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March 2, 2017

Where does $100 to Operation Smile Go?

by Anne Paddock

Operation Smile is a non-profit 501 (c) (3) that provides corrective surgery to children and young adults in developing countries who are born with cleft lip, cleft palate or other facial deformities. Established in 1982, Operation Smile was founded by Dr. William Magee,Jr.  (a dentist and plastic and craniofacial surgeon) who serves as the organization’s Chief Executive Officer and his wife Kathleen McGee, who serves as the organization’s President. Their daughter, Kristie Porcaro also serves as the SVP of US and Global Philanthropy of Operation Smile.

The 2015 IRS Form 990 (2015) for the year ending June 30, 2016 reveals the organization collected $61.5 million, most of which were contributions, including $4.4 million of non-cash contributions. Operation Smile spent $42.5 million or 69% of revenue on program service expenses, $7 million (11% of revenue) on management expenses, and $16 million (26% of revenue) on fundraising. In total the organization spent $65.5 million (excluding depreciation) or about $4 million more than they collected – and were able to because they had $32.3 million in their net fund balance at the beginning of the year and which was reduced to $27.1 million at year-end.

A donation of $100 was spent as follows:

$100:  Donation

-$ 26:   Fundraising Costs

-$ 11:    Management Costs

 $ 37:    Subtotal Fundraising and Management Costs

 $ 63:   Amount Remaining

-$ 69:   Program Costs

– $  6:   From Net Fund Balance to Pay Costs over and above revenue collected

 $   0

In order to fully understand how a donation is spent, the expenses need to be analyzed outside of the broad classifications of program, management, and fundraising because within the three categories are expenses that may not be direct program expenses. For instance, $9.9 million was spent on “public awareness” and $2.4 million in unexplained “other” expenses in the program category  So, another way to look at the way $100 was spent is to look at the specific costs:

$ 100:  Contribution

-$  37:   Public Awareness, Professional Fundraising, and Advertising

-$  20:   Salaries, Pension, and Other Benefits

-$  14:   Grants to Foreign and Domestic Organizations

-$  10:   Mission Supplies

-$  10:   Travel

-$   6:   Office Expenses

-$   6:   Other Expenses (unexplained)

-$   2:   Legal, Accounting

-$   1:   Interest, Insurance, Bad Debt Expense

-$106:  Total Expenses

As illustrated above, the organization had to rely on funds in their fund balance to meet the excess money spent on expenses. For every dollar collected, Operation Smile had to use 6 cents from their fund balance to meet expenses.

The IRS Form 990 (2015) also reveals the following:

  • The seven mostly highly compensated staff were provided nearly $1.8 million and include the founder and CEO, Dr. William Magee ($549,134), his daughter, the VP of US and Global Philanthropy, Kristie Porcaro ($184,527), the COO, Ernest Zinn ($284,497),the Chief Program Strategist, Richard Vander Burg ($236,189), the VP of Finance, Kimberly Getz ($157,265), the Senior VP of Medical Affairs, Ruben Ayala ($183,388), and the SVP of Ent App and Tech, Christopher Bryant ($152,107).
  • Operation Smile allows the CEO (Dr. William Magee), President (Kathleen Magee), COO, and Chief Program Strategist to upgrade to Business or First Class Travel. For domestic flights more than 5 hours, upgradeable fares may be purchased and for travel more than 8 hours internationally, Business Class fares may be purchased for the above persons in said positions.
  • Operation Smile used MDS Communications, a telemarketing firm in Meza, Arizona for fundraising. MDS Communications raised $1.6 million and retained $1.3 million (81%), providing about $300  thousand ($19%) to Operation Smile. Russ Reid Company of Pasadena, California was also used by Operation Smile to fundraise. They collected $25.6 million, retained $1.4 million (6%) , giving $24.2 million (94%) to Operation Smile. E-mail marketing by a company named M & R resulted in $975,000 in revenue. $165,000 (17%) was retained by M & R with the remainder, $810,000 (83%)  to Operation Smile.
  • The highest paid contractors were:  Russ Reid ($1.6 million) for fundraising counsel, MDS Communications, Inc. ($605 thousand) for tele-fundraising services, Merkle Response Services ($440 thousand) for keying and caging, Strategic Fundraising ($407 thousand) for tele fundraising services, and Blackbaud ($382 thousand) for consulting services related to fundraising.
In summation, fundraising and public awareness costs take $37 out of every $100 donation to Operation Smile, leaving $63 to the organization. Another $6 is taken for other expenses which are unexplained leaving $57.  Of additional concern is that the CEO receives more than a half million dollars in compensation (and he appears to work outside the organization as a surgeon and educator) and that he and his wife, the President (who does not take a salary according to the IRS Form 990) fly Business and First Class in accordance with the organization’s rules. Their daughter is also employed by the organization (and paid nearly $200,000) to work in philanthropy. And, finally the organization appears to heavily compensate telemarketing firms for fundraising. For donations made directly through these firms, a portion of the donation which appears to range from 11% – 94% is taken with the proceeds then given to Operation Smile.
To read the IRS Form 990 (2015 for the year ending June 30, 2016) click here.

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