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Why Does Our Government Ignore Charities?

A Recipe for Disaster

Trent Stamp

October 14, 2002


America will survive the corporate disasters that were Enron and WorldCom. We always do. New wealth is created. A generation of pensioners will have their twilight years disrupted, but they will survive. It's not fair, but we will move on.

But what will happen to our nation when one of America's largest charities unravels in a maelstrom of financial mismanagement, cover-ups, and dishonesty? What will happen to our most vulnerable citizens who depend on this huge, reputable charity? Their lives may very well be destroyed.

And you can rest assured that this will happen. One of America's largest charities will be exposed for Enron-like reporting practices. I don't know which name-brand charity it is yet, but it will happen. It is naïve to think this can happen in the highly-regulated and transparent world of for-profits, where literally thousands of interested individuals are looking at the books and the SEC is charged with this specific task, but it won't happen in the non-profit sector, where almost no one is scrutinizing the books. There are only 16,000 public companies in America. There are nearly 900,000 charities. The numbers alone guarantee a failure.

When this failure happens, the victims will not be investors, or speculators, or even retirees. The victims will be the most vulnerable members of our society: the poor, the homeless, and the needy. And when this failure happens, it will be because people who could have done something about it, America's government, decided to look the other way. America's charities are operating with very little regulation or oversight.

Our government, from the White House to the State Houses, has not done an effective job of regulating America's charities. And this is a recipe for a disaster.

The American government can no longer make a plausible argument that charities don't deserve the type of scrutiny that the for-profit sector warrants. Quite simply, the charitable sector is much too large to warrant the continued disinterest our government has shown it. 865,000 organizations in this country are recognized as charities. Nearly 15% of our nation's GDP flows through these charities. Did you know that charities in this country raised $212 billion last year from individuals, corporations, and foundations, an amount roughly the GDP of Israel and Egypt combined? Every single one of us in this nation has our life touched by a public charity.

When charities are good, as they usually are, we all benefit. Charities do the work that we once envisioned our government would do. If it weren't for Planned Parenthood, where would girls from low-income communities turn to receive much-needed medical care and counseling? If it weren't for Teach For America, which provides 2000 teachers to America's neediest communities, who would teach those kids? Who do we really think is working harder to save our environment: Gale Norton's Department of the Interior or The Nature Conservancy? Which one cares more?

And every once in a while, when charities are bad, we ALL lose. When a charity wastes, or worse, steals money, not only are its donors ripped off, but people who need that money are denied what was intended for them, to help them. Furthermore, when money goes to a bad charity, with a good cause, it is denied from a "competitor": a good organization, with a talented staff and strong management, who would have used that money wisely.

When Firefighter's Charitable Foundation decided to give less than 10% of the money they raised last year to victims of fires, and spent the rest on themselves, America was weakened. Fire victims didn't get the money they needed. Donors who wanted to help were violated. And legitimate fire-related charities, which would have ensured that the money reached its intended and worthy victims, had fewer resources to utilize.

So, it is clear that the charity sector is massive, that it touches all of us, and that it has the potential to improve (or weaken) our lives. It would seem then that it is therefore in the public interest to ensure that this sector is operating in a transparent, forthright, and accountable manner. And yet, our government seems not to care.

When Enron went bad, President Bush immediately sought to reassure investors by proposing tough new government requirements on CEOs. But today, as the United Way in Washington, DC is in danger of shutting down completely, embroiled in conflict, controversy, and crisis, where has been our government? The silence is deafening. No attempt to reach out to the recipients of the United Way's services has been made. No one from the government has sought to reassure the thousands of local donors that their dollars will be spent wisely.

And this organization is only a minor example. Quantitatively, we know our government has no interest in charity regulation. In the last ten years, the number of charities in this country has doubled, while the number of IRS agents assigned to monitor them has stayed the same. Furthermore, in those ten years, 400,000 brand-new, in some cases, unproven charities, have been created and the number of IRS audits of charities has declined by 50% in that time.

