For U.S. charities, a crisis of trust

An expanding universe of choice
According to the 2007 charity almanac, approximately 1.4 million nonprofit groups were registered with the IRS in 2004, the most recent year for which complete data were available – a 27 percent increase over 1994. (Those organizations play an increasingly important role in the economy, accounting for 5.2 percent of the nation's economic output and paying 8.3 percent of all U.S. wages and salaries, it said.)

The increasingly crowded field is good for the charities with household names like the United Way and the American Red Cross -- donations to the country’s largest charities are up 13 percent from last year – but it has left many smaller nonprofits struggling to survive.

"The competition is fierce, and organizations that in the old days might have gotten along just fine might find someone else is eating their lunch," said McCarthy, the United Way CEO in Southern California. "The larger organizations -- megachurches, universities, hospitals, major philanthropic organizations – they’re all getting better at how to do this … but the smaller organizations, they don’t have that kind of horsepower."

McCarthy said that competition also has changed the equation for the United Way, which parcels out money it collects to a broad array of charities.

"When we have an organization providing a needed service, and all of a sudden they have to close their doors because they have no money … we have to deal with how can we continue to service those clients," he said. "So we don’t just have to raise money, we have to invest ourselves in the health of those partners. We have to do board training, network training and get big foundations to look at small organizations. It’s no longer a matter of just looking at how well they do their programs."

Private groups like GuideStar and Charity Navigator have tried to cut through the white noise by ranking nonprofits based on their tax returns, called Form 990s. These rankings show what percentage of money raised by a nonprofit goes to programs vs. overhead and fundraising, and give higher ratings to those organizations that funnel more money to programs.

Are rankings reliable?
But some charity experts say the rankings have added to the confusion by oversimplifying the financial realities of philanthropy and failing to recognize that smaller charities often need to devote more resources to fundraising.

That leads many donors to try to "bypass the infrastructure," said Eugene Tempel, executive director of Indiana University’s Center on Philanthropy.

As an example, Tempel said that during the Hurricane Katrina aid effort, "Voices were raised about giving directly to victims. … (In response), nonprofits talked about an imaginary donor who takes $100, drives to Louisiana and hands the money to a victim. All the money went to program, right? Wrong: The donor incurred costs to get there, to get back … and the spending was considerably more than $100. Charities bear those costs (and) critics don’t think about that."

The ratings also have helped give rise to a practice in which donors target their gifts to a specific need, hamstringing a charity that is battling to meet its operating costs, said Cohen, the former director of the National Committee for Responsive Philanthropy. He compared the practice to "buying stock in GM and saying I want my money only to support hubcaps."

Many in the charity world see a single underlying issue behind such concerns – the simple matter of trust.

And they say it is an issue that must urgently be addressed if U.S. charities are to harness what former President Bill Clinton described in the keynote address at this month’s Slate 60 charity conference as "the unprecedented capacity of ordinary people to collect and direct their funds in a way that gives them about as much power as the wealthiest people in the world."

Success is not a foregone conclusion, warns Egger, who runs the food bank in the nation’s capital.

"Nonprofits always had a safe warm spot in the public's heart," he said. "Now that is in real jeopardy."

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