Delwin Derksen Carlene Gilbert Kim Luchsinger Beth Mammenga Jon White Expenses and Contributions in Minnesota Housing and Homelessness Nonprofits Delwin Derksen Carlene Gilbert Kim Luchsinger Beth Mammenga Jon White Beth

Agenda Purpose statement Operational definitions Problem statement Research questions Background research Limitations and ethical considerations Data and analysis Results and conclusions Recommendations Beth Beth - Purpose statement Beth - Operational definitions Beth - Problem statement Beth - Research questions Jon - Background research Carlene - Limitations and ethical considerations Kim and Delwin - Data and analysis Kim and Delwin - Results and conclusions Kim - Recommendations

Purpose Statement Determine the effect of administrative expense efficiency ratio and fundraising expenses to contributed income Within Housing and Homelessness nonprofit organizations As listed by the Charities Review Council Years 2003-2006 Beth Determine the effect of administrative expense efficiency ratio (which is the administrative expense divided by the total expense for an organization) and fundraising expenses to contributed income Within Housing and Homelessness nonprofit organizations (85) As listed by the Charities Review Council Years 2003-2006 --- These years had consistently available information

Operational Definitions Administrative Expense Efficiency Ratio: Management and general expenses divided by the total expenses. Fundraising Expense: Costs incurred in raising contributions. Contributed Income: Gifts, grants, and contributions received by the nonprofit organization. Also known as contributions or charitable donations. Beth

Problem Statement Varied beliefs within nonprofit sector about the impact of expenses on contributed income. Confusion leads to distrust. Distrust leads to lower donations. Beth Nonprofits and the general public have various beliefs about how expenses impact contributed income. Anecdotally, some believe nonprofits with higher administrative and fundraising expenses lead to less money spent on program services, and therefore, fewer people served. However, others believe higher administrative and fundraising costs could mean that the charity is: Younger, with more start up costs. Smaller, with fewer economies of scale. Able to dedicate more resources to advertising and marketing of services, and therefore, raise more money through fundraising.   Still others believe that administrative and fundraising expenses should not be an indicator of the nonprofit’s effectiveness or impact on the community. “Experts cite many reasons that focusing on an overhead ratio is the worst way to choose a charity: It tells you nothing about the impact the charity has on people it's trying to help. It discourages charities from investing in tools and expertise that would make them more effective. The rules for determining overhead costs are vague and every charity interprets them differently. Accounting experts estimate that 75% of charities calculate their overhead ratio incorrectly.”(Ogden, 2009) Donors often look to overhead expenses (administrative and fundraising) to determine the nonprofit that will receive their donation. “Many donors seek charities with low overhead costs, and numerous watchdog groups look at the percentage of funds used for fundraising and administration when rating charities. Because donors are more inclined to give to charities with low overhead, organizations have a strong incentive to underreport their fundraising and administrative costs, or lump them together with program expenses, the study says.” (Block, 2004) If the expenses are reported correctly, nonprofit organizations may choose to spend funding on program services expenses, rather than necessary overhead to run the organization smoothly. “The heightened focus on fundraising and administrative costs may discourage organizations from spending money on things that could make the charity more effective, says Patrick Rooney, director of research at the Center on Philanthropy. Non-profits deal with ‘the most intractable problems society faces,’ he says. ‘They need good staff and accounting systems. They also need roofs that don't leak and computers that don't crash.’” (Block, 2004) According to Charitable Choices, “…all charities in this service must have combined fund-raising and administrative costs around 25 percent or less, often much less. We note the costs of each charity. They vary a lot. Should you choose a charity because its costs are among the lowest? Obviously, if overhead is most important to you, that should be a key consideration.” Because there is confusion on how nonprofit expenses impact contributed income and the effectiveness of services provided, there is distrust in the management of nonprofit funds. This distrust can lead to a decline in individual giving, as noted in the Charities Review Council’s Report of Findings of a survey of Minnesotan’s Charitable Giving Habits and Perceptions of Charitable Organizations. This study found that “…most Minnesotans (83 percent) said that their general trust in charities influences their charitable giving.” In a time when “nearly four of five Minnesota households (78 percent) contributed money to a charity other than their religious congregation or their college,” building trust is essential.

