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April 21, 2018

Where Does $100 to Donors Choose Go?

by Anne Paddock

Donors Choose is a New York City-based 501 (c) (3) non-profit that connects the public to projects that need funding in public schools. Founded in 2000 by a history teacher, Charles Best, Donors Choose asks public school staff to post projects that need funding so that the public can choose what they want to help pay for via their donations (along with a suggested 18-20% donation to the organization (that covers program, management, and fundraising costs although the organization states the reason is to help Donors Choose reach more classrooms) and a $30 fulfillment labor and materials cost and a “third-party processing fee” that goes to Donors Choose to help cover program costs. The process sounds very simple but the From 990 submitted by Donors Choose to the IRS shows the collection and disbursement of revenue is a bit more complicated.

The IRS Form 990 (2016 reflecting the year beginning July 1, 2016 and ending June 30, 2017) reports the organization received $121.4 million in contributions, gifts and grants (about $700,000 were non-cash contributions in the form of publicly traded securities). Expenses were $101 million (not including $1.6 million in depreciation) which means the organization spent about 83% of the revenue collected.

Expenses can be viewed two ways:  by broad category(program, management, and fundraising) or by specific line item category (i.e. compensation-related, travel and conferences, office-related, etc). Both ways are beneficial with the broad category giving a general overview of how revenue is spent while an analysis of specific line item category expense provides more detail.

Expenses by Broad Category (Program, Management, Fundraising)

As stated above, the organization collected $121.4 million and reported $101 million in expenses that were categorized as follows:

  • $ 95.9 million (or 79% of revenue):  Program Services
  • $  4.2 million (or 3% of revenue):  Fundraising
  • $  0.9 million (or 1% of revenue):  Management
  • $101.0 million (or 83% of revenue):  Total Expenses

Donors Choose had $20.4 million at year-end (17% of revenue) after paying expenses, which was placed in the net fund balance which had $61.8 million at year-end, compared to $43.1 million at the beginning of the year.

Using the above information, $100 in revenue was spent as follows:

$100:  Revenue

-$   3:  Fundraising

-$   1:  Management

-$  4:  Total Fundraising and Management

$ 96:  Amount Remaining

-$ 79:  Program Services

$ 17:  Amount Remaining:  To Fund Balance

As illustrated above, Donors Choose spent $83 out of every $100 received and most of the funds were spent on program services, leaving $17 out of every $100 (or about $20 million) for the net fund balance.

Expenses by Specific Line Item Category

Donors Choose expenses ($101 million)can be categorized in the following specific categories:

  • $ 87.0 million (or 71% of revenue):  School Supplies (and gift card production)
  • $  9.6 million (or 8% of revenue):  Compensation-Related Expenses
  • $  2.2 million (2% of revenue):  Office-Related Expenses (Office, IT, Occupancy)
  • $  1.5 million (1% of revenue):  Fees for Services (Accounting, Legal, Investment, and Credit Card Processing)
  • $  0.9 million (1% of revenue:  Advertising, Promotion, Thank You Packages, and Travel
  • $101.0 million (83% of revenue):  Total Expenses

As illustrated above, $87 million or 71% of revenue was spent on school supplies (and a very small portion on gift card production) followed by $9.6 million or 8% of revenue on compensation-related expenses. Donors Choose reports there were 199 employees but about 40% of these employees were part-time or seasonal workers. At year-end (June 30, 2017) there were 118 full-time employees, 22 of whom received more than $100,000 in compensation with the most highly compensated individual the founder, Charles Best who received $407,059 in total compensation.

Based on the above information, $100 in revenue was spent as follows:

$100:  Revenue

-$ 71:  School Supplies

$ 29:  Amount Remaining

-$  8:  Compensation Related Expenses

-$  2:  Office Related Expenses

-$  1:  Fees for Services (Legal, Accounting, Investment and Credit Card Processing)

-$  1:  Advertising, Promotion, Thank You Packages, and Travel 

$ 17:  Amount Remaining:  To Net Fund Balance

SUMMARY AND CONCLUSIONS

In summary, Donors Choose spent $12 out of every $100 for staff and organizational support and $71 out of every $100 on school supplies, leaving $17 out of every $100 unspent and add to the net fund balance which had $61.8 million at year-end.

