Where does your money really go?

Donor churn at all-time high
At risk are more than a few sullied reputations. Nonprofits generate billions in revenue and over 8.3 percent of all wages and salaries in the United States each year, according to the National Center for Charitable Statistics in Washington. Yet despite a minimal risk of exposure, there is plenty of anxiety within the charity industry. Part of that is because the growth in charities is outpacing the growth in donations, according to Independent Sector, a nonprofit trade group that represents nonprofits in Washington. Since 2001, charitable giving has risen 12 percent while the number of charitable organizations has risen 23 percent. Adjust the numbers for inflation and the picture looks even worse. Total giving per charitable organization (in 2006 dollars) fell from approximately $382,000 in 1982 to $277,000 in 2006. Increasingly, donors would rather turn a blind eye, or walk away, rather than fight: donor churn is at an all-time high, with nearly one in two donors feeling underappreciated or ignored or simply fed up with bad management — and withdrawing their support within the first year, according to the Urban Institute.

And the trend is on the rise, says Mark Kramer, a senior fellow at Harvard University and founder of FSG Social Impact Advisers, a Boston philanthropy consultancy. Kramer, citing a survey he did for the Gates Foundation, says more donors today are becoming increasingly skeptical of the traditional nonprofit system and would rather start their own nonprofits than trust their money to an existing one. Adds Eric Kessler, principal and managing director of Arabella Philanthropic Advisors, an advisory firm based in Washington, DC: “The same people who feel like they got burned by Enron are also feeling like they got burned by some of these big nonprofits.”

And once a big scandal hits the news, many assume the worst; one bad apple tarnishes the rest. “People don’t differentiate from one charity to another. They think what they’re reading and hearing is the tip of the iceberg,” says Diana Aviv, president of Independent Sector, who opposes mandatory nonprofit regulation. “I’m very worried that the big scandals damage the image of the sector,” Aviv says.

The anxiety is more than palpable. A national survey conducted for Contribute by Harris Interactive poll puts some striking numbers on the extent of the concern and mood for change. While most of the 3,040 people surveyed between October 11 and October 15 feel strongly about the role of philanthropy, large majorities are increasingly skeptical of how nonprofits spend money — to the point of saying they believe nonprofits should be subject to more policing. As many as three-fifths of those surveyed said they agree or “agree somewhat” that there should be more regulation of nonprofit/charity organizations. More than half — 56 percent — acknowledged being more concerned about charity misuse of funds or services than they were a decade ago.

While illegality and ethical transgressions make news, nonprofit dollars can be consumed in a variety of never-intended ways, from funding excessive executive salaries to increased expenses tied to retaining existing donors and keeping new ones from walking out the door.

Sometimes, the money isn’t used at all: the 2006 tax return for the Schwarzman Charitable Foundation — the family foundation held by hedge fund mogul and Blackstone Group Chairman and CEO Stephen Schwarzman — shows five-figure assets of $63,424 but only $991 of that being used for charitable purposes.

Yet for all of the instances of waste and worse that have surfaced in recent years, many politicians respond with little more than shrugs. “I see very little real interest in aggressively using resources to go after the bad guys,” says Rick Cohen, former executive director for the National Committee for Responsive Philanthropy and currently a correspondent for The Nonprofit Quarterly in Washington. Cohen is hardly exaggerating. The new head of the Senate Finance Committee was recently asked about cracking down on abusive charities. “That’s not at the top of my list. I haven’t got time,” Sen. Max Baucus, D-Mont., acknowledged in an interview published last summer in The Chronicle for Philanthropy.

Promotion favored over regulation
Then, in October, that same publication reported that the Council on Foundations “is changing its legislative strategy because it has gotten signals from Democratic leaders that they are more interested in efforts to promote philanthropy, especially during a time of federal budget constraints, than in regulating it.”

