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

by Andrew Wright
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

What is the primary subject matter of the article?

The article primarily discusses the issue of overhead costs in nonprofit organizations. It explores how the documentary “Uncharitable” seeks to shift public perception about the necessity and value of operational expenses in charitable institutions.

Who is Dan Pallotta and why is he significant in this context?

Dan Pallotta is a longtime advocate for a different approach to nonprofit fundraising and operational expenses. He is featured in the documentary “Uncharitable,” which serves as a platform for his views that nonprofits should not be unduly pressured to minimize operational costs at the expense of their missions.

What changes in rating methodologies for nonprofits were mentioned?

The article states that Charity Navigator, a major rating agency for nonprofits, has recently announced a comprehensive revision to its methodology. This includes a significant change in how it accounts for fundraising and administrative costs, aiming to shift the focus towards the impact a nonprofit makes rather than where its revenue is spent.

What is the “overhead myth” referred to in the article?

The “overhead myth” refers to the commonly held belief that low overhead costs are a primary indicator of a nonprofit organization’s effectiveness. Rating agencies like GuideStar and Charity Navigator have historically contributed to this perception, but are now making efforts to challenge this notion.

How have recent studies and the COVID-19 pandemic affected views on overhead costs in nonprofits?

Studies from organizations like the Urban Institute and The Bridgespan Group have warned against the negative effects of underinvestment in basic organizational infrastructure. The COVID-19 pandemic has further influenced many donors, foundations, and nonprofit boards to see the importance of maintaining financial reserves and granting unrestricted funds for unexpected events and capacity-building.

Who are some of the philanthropic leaders supporting a change in how we view overhead costs?

Darren Walker, the CEO of the Ford Foundation, is mentioned as one of the philanthropic leaders who have increased their funding allocations for general operations in nonprofit organizations.

What does the article suggest donors should focus on when deciding where to donate?

The article suggests that donors should concentrate on the impact and results of a charity, rather than solely on the percentage of revenue spent on administrative and fundraising costs. The emphasis should be on what the donated money accomplishes, not merely where it is allocated.

What role do rating agencies play in shaping public perception of overhead costs?

Rating agencies like GuideStar and Charity Navigator have historically emphasized fiscal data in their evaluations of nonprofits, contributing to the pressure on these organizations to minimize overhead costs. However, these agencies are beginning to shift their methodologies to focus more on a nonprofit’s impact and effectiveness.

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Emily Williams October 21, 2023 - 7:32 am

So basically, we’ve been looking at this all wrong. More focus on impact than dollars spent on offices and staff sounds logical. Why’s this even a debate?

Jane Smith October 21, 2023 - 9:35 am

Wow, this is an eye-opener. I’ve been guilty of judging charities by how much they spend on admin. Didn’t realize that it actually affects their ability to do good work.

Tim Roberts October 21, 2023 - 1:17 pm

Had no idea about the overhead myth. Gonna make me think twice before i check those charity ratings. But, does the film actually make a convincing argument?

Linda Brown October 21, 2023 - 3:38 pm

Good piece. Been working in nonprofits and can confirm, the struggle is real. We’re always trying to do more with less, but at what cost?

Mark Johnson October 21, 2023 - 4:56 pm

i agree with the article. but what’s the solution? easier said than done, right?

Sarah Lee October 21, 2023 - 10:42 pm

Really changes how I think about donating. What’s the point of 95 cents on the dollar going to ‘the cause’ if the cause isn’t effective or efficient?

John Doe October 22, 2023 - 3:47 am

Fascinating read. Never really thought about how much pressure there is on nonprofits to keep overheads low. It’s like a race to the bottom and who suffers? The cause.


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