THE THEORY
When charities get an increase in gifts, does the extra money go right out the door to be put to good use? That wasn’t the case four years ago when the ALS Association pulled in $98 million in a month from its “ice-bucket challenge.” The organization resisted calls to spend the windfall quickly. However, new research suggests that decision wasn’t unique: Charities often save increases in gifts for a rainy day and use government grants or program revenue to run their day-to-day work.
THE TEST
Using data from filings with the Internal Revenue Service that was compiled by the National Center for Charitable Statistics, Nicolas Duquette, an economist at the University of Southern California, tracked the revenue sources of more than 13,000 charities over 26 years. He then calculated how charities allocated their money when they got a windfall.
THE RESULTS
For every dollar increase in government grants, charities directed about 77 cents to a program service, like running a homeless shelter or supporting research, and dedicated less than 16 cents to savings.
But for each dollar in additional donation revenue over the previous year, the charity spent only about a quarter on services and socked away almost 71 cents. (The rest was spent on nonprogram expenses.)
Donor restrictions on gifts were not the cause of the disparity, the researcher found. Instead, charities tended to treat donor contributions as long-term investments, contrasted with government revenue, which pays for short-term programs that are often constrained by the election cycle, Duquette said.
“The spending of government revenues happens before you’ve even paid the taxes,” he said. “The actual spending of charitable donations takes place over a long time frame.”
DIG DEEPER
A question for policy makers to ponder, Duquette writes, is whether tax regulations should discourage nonprofits from accumulating assets and instead encourage them to spend money more quickly on programs.
FIND IT
“Spend or Save? Nonprofits’ Use of Donations and Other Revenues” was published by the Nonprofit and Voluntary Sector Quarterly, Vol. 46 (6) 2017.