Some donors, meanwhile, practice what might be called give-and-forget; they don’t demand close accountability for how their money is being spent. But this, too, is starting to change. According to Blackbaud’s 2006 State of the Nonprofit Industry Survey, 31 percent of 657 organizations polled by the charity research firm said they were getting increased demands from donors asking to be updated on how their contributions were being spent, and 42 percent of organizations said they saw an increased demand from donors asking that contributions be restricted to a certain purpose — to the point that 48 percent, or nearly half of those nonprofits surveyed, reported that they’re now having trouble raising funds for general operating expenses, such as salaries or overhead to keep the lights on. In that same survey, 58 percent of charities said their biggest challenge was recruiting new donors.

Indeed, says Bill Levis of the Urban Institute’s Center for Charitable Statistics, donor retention is becoming an enormous problem for the industry at large. Blackbaud studies of nonprofit performance show that over the past five years, there’s been a gradual but steady decline in the number of nonprofit donors — particularly in the number of new ones.

Some funders are simply walking away from conventional giving channels and building their own. In 2002, a group of philanthropists frustrated with the U.S. health care system founded the Bravewell Collaborative, an operating foundation, to promote alternative medicine — and turn the traditional philanthropic model on its head. “The general feeling among philanthropists is that they’ve been burned,” says Bravewell founding member Christy Mack. “We don’t just write the check and say ‘Good luck, hope you use it the way we want.’” Instead, the collaborative oversees and runs a clinical network and a fellowship program, working closely with clinics and physicians to make sure the program on the ground matches the program on paper. New York philanthropist Lewis Cullman, who sits on the boards of New Leaders for New Schools, Chess in the Schools, and the Municipal Art Society of New York, shares Mack’s skepticism. “I always worry about how much money actually gets to the people that need it. There just doesn’t seem to be any oversight.”

'Nobody wants to hear'
That kind of crisis of donor confidence is definitely not a message that many nonprofits want to hear. Just ask Paul Light, the professor of public service at NYU’s Wagner School of Public Service. Five years ago, Light started a project monitoring the public’s confidence in charities. In 2006, he found that 71 percent of Americans say charitable organizations waste “a great deal” or “a fair amount” of money, up from 66 percent in 2005 and 60 percent in 2003. In the for-profit business world, that kind of waste would draw plenty of scrutiny, and probably lead to firings a-plenty and intense scrutiny by investors and executives. In the nonprofit world? Light says it’s information “that nobody wants to hear.” His study ended this year for lack of funding (even though it only cost about $15,000 to run). “They just really weren’t interested in learning more,” he says of leaders in the charity sector. Whether indifferent or simply tired of hearing the obvious, says Light, “even people who have a great deal of confidence in the sector believe we don’t spend money wisely.”

Yet like any industry, the independent sector also has expended some serious time and energy on organized resistance to change. When members of Congress threatened to consider a new set of Sarbanes-Oxley–like requirements for nonprofits two years ago, the nonprofit world’s lobbyists in Washington resisted and came up with voluntary standards themselves, the better to stave off regulation. On October 18, the leading charity lobby, Independent Sector, put forth a 33-point plan outlining various ways the charity industry might better police itself, including a suggestion that it embrace a voluntary code of ethics. But even Independent Sector’s President Aviv concedes that the call for self-regulation isn’t endorsed by many charity-watchers and donors.

Doug White, an NYU instructor and a consultant for such groups as the Smithsonian Institution and Greenpeace, says: “There should be some legislation that should be scalpel oriented, but the lion’s share of the work has to be done by the charities themselves. They have to be self-motivated [to do the right thing].” After all, says White, “the question, ‘do you lie to donors?’ will never be on the Form 990. ... Some of the important reforms will have to be driven by the sector itself,” White told a Contribute roundtable on charity reform in Washington on Oct. 22. Trent Stamp, president of Charity Navigator, disagrees. “It’s time,” Stamp says, “to quit fooling around and go to an SEC for nonprofits.” Considering the size of the industry, its workforce, its involvement in tasks once the domain of government, its impact on the national economy, and on society overall, Stamp adds, “it’s time to regulate it for the big business that it is.” But congressional insider Dean Zerbe, a charity expert on the staff of the Senate Finance Committee, says such a measure would only pass Congress if charities supported it — an unlikely prospect.

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