DATELINE: January 16, 2008, Chicago
The American Red Cross just can't seem to catch a break. The opening paragraph of today's article by New York Times reporter Stephanie Strom reports that the American Red Cross is facing a $200 million operating deficit. Short on Fund-Raising, Red Cross Will Cut Jobs. This could lead to the layoff of up to 1,000 employees in the national office, according to Strom, which amounts to a one-third reduction in headquarters staff. There is also talk of reducing regional management. This will be a surprise to staff, but it should not be that much of a surprise. Prior to his forced departure last November, former-Red Cross president and CEO Mark Everson had apparently talked of a 20% reduction in staff.
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that the American Red Cross suffered from a bloated work force were right. It's hard to imagine that the organization could continue to function with those levels of reductions, but no one seems to question that it will go on as before. That certainly is the definition of bloat—apparent redundancy. Of course, this appears to support the views of many that focusing on administrative expenses and related efficiency metrics is a legitimate focus. We are not convinced that this is the proper conclusion to draw from this story. What's below the newspaper's proverbial fold is far more telling, or at least supports an alternative hypothesis.
The deeper story may lie in the public's unrealistic expectations. Strom reports that Everson also was dissatisfied with the Red Cross' fundraising capacity and efforts. This may stem in part from the bad publicity that followed on the heels of the Red Cross' 9/11 efforts. Recall that the public and government officials, and media grandstanders had a conniption fit when they learned that the Red Cross intended to retain $200 million of the funds it raised from the public to build a "reserve fund for future terrorist attacks and improve its own readiness for such attacks." The public wanted all the money raised to go to the 9/11survivors and victims of the deceased. That's what ultimately happened, even if the survivors had more-than-sufficient financial resources. Recall that Congress had to enact special legislation to obtain that result. That legislation assured charities supporting 9/11 victims and survivors would not lose their tax-exempt status if they provided funds to people who weren't in financial need.
Having been severely criticized, the Red Cross responded with a new program called Donor-Direct. Donors were allowed to designate that their donations could only be used to assist the victims of the disaster that inspired the gift. Donor-Direct had appeal to donors, because their donations would go to help poster-child victims of major disasters rather than pay dreaded general and administration costs. In the minds of too many, charities are not supposed to have administrative expenses, all of which is viewed as nothing more than waste. People want accountability and effectiveness, but for some reason they mistakenly believe that those laudable objectives can be achieved without expense. If President Clinton wants to talk about fairy tales, he should begin with this fanciful notion.
The public and regulators got what they wanted—truth in solicitation. That too is a laudable goal, but it ignores the fact that every time a house burns down or there is a minor disaster, the Red Cross arrives at the scene to provide much needed and appreciated assistance to a single family or a few people. Unfortunately, the public doesn't respond to these disasters the same way it does to 9/11, Hurricane Katrina, and the South Asia Tsunamis. In fact there is evidence that the recent California wildfires, as dramatic as they were, didn't generate the level of donations that we or the Red Cross would have expected.
As a consequence of Donor-Direct and the public's obsession with big disasters, the Red Cross' disaster fund is nearly or completely depleted, according to Strom's reporting. This appears to be at least partially a consequence of the inability of the Red Cross to cross-subsidize the provision of relief to victims of small disasters with some of the outpouring of funds that come from larger-scale disasters. That flows directly from the notion that every dollar a donor gives should go to fund exactly what the donor expected it should fund.
The advocates of efficiency metrics will argue that truth-in-solicitation and efforts to educate the public about wasteful administrative expenses have paid off. After all, the Red Cross is reigning in a bloated administrative structure. Clearly they have a point, but so do we. We suspect that at least some of financial problems now facing the Red Cross stem from it being forced to fund small-disaster relief that the public has largely refused to fund. Unfortunately, Strom's article does not provide a detailed financial analysis. This isn't her fault. Even the Red Cross spokesperson didn't seem to be fully knowledgeable about the facts.
The Red Cross could do both itself and the sector as a whole a big favor if it released a thorough financial analysis that explains the underlying reasons for the deficit. Some of the $200 million deficit is undoubtedly attributable to bloat, but we suspect some of it is attributable to both the public's and politicians' opposition to administrative expenses, and the resulting desire to limit funding to big ticket disasters. After all, this is a $200 million operating deficit, but the Red Cross has an $800 endowment which it has not tapped. We suspect that a significant portion of that endowment is restricted.
Before concluding, we want to stress that the Red Cross is responsible for its current plight, but not only because of a bloated administrative structure. Donor-Direct was a mistake. It should have done a far better job of educating the public about the need to cross-subsidize small disasters. Had we been in public relations, we would have run newspaper ads following major disasters with two pictures—the large one would have pictured the poster-child victims of the big disaster floating on rafts or weeping and the small picture would have shown a house burning to the ground on a nice-looking suburban street, with the Ward Cleaver family in their PJs watching the firefighters in the ice and cold. The caption: "Your donation helps both."
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