Debunking overhead costs at United Way of Greater Cleveland

By Carissa Woytach, United Way of Greater Cleveland Staff Writer

Woman with calculator

You may have seen social media posts and viral emails about the overhead costs associated with well-known nonprofits. Making their rounds through inboxes and Facebook feeds, these posts, often containing outdated or false information, can still manage to impact donors’ charitable decisions.

Snopes, a website committed to providing accurate information on urban legends and rumors, compiled viral emails from October 2010 and November 2012. These emails rank charities with the lowest overhead as “best” and those with higher overhead costs as the “worst.”

The emails tout United Way Worldwide (UWW) is the “third worst offender … for the seventh time,” and UWW President Brian Gallagher is exorbitantly compensated.

And while it has been debunked countless times by Snopes, Charity Navigator and the Better Business Bureau, this notion of exuberant overhead costs has stuck with some individuals.

What is overhead?

Overhead, which includes fundraising, administrative costs and salaries, is often referred to as if it’s the boogeyman of the nonprofit sector. No one wants their donated dollars to go to a CEO’s six-figure salary or an organization’s advertising efforts; they want their money to go to the organization’s core mission.

A sensitive topic for many who work in nonprofits, overhead is the cost it takes to keep the lights on and pay workers a livable wage. If an organization strives solely to keep its overhead low, it may run on minimal, overworked staff or it may lack the resources to upgrade technology as needed.

And, according to a TED Talk by Dan Pallotta, a speaker and humanitarian activist, this looming idea of overhead hurts nonprofits’ incoming funding as well. Because they avoid raising overhead and fundraising costs, they also avoid investing risk capital in larger campaigns that would ultimately multiply their bottom line hundreds of times over, he said.

“This is what happens when we confuse morality with frugality,” Pallotta said. “We’ve all been taught the bake sale with five percent overhead is morally superior to the professional fundraising enterprise with 40 percent overhead, but we’re missing the most important piece of information, which is: What is the actual size of these pies? Who cares if the bake sale only has five percent overhead if it’s tiny? What if the bake sale only netted 71 dollars for charity because it made no investment in its scale and the professional fundraising enterprise netted $71 million because it did? Now which pie would we prefer, and which pie do we think people who are hungry would prefer?”

Keeping the lights on

United Way of Greater Cleveland, as a 501(c)3 nonprofit is tax exempt and held to transparency standards by the Internal Revenue Service. Because of this, its 990 tax form is available online, outlying all administrative costs and CEO salaries paid for the fiscal year.

Beyond that, United Way’s funding distribution is divided into community investments, designations, federated agencies, United Way 2-1-1, operating costs and contracts and commitments.

Designations make up the majority of the pie, with 38 percent of contributions invested in funded agencies/programs, non-United Way agencies and other United Ways.

More than 28 percent funds the Community Impact Agenda in key impact areas such as basic needs, academic success and access to health care. A full list of funded programs is available at www.UnitedWayCleveland.org.

Nearly $33.4 million is invested back into the community, including high-priority programs in education, income and health.

Of the total operating costs, 60 percent is allocated to staff salaries, according to Michael Headen, United Way’s chief financial officer.

Social media summary

As viral emails circulate on the inefficiency of nonprofits with high overhead costs, it is important to remember what overhead pays for. Included under “administrative costs and fundraising” are salaries.

Low overhead means little innovation — a lack of risk capital, means a lack of investment in larger campaigns to grow the bottom line. In his TED Talk, Dan Pallotta explained the dangers of keeping overhead low for the sake of a charity’s image damages the causes donors care so deeply about.

“We’ve all been taught charities should spend as little as possible on overhead things like fundraising under the theory that the less money you spend on fundraising, the more money there is available for the cause,” he said. “Well, that’s true if it’s a depressing world in which this pie cannot be made any bigger. But if it’s a logical world in which investment in fundraising actually raises more funds and makes the pie bigger, then we have it precisely backwards… because fundraising is the one thing that has the potential to multiply the amount of money available for the cause we care about so deeply.”

 

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