America’s Charity Explosion

Are 800,000 charities too many to serve society, or not enough?

Nearly 800,000 charities are now listed on the Internal Revenue Service’s official roster — about twice as many as in 1990.The booming economy of the mid-1990s was a big reason for the growth, as were changes in government programs — including President Bush’s efforts to steer government funds to religious groups.

And concern about legal liability among charity board members has prompted a growing number of groups that previously operated informally, such as Little Leagues and church soup kitchens, to seek formal designation as a charity, meaning not only are the organizations exempt from taxation, but also that their donors are able to write off their gifts.

As more and more organizations are created, leading to fierce competition for private donations and government aid, a growing number of people in and out of the nonprofit world are asking whether too many groups are overlapping one another and draining resources from those charities that do the best work. Others say the continuing creation of nonprofit organizations is a healthy sign, opening up opportunities for innovation and providing services to people who might be forgotten by larger, more-bureaucratic charities.

“Small organizations can be more personal and get to know a community better,” says Mark A. Hager, a senior research associate at the Center on Nonprofits and Philanthropy at the Urban Institute, in Washington. “The downside is that there’s a lot of inefficiency and duplication of service.”

New Laws Considered

The proliferation of charities has attracted attention in powerful quarters, including the U.S. Senate. Some policy makers and nonprofit experts have suggested that a re-examination of how charities get started and raise money is long overdue — and some lawmakers believe well-established organizations need to be asked more frequently to prove that they deserve to keep their charity status.

While the Senate is considering whether new charity laws are needed, some nonprofit and legal experts are urging the IRS to deny charity status to organizations that are duplicating efforts already under way.

Some nonprofit observers also want foundations to reduce the number of charities they support and provide financial incentives for charities to merge or collaborate. Still others hope that Americans can be encouraged to seek more data on which nonprofit groups are achieving results and to stop supporting groups that demonstrate little more than good intentions.

Without legislative changes, getting donors to cut off the flow of funds to charities that perform poorly is one of the only options available, say legal experts. The federal government doesn’t evaluate whether charities are doing high-quality work and therefore continue to deserve tax-exempt status.

“A charity run by a well-meaning but inept person is something that our system doesn’t know what to do with,” says Evelyn Brody, a professor at Chicago-Kent College of Law who specializes in nonprofit tax law.

Among the efforts under way to help donors get more information: The William and Flora Hewlett Foundation, in Menlo Park, Calif., has given $600,000 to help spread to seven cities a project started by the Greater Kansas City Community Foundation to gather evaluations on charities and make them available online.

Foundation Assets Balloon

The sharp increase in the number of foundations, prompted by the rise in the number of wealthy Americans in the 1990s, has helped to fuel the growth of new charities. In the decade ending in 2002, the number of foundations grew by 81 percent, to 64,843, and their assets more than doubled, to $435-billion.

Steven Rathgeb Smith, a professor of public affairs at the University of Washington who studies nonprofit groups, says foundation giving has tended to favor charity growth. “Private funders often require setting up a new organization for some new initiative, such as revitalizing a disadvantaged neighborhood,” he says.

In 2003, the total number of charities rose by 5.6 percent, which lagged behind the growth rate of the nation’s businesses. Some 573,000 businesses were started last year, or about 10 percent of the nation’s 5.7 million companies, according to the Small Business Administration. But that was almost as many as the businesses that failed, so the total number of companies didn’t expand significantly. Charity closures are harder to measure, but a recent analysis by the Urban Institute found that as many as 4.5 percent of the nation’s charities shut down each year.

The creation of charities outpaces the formation of other kinds of tax-exempt groups. Nearly two-thirds of all organizations that had tax-exempt status in 2003 were classified as charities, up from about a third of all organizations in 1977, according to Sandy Deja, a tax consultant in Fairbanks, Alaska, and a former IRS agent.

“Professionals who help nonprofits are getting more sophisticated about how to structure their argument so that it will qualify under 501(c)(3),” Ms. Deja says. “I hate to say it, but there’s a chance that since the IRS has little funding” to evaluate the applications, “some people may be sliding by who probably shouldn’t.”

Getting Government Aid

A Chronicle analysis of what parts of the charity world are growing most quickly found that the biggest increase came among religious organizations, with more than 35,000 new groups forming from 1999 through 2003, an increase of 140 percent.

Some religious congregations that have been doing good works for decades are now setting up separate organizations to carry out those same activities, a move that could make it easier for them to gain financial support, including new federal grants from President Bush’s Compassion Capital Fund. The fund has directly awarded more than $99-million to about 200 organizations since 2002, and those groups have passed funds along to an additional 1,700 grass-roots charities.