Need more proof our government isn't paying attention to charities? For-profit companies have to file their financial statements with the IRS quarterly, and have to submit their audited annual report with the SEC within 90 days of the end of their fiscal year. On the other hand, charities file an informational return, the 990, 135 days after their fiscal year, and can have an automatic four-month extension merely by asking (which unlike the for-profit world carries no penalties of interest incurred). And while these 990s are supposed to be provided to any citizen who asks for them, we have found a huge number of national charities who flat-out ignore this law. And what does the IRS do to charities that ignore not only the internal revenue code, but the rights of American donors (and taxpayers), by refusing to provide these documents to citizens who ask for them? Sadly, the answer is "nothing." The IRS either doesn't care or doesn't have enough people to enforce their own laws.

Not enough evidence? Explain to me why the Firefighter's Charitable Foundation is allowed to exist when they don't actually give money to fire victims? Why does Hale House, which acknowledged stealing from donors, still have tax-exempt status? Why is the United Children's Fund, which used its innocuous name to raise nearly $2 million, and then allocated only $5,000 of it to children, still allowed to offer its donors a standard IRS tax deduction? Because our government simply doesn't care. No malice exists. It's not that the wolf is watching the hen house. It's that no one is watching the hen house.

But why should we care? Charities are the "Independent Sector". They're not government, and they're not for-profit. They're different. Right? Hogwash.

First of all, most charities operate like for-profit companies. Did you know the YMCA of the USA had revenues last year of 4 billion dollars? Did you know that the California Community Foundation lost $23 million in the stock market last year? Why are these organizations any different than for-profit companies? The idea that charities consist of a few bleeding hearts serving up soup to the homeless is an antiquated recollection of a day that may never have existed, but certainly doesn't now. Charities are big business. They need to be regulated.

And what makes this laissez-faire approach to charity regulation even more insidious is that most big charities are inextricably intertwined with the government. Most charities get tons of money from the government, basically to carry out government work. Governments, state, local, and federal, contributed over $250 billion of tax-payer money to America's charities last year. At Charity Navigator, we found that, of the largest 2000 charities in America, an overwhelming majority of them received most of their funding from government sources.

Any idea why Congress was not heard from during the most recent Red Cross controversy? How about because the Red Cross was created under a special Congressional charter, and that, in fact, eight members of their Board of Governors are appointed by the President of the United States, who is the honorary president of that organization? Did you know that the New York City's Museum of Modern Art, which charges a $12 admission fee, received over 50% of its funding last year from government sources? I'm not saying this funding is inappropriate. In fact, I think it's more than appropriate; it's necessary. But the funding, without any accompanying oversight, is immature.

In essence, what we have done is create a system that is, in many ways, as large as the private sector, with stakes just as high, that operates with a ton of government funding, and that is accountable to no one but the whims and needs of the individual donor. This is outrageous.

Our government has acted like irresponsible parents who don't realize how big, strong, and powerful their child has become. We would mock a parent that, no matter how great their intentions were, gave their child the keys to the car, a couple of hundred dollars, and no curfew, and then acted shocked when that kid got into trouble. And then if the parent tried to impose some rules, we wouldn't be surprised if the child ignored them.

But that's what we have here. We've given charities the privilege of tax-exempt status. We've given them millions of dollars of tax-payer funding. We've given them a far less-sophisticated set of accounting and reporting rules to play by, and then we've walked away, and hoped that they would behave.

And thank God that so many have. Charities do amazing work in this country and remarkably, with little oversight, usually have codes of ethics we all should emulate. But to continue to ignore them is irresponsible and childish, and a relic of a day long gone. It's time to recognize that charities in this country are as big as for-profit companies, are tax-payer funded, and have no one but their own donors demanding that they act responsibly, transparently, and ethically.

So how do we fix this problem, before it's too late? We need an SEC for charities. The IRS clearly isn't up to the job. We need a more thorough review of tax-exempt status. Way too many organizations are being granted this privilege and they're crowding the field for the organizations with the ability to bring about long-term change. We need regular and more frequent reporting of annual returns. Filing one tax return, as late as nine months after the fiscal year ends, is preposterous. We need an insistence on uniformity of rules for reporting that data. And we need penalties that are actually enforced, for organizations that don't provide their data, to taxpayers, on request.

Basically, we need a government that cares about its most generous people, the ones who give to charity, and one who also cares about its most needy citizens, the ones that depend on that philanthropy. We need a government that cares about charities, and about holding them to the highest standard. Right now, our government couldn't care less.

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