Can the Recent Documentary ‘Uncharitable’ Alter Public Perception About Overhead Costs in Nonprofit Organizations?

All Hands and Hearts prominently declares on its website’s homepage that “95 cents of every dollar is allocated to our programs.”

Situated in Massachusetts, this disaster relief nonprofit organization experiences the same fiscal scrutiny that has been a hallmark for charitable institutions for years. Izzy Smith, the Chief Information Officer for All Hands and Hearts, which organizes volunteers for natural disaster response, describes it as a “persistent dilemma for nonprofit entities” to justify the necessity of investments in operational costs and shared services to donors and the general public.

Smith argues that financial instability in a nonprofit organization “undermines our capacity for effective and efficient work.”

Attempting to shift this paradigm is the documentary “Uncharitable,” directed by Stephen Gyllenhaal, known for films such as “Paris Trout” and “Losing Isaiah.” The documentary spotlights Dan Pallotta, an advocate who initiated fundraising through cycling events and marathons, primarily to gather funds for AIDS and cancer research. Pallotta contends that nonprofits are unjustly pressured to reduce salaries, minimize operational expenditures, and postpone long-term investments, all of which impair these organizations’ abilities to fulfill their objectives.

While some leaders in philanthropy, such as Darren Walker, CEO of the Ford Foundation who is featured in the film, have increased their allocations for general operations, Pallotta aspires for the documentary to engage a wider audience. Specifically, he aims to attract smaller donors or those yet to be convinced of the need for operational spending.

Pallotta envisions that the film will achieve a status akin to that of “An Inconvenient Truth” in the dialogue about climate change, making it “socially inappropriate to assess charitable organizations based on shallow, impulsive metrics.”

Although Pallotta’s campaign is deeply personal, over the years, leaders, employees in the nonprofit sector, as well as academic researchers have endorsed aspects of his views. His for-profit fundraising enterprise, Pallotta TeamWorks, shuttered in 2002 following lawsuits from client organizations claiming an excessive share of the funds raised was taken as commission.

In 2008, Pallotta expanded on his thesis in a book, also titled “Uncharitable,” which he later adapted into a TED Talk that serves as the core of the documentary.

For nearly two decades, both researchers and nonprofits have cautioned against the adverse effects of depriving organizations of general operating expenses, also known as overhead costs. A substantial study conducted in 2004 by the Urban Institute, in partnership with other organizations, revealed that underinvestment in basic infrastructure compromised organizational efficacy. A similar conclusion was drawn in 2009 by The Bridgespan Group, despite which, many nonprofit leaders persisted in cutting overhead spending.

Rating agencies such as GuideStar, which was acquired by Candid, and Charity Navigator have historically contributed to this pressure by emphasizing fiscal data in their evaluations. In a move to change this, three major rating agencies co-authored an open letter in 2013 to challenge the “overhead myth,” urging donors to focus on the impact and results of a charity rather than its administrative and fundraising costs.

Recently, Charity Navigator announced a comprehensive revision to its rating methodology, a significant aspect of which includes a change in how it accounts for fundraising and administrative costs. Michael Thatcher, President and CEO of the organization, stated that the modifications aim to redirect donor attention to a nonprofit’s impact rather than how revenue is spent.

Although these rating agencies still suggest that 65-70% of a nonprofit’s revenue should be allocated to programs, recent opinion research by the BBB Wise Giving Alliance indicates that “financial ratios continue to be among the top five indicators of trust for donors, especially among those who are older and more affluent.”

Elizabeth Searing, an Assistant Professor at the University of Texas at Dallas, notes another countervailing force: the concept of effective altruism, which has been embraced by certain donors and foundations. By emphasizing efficiency, these donors perpetuate the pressure on nonprofits to reduce overhead, albeit using different terminology.

According to Searing, the COVID-19 pandemic has led many donors, foundations, and nonprofit boards to realize the necessity of maintaining a financial cushion for unexpected events, as well as the benefits of providing unrestricted funds to enhance organizational capacity and infrastructure.

Big Big News’ coverage of philanthropy and nonprofits is made possible through its partnership with The Conversation US, supported by the Lilly Endowment Inc. The Associated Press bears sole responsibility for this content. For comprehensive coverage on philanthropy by the AP, visit Big Big News’ Philanthropy Section.

Frequently Asked Questions (FAQs) about overhead costs in nonprofit organizations

More about overhead costs in nonprofit organizations

• All Hands and Hearts Official Website
• Charity Navigator’s Methodology Update
• Urban Institute’s Nonprofit Studies
• The Bridgespan Group Research on Nonprofits
• Dan Pallotta’s TEDTalk
• Ford Foundation
• GuideStar
• BBB Wise Giving Alliance
• Effective Altruism
• The Overhead Myth Open Letter