John Eaton, a consultant in Atlanta who has helped 350 nonprofit groups incorporate, says the formation of social-service organizations that are affiliated with a church, but whose primary focus is charity, is a thriving part of his business. “A lot of public funders will not give a church money — they see it as a First Amendment issue,” Mr. Eaton says. “And private funders are saying, ‘We’re not going to help you further your religion — we’re in business to address humanitarian things.’”

Other types of nonprofit groups also showed tremendous growth from 1999 to 2003. More than 30,000 new educational organizations were formed, along with some 28,000 human-service groups.

Kent E. Seton, a lawyer in Los Angeles who helps charities incorporate, says he has no trouble understanding another area of rapid growth: organizations that help animals. The number of such charities rose by 143 percent over the past five years, an addition of nearly 5,000 organizations. During that time, Mr. Seton estimates that he has helped 60 to 70 animal-welfare operations around the country obtain charity designation.

People who are passionate about particular types of animals are starting many of these organizations, such as the Delaware Valley Bichon Rescue, in Cinnaminson, N.J. Others are bringing animal-welfare operations to their towns or neighborhoods for the first time.

Mr. Seton says he has been criticized by some nonprofit leaders who believe he should encourage his clients to first go volunteer at existing nonprofit organizations. Mr. Seton doesn’t buy that logic.

“It doesn’t make sense to go to work at the animal-rescue operation in Santa Monica if you live in Glendale and there’s no animal-rescue operation out there,” he says.

He adds: “People who are inclined to start their own program should not be discouraged. That’s what this country is all about. It’s easy to stand outside and say we’re forming too many of these things, but who’s getting hurt?”

Alienating Donors

Robert Egger, a charity founder and the author of Begging for Change, an examination of the problems in the nonprofit world, says that all charities are hurt by uncontrolled growth.

As the pool of money supporting charities is spread across more groups, he argues, charities operate less efficiently, and their fund raisers become more aggressive, using tactics that turn off donors to all nonprofit organizations, he says.

And as more and more charities incorporate and go about their business without collaborating, they are duplicating services provided by other organizations, squandering even more charitable capital.

“We’d be a much better sector with 25 percent less nonprofits,” says Mr. Egger, president and founder of D.C. Central Kitchen, a job-training and food-delivery program in Washington. “If you talk to somebody from a large corporate foundation, in their view, we’re like the Dawn of the Dead: ‘Where do they keep coming from?’”

Mr. Egger is hardly alone in believing that too many charities exist. The most radical plan for curbing that growth is to have the Internal Revenue Service begin making subjective judgments about whether an organization deserves charity status based on what it would add to services already provided by existing groups.

“The IRS could ask the kinds of questions of an organization that it doesn’t ask now,” says Conrad Rosenberg, a columnist for EO Tax Journal, a newsletter that covers tax issues related to charities. “What’s your value-added? What will you add to the existing pool of soup kitchens in Washington?”

Mr. Rosenberg, who spent more than three decades in the IRS’s Exempt Organizations Division, acknowledges that the agency doesn’t have nearly as many employees as it would need to carry out such thorough evaluations.

Mr. Rosenberg’s idea doesn’t have much support, even among those — like Sen. Charles R. Grassley, Republican of Iowa and chairman of the Senate Finance Committee — who support tighter regulation of charities.

“The simple reality is that if people say they’re here to help orphans, what are you going to do?” Senator Grassley says. “It’s a very difficult task for the service at the onset to look at the leaders of an organization and determine whether they’re well-meaning or not.”

Instead, Senate Finance Committee staff members have suggested an increase in the number of audits of existing charities financed by a $100 annual fee for all charities that file informational tax returns, known as the Form 990. The committee is also exploring the idea of requiring all charities and foundations every five years to file an updated version of Form 1023, their application for charitable status. That form could be revised to allow the IRS to use it to keep tabs on tiny charities that never file a Form 990.

“A benefit of this proposal could be that the charities themselves and potential donors all have an up-to-date understanding of what the vision is for the charity,” Senator Grassley says.

Ms. Brody, the professor at Chicago-Kent College of Law, likes the idea of the periodic IRS reviews. She sees that process as a “graceful way to exit” for moribund charities that could never get off the ground. “I wouldn’t make Harvard do this every five years,” she says, “but with the newer, smaller organizations I think it would be a great thing to do.”

However, Mr. Hager of the Urban Institute says that approach could be difficult for the IRS to enforce. For example, he asks, if a neighborhood association had an inactive year that coincided with the deadline to file an updated Form 1023, would the IRS really devote the time and resources to following up with the volunteer in charge of the association until the matter was resolved? “It’s hard to imagine that,” Mr. Hager says.

