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What's Wrong With Charities in America?

Trent Stamp's 10 Questions for Those Reluctant to Embrace Non-Profit Reform

April 5, 2006

 
 

Five years ago this month, I accepted the offer of New York philanthropists John and Marion Dugan to lead the construction of America's premier charity evaluator and provide America's donors with the same types of tools that were available to consumers in every other sector. A year later, Charity Navigator was born at www.charitynavigator.org, and this month we proudly celebrate its 4th birthday.

In those four years of operations, Charity Navigator has grown to include 5000 charities. Over 3 million donors will use our website this year to guide their charitable giving. Forbes has called us "Best of the Web," Esquire said using our service "was one of 41 ways to improve the world", and PC World and Mother Jones have both described us as "the Consumer Reports of the nonprofit world." While we're clearly still a work in progress (with ambitious expansion plans scheduled for the second half of 2006), I think we have gone a long ways in our few years of service to honor the Dugan family challenge. I only wish I could say the same about recent attempts to protect America's donors with significant reform efforts.

With the 2006 midterm elections rapidly approaching, even those with just a cursory knowledge of the American political process recognize that no meaningful legislation will be passed during the remainder of this year. This means another Congressional session will have come and gone without legitimate charitable reform. For those keeping score at home, the charities win, and donors lose, again.

As charities have once again banded together to quash proposed reforms, it appears to me, an unapologetic donors' advocate, that a belief pervades the non-profit sector that all externally-proposed reforms should be resisted, because any acknowledgement of sector weaknesses will open the door to unwarranted intrusions into the legitimate business operations of reputable, well-run groups. It's almost as if those charities that operate in a way in which we all can be proud (the vast majority) are willing to let the misdeeds of those predisposed to deceive and mislead to continue, because acknowledging that some members of the sector are operating outside the lines of ethics will open the door to regulation for all.

I believe this code of silence is short-sighted. I believe that calls for reform would be muted, if not silenced, if the "good" charities would turn on the "bad" and publicly admit that the latter's actions are unacceptable, and counter to what we hold dear in this sector.

I suspect that America's charities have recently looked at the calendar, realized they've evaded the reformer's axe yet again, and have chuckled to themselves, if only in the mirror. But if I could be so bold, I would ask those same charities to look back at what they see in that mirror, and ask themselves the following ten questions. I think that if they answered them truthfully, keeping in mind why they originally chose to enter this sector, they might be less likely to resist honest reforms next time.

What's wrong with a minimum program expense ratio requirement? We've heard for years that requiring charities to spend a minimum amount of their expenditures on their charitable purposes would be un-American and would make it impossible for those advocating on behalf of unpopular but legitimate causes. This would be a relevant argument if it were only true. Most charities working for difficult causes are unable to hire a for-profit telemarketer and are compelled to be thrifty, smart, and efficient. The most egregious fund raisers in the country are often affiliated with our most-celebrated and supported causes, those of veterans, police officers, and firefighters. Knowing how much resistance this proposal would face, how about starting off initially with a ridiculously low bar to clear, like say 50%? Who has a problem with demanding that charities spend half of what they raise on their programs?

What's wrong with making donors give you permission to sell their name? The #1 complaint we hear from donors, especially the elderly, is that they make a small gift to a charity and never hear from that particular group again, but subsequently spend the rest of their natural lives trying to dig out from the endless mail solicitations in their box each day. These frustrated donors try to find a way to stop the appeals and are shocked to learn that a charity they contributed to sold or traded their name to countless others and that stopping the appeals now is virtually impossible. If, as many charities would have us believe, donors really don't mind this practice and actually enjoy being exposed to new groups, why not require donors to check a box stating that they would indeed like for you to sell or trade their name to others?

What's wrong with reporting your single-entity organization as a single entity? No rational reason exists for why an organization, housed in one building, with one cause, and one set of management, is permitted to legally sever its operations into disparate reporting entities. This only causes confusion for donors, which I assume is the point. Even the most savvy donors have difficulty finding financial information on charities from which they receive appeals when the name and reply address on the appeal do not match the name and address on the 990. In addition, some charities are able to pay their CEOs through multiple affiliated organizations -- allowing them to report a lower salary on any one 990, satisfying donors who want to keep the number low. If the massively-complex and decentralized Red Cross can consolidate their operational activities into one entity, with one financial reporting mechanism, can you honestly argue that the local performing arts center needs to be six separate institutions?