The website for Donors Choose (www.donorschoose.org) reports the organization spends 94.9% on classroom projects and material processing, 4.2% on fundraising, and 0.9% on general and administrative. The IRS Form 990 shows the reader that for the year ending June 30, 2017, Donors Choose spent significantly less than 94.9% on classroom projects because nearly 17% of revenue was retained by the organization to build the net fund balance to its year-end balance of $61.8 million.

In addition, it is important to point out that the total project cost also includes a “suggested donation” equal to 18-20% of the primary component part (i.e. an iPad, trip cost, books, etc)  “to reach more classrooms” along with a $30 fulfillment, materials, and labor charge and a third party processing fee that varies with the dollar amount of the project. Donors can opt out of a 15% suggested donation (the 15% differs from the suggested donation because the suggested donation is based on three costs: the component part asked for by the teacher, AND the fulfillment and labor and third party payment processing costs added by Donors Choose) at check out but I was advised that about 85% of donors choose to pay this cost which primarily goes to pay the program, fundraising, and management costs of the organization. The bottom line is that the 18-20% is not part of the actual component cost that the teacher is asking for.  Instead, these funds are primarily collected to pay for program, fundraising, and management costs.

To better understand the above, we can look at a specific project on the Donors Choose website.  A project by a Mrs. Rogers asks for $330 to buy an iPad for her classroom. Donors Choose adds $30 for fulfillment and labor and $5 for third party payment processing along with a suggested donation of $64 (19% of $330) for a total project cost of $429.  When funded, $429 will be collected but only $330 (77% of what was donated) goes to Mrs. Rogers in the form of an iPad. The remaining $99 (23% of what was donated) goes to Donor’s Choose.

In another project, a Mrs. Norton asks for $2,375 for a class trip.  Donors Choose adds $30 for fulfillment and labor and $36 for third party payment processing along with a suggested donation of $431 (18% of $2,375) for a total project cost of $2,871.  When funded, Mrs. Norton will receive $2,375 (83% of the amount donated) while $497 (17% of the amount donated) will go to Donors Choose, which they will use to pay for program, management, and fundraising costs, with any unspent funds added to the fund balance.

What the above tells the reader is that the percentage of each donation that goes to the project varies but it certainly is not 94.9%.

It is also important to note the following (rounded to the nearest million and including depreciation which was not included in the above analysis):

Year                                          2014                         2015                        2016                         2017 

Total Revenue                      $61 million              $78 million         $108 million          $121 million

Classroom Materials           $50 million             $67 million           $87 million             $87 million  

Program Expenses (P)           $5 million                  $7 million                 $9 million             $11 million

Fundraising Expenses (F)      $3 million                  $3 million                 $4 million              $4 million

Management Expenses (M)   $1 million                  $1 million                 $1 million               $1 million  

Total PFM                                 $9 million             $11 million         $14 million              $16 million

PFM/Revenue                                16%                           14%                      13%                       13%

Total Expenses                       $59 million            $78 million        $101 million          $103 million

Expenses/Revenue                          97%                        100%                    94%                       85%

The table above tells the reader several things:

  • Revenue has been increasing over the past 4 years.
  • The organization had been spending nearly all the revenue raised until 2017 (which could be due to a delay in funding projects where revenue was already posted but it is also due to collecting more than what is being spent).
  • Program, Fundraising, and Management Expenses have been increasing in actual dollars from $10 million in 2014 to $16 million in 2017) although as a percentage of revenue, these expenses have been declining.
  • Net Fund Assets are increasing because 18-20% of each project cost is collected to cover Program, Fundraising, and Management Expenses which have ranged from a high of 16% in 2014 to a low of 13% in 2016 and 2017. The spread between these two numbers (18-20% versus 13-16%) will cause net fund assets to increase.
  • The bottom line is that about $13-$14 (on average) out of every $100 in revenue has been spent on program, fundraising, and management costs while the remainder has been spent on classroom materials (although in 2017 a significant portion of revenue was not spent which could be partially attributable to the recognition of revenue but not the associated expenses (i.e. classroom materials).

To read the IRS Form 990 (2016), click here.

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