Where does your money really go?

State regulation assailed
To be sure, some even think the problem is too much regulation. In early October, mass-mailing and marketing specialists American Target Advertising sent a protest to the National Association of State Charity Officials, charging that its yearly conference “will fail to address violations of law by the sector that most consistently violates charitable solicitation law: state charitable solicitation officials themselves.” The long letter charged that individual regulation by states costs charities millions in wasted revenue, and claimed that many states are ignoring established Supreme Court decisions when they penalize charities.

At the state and local level, barriers to tougher scrutiny and rule-making include more than political indifference or unpopularity of going after seemingly good causes. It can be a matter of limited resources and other priorities. Jack Siegel, a consultant and former tax lawyer who writes a blog on charities, says it can be “just a practical problem — our state budget is a complete disaster, mass transit is on the verge of collapse and everybody’s screaming about the education system. To think that the Illinois attorney general is going to get ten more people in that office (to investigate charities) I think is sort of fanciful.”

Regulation and policing of nonprofits is a hodgepodge across the country, at times almost nonexistent. Among the most active states is California, where Attorney General Edmond G. “Jerry” Brown, Jr., the former governor who took office this year, extracted a settlement in July from Noah’s Wish, a charity that solicited $8 million to rescue animal victims of Hurricane Katrina but spent only $1.4 million of it on them. He confiscated the $4 million remaining in Noah’s Wish coffers to redistribute to the intended beneficiaries, demanded that the charity provide governance training to its board, and barred the president from serving any charity in any capacity for five years. In June, he enjoined Sensory Integration International, a nonprofit that purported to treat autistic children, from conducting any business activities whatsoever until a trial could determine whether one of its officers was commingling charity assets with personal assets and self-dealing at the expense of the charity.

But Brown is an exception. Charities based in Florida (a state that ranks fourth in the nation in the number of nonprofit organizations registered with the IRS and 14th among states in terms of the amount of money given to charities) raised $19.5 billion in 2006. Yet the the state doesn’t have a single full-time auditor, investigator, or prosecuting attorney devoted solely to monitoring their books.

The situation couldn’t be more different in Pennsylvania, which lags Florida both in the number of charities based within its borders and the amount of money they raise — but has recently expanded its charity investigation staff to five investigators, four auditors, and a full-time prosecuting attorney.

Warning about 'bad players'
As in any boom, huge sums fuel temptation — a vulnerability that nonprofit insiders have cautioned about for years but to little effect. J.J. McNab, a financial consultant and author of Tools and Techniques of Charitable Planning, put it succinctly before Congress in 2004: “Bad players have discovered that they can use small, hungry, or newly formed tax-exempt organizations to conceal everything from Ponzi and affinity scams to high-end corporate fraud and terrorism funding ...(and) even good charities are finding themselves sorely tempted to, if not sell their souls, at least rent them out to the highest bidder.”

But reliable, complete information about charities and nonprofits is hard to come by. Consider that the chief method of gaining a glimpse of a nonprofit’s inner workings, the IRS Form 990, deals only in broad financial categories. “For better or worse, the tax form is the nonprofit disclosure instrument,” says Peter Swords, an expert on nonprofit tax reporting and the former head of the New York Nonprofit Coordinating Committee. “It is to nonprofits what the SEC regime is to regulated companies, and it is something that ought to be taken very seriously.”

Yet hundreds of thousands — or millions — of dollars can be listed as expenses or salaries, with little sense of whether they were legitimate. Indeed, deciphering a 990 would challenge an ace detective — and probably has. Yet should a donor have to moonlight as an accountant or detective just to make sure his or her money is properly spent? “It can be easier to understand how much a Fortune 500 executive is paid than how much a charity is paying executives due to the shell games that go on,” Sen. Charles Grassley, R-Iowa, wrote to the Treasury Department, complaining about the current 990 form.

When the IRS released a proposed redesign of the form this summer, it got thousands of comments from the nonprofit sector, and backed off some of the changes. Many objected to the idea that a generic form can truly reflect whether an organization is efficient or not. “We had stars in our eyes starting out,” says Steven T. Miller, commissioner of the Tax Exempt and Government Entities Division of the IRS, the arm that oversees charities and sought to put more regulatory teeth in the form. “We thought it would be great if Joe Blow could compare organizations by looking at the 990 (and) we tried to improve the form to do that, but we have not been successful,” Miller told nonprofit leaders at the Independent Sector’s annual convention Oct. 23 in Los Angeles. “I don’t know if we’ll ever be able to get there. It’s a pity.”

So is all the stench and smoke surrounding charities a sign of doom for the sector? Is all the talk advocating reform — self-regulation or otherwise, just that — talk? Hopeless?

Hardly, says Marion Fremont-Smith, a senior research fellow at the Hauser Center for Nonprofit Organizations at Harvard University, whose experience with nonprofit organizations began in the 1960s, when she served as assistant attorney general and director of the Division of Public Charities in Massachusetts. She thinks the debate over Form 990 has been “very productive,” considering there might not have been one at all.

And while Supreme Court rulings limit the ability to challenge even seemingly excessive fundraising costs, states have other powers. “The power of the states to [oversee] charities is broader,” she says, noting that attorneys general have nearexclusive standing to bring suit for abuse of the old common law concept of “charitable duties” — which include the avoidance of personal gain at the expense of a charity and gambling with a charity’s money.

Reform movement flows from unexpected source
Yet the most surprising force for reform is coming from an unexpected source: bloggers, activist donors, and young entrepreneurs who are willing to spend extra time monitoring charitable organizations. An example is Perla Ni, a former publisher of the Stanford Social Innovation Review, who, aiming to guide donors the way Zagat guides diners, earlier this year launched sf.greatnonprofits.org to open a few windows. At Stanford, she realized how little was known about the nonprofits her publication regularly wrote about. Who were the good ones? Who used money wisely? Says Ni: “There’s nothing like transparency and empowering volunteers and clients to have a voice to improve accountability.” Other such efforts include London’s Intelligent Giving group and Web site. Founded in 2004 by journalist Peter Heywood, its mission is “to help you give happily and with confidence.” Heywood notes that he wants “to find a way of helping people less fortunate than me, but I’ve discovered this isn’t as easy as it sounds, largely because it’s tough to work out which charities to give money to.” Adam Rothman, a feature editor of the London-based site, recently took a British charity, the Wooden Spoon Society, to task for spending too much on overhead and not enough on the needy children it serves. “This is a truly dismal performance that lets the whole (charity) side down,” Rothman wrote in a recent posting.

To be sure, says Charity Navigator’s Stamp, today’s younger activists are mostly looking to find better ways to help society, and a partnership announced in September between the Case Foundation, the Gates Foundation, and MTV—called Think.MTV.com—“aims to be the definitive online resource and rallying point for young change makers...where everyone from sunny day volunteers to die hard activists can Get Educated, Get Connected, Get Heard, Get Active, and Get Rewarded,” noted a press release.

Stamp says that what major charities should note is that they weren’t chosen to implement the project. He says that if the charity sector keeps acting as if high-profile scandals are just business-as-usual, younger donors may be far more likely to tune out completely — as both donors to traditional nonprofits and as their employees. “For the first time in several generations,” Stamp says, “young people have money. It’s one thing to be disenfranchised and poor. It’s something else to be all those things and have a nice fat checkbook.”

With additional reporting by Marcia Stepanek, Tracie McMillan, Julie Connolly, and Matthew McCann Fenton in New York.

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