an industry trade paper. It has an entirely different take on Farm Aid. It is very difficult to reconcile that take with the Tribune’s. One of these accounts is out of step. When I look at Mr. George’s dependence on financial data to add credibility to his thesis, it is clear to me that he is the one who is out of step.
Mr. George is Also Out of Step with the Approach of Taken by Many Grantmakers When Evaluating a Charity. The clear movement among grantmakers has been away from the use of artificial financial metrics when evaluating charities. Take Chicago’s Metro United Way. It, as do many of the United Ways throughout the county, uses a program logic model to evaluate efficacy. This is an attempt to quantify what the charity has accomplished with the public’s fund. To illustrate, take a charity that had a program directed at improving the literacy of underprivileged youth. Under a program logic model, this charity would not necessarily receive funding simply because it served 500 teenagers or reading scores went up 10%. The charity would be asked to develop a more meaningful metric: How many of these kids were employed in above-minimum wage jobs after completing the program? Developing that sort of metric is much more difficult than crunching numbers on a tax return, but it is also much more meaningful. Mr. George didn’t even think about starting down that road; at least his article doesn’t reflect such an attempt.
Conclusions Regarding the Article. Mr. George misinterpreted statistics in writing his article. Mr. George implicitly acknowledges this fact by noting in several places—through quotes attributed to experts—that evaluating charities and their numbers can be difficult. Fair enough. My problem is that when all the “cows came home,” those numbers formed the basis for the headline and greatly overshadowed the cautionary notes. To me, this suggests that the intent was to sell newspapers through headlines rather than to arrive at the truth. In my mind, this is supported by the Tribune’s focus on Farm Aid rather than major Chicago charities that in some respects do not fair as well as Farm Aid when it comes to the raw numbers that Mr. George seems to favor.
Farm Aid is Not without Fault. While I have not made a comprehensive study of Farm Aid, it clearly is not without fault. It appears to have too many spokespersons. At least one of its board members appears to be poorly informed. It has not posted financial information on its website, or much program-related information. It has not adequately supplemented its Form 990 with useful explanatory information, such as a functional breakout of expenditures by major program activity. Yet, much of this is a question of transparency, which can easily be fixed. In fact, I advised Farm Aid last week that they should get their financial information up on their website as soon as possible. They have started to work on that, with the current Form 990 now available. I found the people I spoke to very open to suggestions. I might add that many, many charities suffer from this same lack of transparency.
Specific Requests. I would like a written reply to this letter. Setting aside Farm Aid, I believe Mr. George’s article contains some serious flaws. I want to know what the Tribune plans to do to make sure that those sorts of flaws don’t appear in its pages again.
As for Farm Aid, I would hope the Tribune would provide them some space to reply to Mr. George’s article. I would also hope that the Tribune might consider a series of articles explaining to the public how to evaluate a charity. We are already hearing a lot of grumblings about the Red Cross’s response to Hurricane Katrina, including some people now saying that the Red Cross is too powerful because it has received such a high percentage of the disaster relief contributions. Helping people understand the alternatives available to them would be a public service.
I look forward to your response to the issues I have raised in this letter.
Sincerely yours
Jack B. Siegel
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