Why shouldn't charities that don't do charity work lose the right to be a charity? Every year, Charity Navigator assesses the financial operations of organizations that raise millions of dollars from unsuspecting donors and subsequently don't actually spend a single dime on their charitable purposes, watching the monies vanish into a sea of administrative, consulting, and fundraising expenses. And yet, we'll scrutinize their books again next year, as they're free to ply their trade in perpetuity. Why shouldn't groups that don't actually spend any money on charity lose their non-profit status, and have to go back to the IRS and make a new case for tax-exemption?

What's wrong with applying the same regulatory standards to each charity, regardless of state affiliation? Why should state regulation of charities be left up to the whim of each individual state, when little charitable solicitation is correlated with state jurisdictions? Isn't there a federal interest in protecting United States citizens from charitable fraud? Here in the Northeast, we encounter professional fundraising firms that are banned from soliciting in the state of New York, because of their deceptive and fraudulent practices, but who are free to still telephone the residents of New Jersey. Don't the folks of New Jersey deserve to be protected from bogus charities as much as the citizenry of New York?

What's wrong with demanding that "charity" hospitals do charity work? In Illinois, Attorney General Lisa Madigan is attempting to pass legislation that would require non-profit hospitals to actually do non-profit work. In exchange for not having to pay income or property taxes because they are technically charities, Madigan wants the hospitals to spend at least 8 percent of their annual operating costs on charity care. She says that tax-exempt hospitals in Illinois are currently spending less than 1 percent of their total hospital charges on charity care. Can this refusal of charity hospitals to serve the public good logically be defended?

What's wrong with requiring truth in advertising? Charities that take steps to deceive donors, whether it is in how much they pay their CEO, how much they pay outside consultants to fundraise on their behalf, or the true nature of their operations, deserve not to be trusted by anyone, about anything. If you call yourself an international medical relief organization, and you provide neither medicine nor doctors, haven't you violated the social compact with your donors, and in effect committed fraud?

What's wrong with a few barriers to entry in becoming a non-profit? Every time a natural disaster happens, amateurs race to incorporate new non-profits, as if the currently-existing ones weren't up to the task. And if the cause is politically popular enough (as it was with Hurricane Katrina), the IRS actually moves these groups to the front of the line for approval. Why should we make it easier for people who have never done this kind of work and were never moved to entertain the idea before to enter the space and compete with reputable, experienced organizations, especially when we know from experience that most of the newcomers will simply fail?

What's wrong with banning confusing sound-alike names? Scam artists often use sound-alike names to trick donors into thinking they represent a legitimate charity. Why would established charities resist the idea of limiting what you can call your organization, especially when the new organization has a name that sounds suspiciously close to better-known groups? Who is served by this?

What's wrong with implementing a few insider trading rules? Should charities really be allowed to do financial business with family members? Why are charities, which are tax-exempt and chartered to serve the public good, allowed to reward multi-million dollar contracts without a competitive or open bidding practice? All local governments are forbidden from these types of practices. Why do we demand less from our non-profits?

What's wrong with extending the do-not-call legislation to protect charity donors? People hate the intrusiveness of being interrupted at home. The more than 60 million Americans who have signed up for the federal do-not-call list stands as a testament to this fact. Unfortunately for those who value their peace and privacy, nonprofit organizations are exempt from the do-not-call legislation. Even worse than the invasion of privacy is the fact that most of these calls are being made by professional fundraisers who pocket anywhere from 25 to 95 cents on the dollar of every contribution they raise. Donors are misled into believing that they are giving to a worthy cause when, in reality, most of their contribution is ending up in the pocket of a telemarketer. I'm a big fan of the First Amendment too, but shouldn't donors have the right not to receive these calls if they so choose?

I know that America's charities don't have to answer my questions, even though I speak for several million concerned donors. But if you really want to serve the public, how about asking yourself these questions? If you stumble around for the answers, maybe it's time to accept the fact that the sector could use a little reform, for the good of the people we serve and solicit.

Trent Stamp is the president of Charity Navigator.

 
 
   
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