Research Questions Does a lower administrative expense efficiency ratio lead to higher contributions? Does putting more money towards fundraising lead to higher contributions? When comparing the administrative expense efficiency ratio to contributions, is there a difference between large and small nonprofits? Beth Does a lower administrative expense efficiency ratio lead to higher contributions? (Does overhead matter?) Does putting more money towards fundraising lead to higher contributions? When comparing the administrative expense efficiency ratio to contributions, is there a difference between large and small nonprofits? (Large and small were determined by revenue – top 50% and bottom 50%) Next, Jon will discuss our background research.

Background Research Importance of the research Scope and trend of contributions Watchdog recommendations Public opinion Money where our mouth is? Supporting and alternative theories Research sources and methodology Jon

Limitations and Ethical Considerations Auditing requirements Government stream of funding Variations in reporting Informed consent Single, specific non-profit sector Economic recession Carlene

Analysis: Methods & Statistical Procedures H1: Efficiency Ratio = Contributions H2: Fundraising = Contributions H3: LARGE NONPROFITS Stronger correlation than smaller nonprofits Multiple regression analysis Kim

Impact of 2003 Efficiency Ratio on 2004 Contributions Delwin Significance Level: .670 Conclusion: 2003 Efficiency Ratio does not have an impact on 2004 Gifts, Grants and Contributions R-Squared Value Conclusions: 1.7% of the variability in contributions for 2004 is explained by the efficiency ratio. Slight to no correlation

Impact 2003 Fundraising Expenses on 2004 Contributions Delwin Significance Level: .000 Conclusion: 2003 Fundraising does have an impact on 2004 Gifts, Grants and Contributions. R-Squared Value Conclusions: 70.4% of the variability in contributions for 2004 is explained by Fundraising Expense. A Moderate to Strong Correlation

Impact of 2003 Program Service Expenses on 2004 Contributions Delwin Significance Level: .000 Conclusion: 2003 Program Service Expenses does have an impact on 2004 Gifts, Grants and Contributions. R-Squared Value Conclusions: 52.3% of the variability in contributions for 2004 is explained by Program Service Expenses. A Moderate Correlation

Table 1 R-Squared and Significant Level Statistics Top 50% Bottom 50% Year R Squared sig 04 Contributions (Dependent) 03 Program Services 0.523 0.000 0.431 0.019 0.566 03 Fundraising 0.704 0.660 0.189 0.348 03 Efficiency Ratio 0.017 0.670 0.0069 0.984 0.046 0.644 05 Contributions (Dependent) 04 Program Services 0.405 0.277 0.016 0.327 0.040 04 Fundraising 0.307 0.097 0.207 0.390 0.361 0.021 04 Efficiency Ratio 0.082 0.013 0.093 0.006 0.597 06 Contributions (Dependent) 05 Program Services 0.608 0.51 0.197 0.008 05 Fundraising 0.532 0.442 0.003 0.012 05 Efficiency Ratio 0.044 0.158 0.079 0.165 Delwin Contributions were lagged one year when comparing to the 3 major expense categories on the 990 form. Dependent Variable = Gifts, Grants and Contributions Independent Variable = Program Services, Fundraising, Efficiency Ratio

Table 1 R-Squared and Significant Level Statistics Year R Squared sig 04 Contributions (Dependent) 03 Program Services 0.523 0.000 03 Fundraising 0.704 03 Efficiency Ratio 0.017 0.670 Top 50% 0.431 0.019 0.660 0.0069 0.984 Bottom 50% 0.566 0.189 0.348 0.046 0.644 Delwin Dependent Variable = Gifts, Grants and Contributions Independent Variable = Program Services, Fundraising, Efficiency Ratio

Results and Conclusions H1: Efficiency Ratio = Contributions Little evidence to support this hypothesis-weakest correlation. H2: Fundraising = Contributions Strong evidence to support this hypothesis H3: LARGE NONPROFITS Stronger correlation than smaller nonprofits Some evidence to support this hypothesis. Kim

Recommendations More qualitative research Study across sectors - compare and contrast More years Impact of recent economic depression Kim

Kim Blank slide to ask for questions