Focus on Results

Paul Brest, president of the William and Flora Hewlett Foundation, is among those who believe that the charity world would benefit from consolidation, but he, like many others, believes the solution lies in vastly improving the information that is made available about the effectiveness of individual charities.

“My approach would be indirect — encourage organizations to be clear about what they’re trying to accomplish, and how good a job they’re doing, so that you create something that mimics the information that you have in the business sector,” he says. Publicly traded companies must file quarterly reports with the Securities and Exchange Commission on how they are doing.

“If you get to more transparency, you would have donors gravitate away from the weaker organizations and toward the stronger ones,” he says.

This year, Hewlett gave $600,000 to the Greater Kansas City Community Foundation to help expand a project called DonorEdge to seven new cities. The project compiles profiles of charities on a Web site so that donors can go to one spot and have the information they need to evaluate the effectiveness of groups they may want to support.

Program officers at the community foundation have already written profiles of 600 Kansas City charities. Each profile includes 150 pieces of data in three general areas — program performance, management and governance, and financial soundness. The reports are written following a site visit that lasts an average of eight hours and includes interviews with both the executive director and the board chairman.

“DonorEdge enables us to direct the flow of capital coming from funders to charities and nonprofits that are achieving their performance goals,” says Paula Kitt, the foundation’s vice president of community investment. “It also enables the nonprofits to recognize where they need to improve their performance.”

Mr. Brest says that in an ideal world, all donors would demand such information, and charities would disclose on their own Web sites their progress toward meeting stated goals.

More than half of the Greater Kansas City Community Foundation’s 800 donors with online access have used DonorEdge, Ms. Kitt says, and 12 local foundations have agreed to use it in their grant making.

She also sees other benefits: A person interested in starting a charity could use DonorEdge to see how many other organizations are doing the same thing, and charities considering mergers could use the tool to determine how best to link up.

Mergers Often Tricky

Promoting charity mergers is seen by many as a way to weed out some of the thousands of weak charities and make the remaining ones more efficient. But mergers have been relatively rare, in part because charity leaders argue that their small size is an asset that allows them to provide individualized service.

That concern has slowed an effort in New York City to consolidate the 120 separately incorporated providers of Meals on Wheels programs, nearly all of which prepared their meals independently. The city, hoping for greater efficiencies from centralized meal preparation and distribution, started the project in the Bronx, where the city has replaced 17 meal providers with 2.

The change has been controversial. Leaders of the programs argue, among other things, that a greater number of providers allows meals to be catered to the tastes of residents in specific ethnic neighborhoods.

The Altria Group, a corporate supporter of Meals on Wheels programs, has tried to encourage more collaboration among meal providers through a grant program called the Community Coalitions initiative.

The grant program, which has made 24 grants totaling $2.3-million, encourages charities that serve the elderly to work with food banks through such activities as sharing a van or establishing a collaborative distribution system.

“We were looking for synergies, a whole that was greater than the sum of its parts,” says John Barnes, manager of contributions at Altria Corporate Services. “Mergers can be a really threatening thing for nonprofits. If you can start by looking to cooperate and collaborate — maybe share facilities or resources — that could be sufficient in itself or it might lead to a discussion that could result in a merger.”

Small Groups

Small organizations with revenue of $25,000 or less account for most of the growth in the number of charities. Those organizations are also the most fragile, according to Mr. Smith of the University of Washington. “We now have so many small agencies that don’t have many staff people and are dependent upon maybe one or two funding sources,” he says. “Unless they make some changes, they may not be sustainable organizations.”

New nonprofit organizations can reduce their risk of failure by banding together with other nonprofit organizations to share space, utilities, and other overhead costs.

Many foundations have encouraged charities to explore that approach, which is used in more than 100 locations around the country, according to the “Under One Roof” project at the University of Michigan’s School of Social Work.

An organization called Nonprofit Enterprise at Work, in Ann Arbor, Mich., houses 19 organizations in a building that was constructed on the site of a former junkyard.

Benjamin Woodside and Michael Nordstrand leased a small cubicle in the building shortly after they started Real Life Living Services four years ago. The charity, which helps people with developmental disabilities, now has 70 staff members and occupies two suites in the complex.

In addition to office space, Nonprofit Enterprise at Work provides support services to small charities. Mr. Woodside says his organization used that help to establish a Web site and to find people who have demonstrated an interest in becoming board members by completing a course sponsored by Nonprofit Enterprise.

“You want people who know what their duties are,” Mr. Woodside says. “To have pretrained board members — it’s wonderful.”

Mr. Seton, the lawyer in Los Angeles, says heads of new charities can also benefit from a crash course in nonprofit management. Mr. Seton holds seminars for new charity leaders, including one in November that was attended by representatives from 50 organizations, that focus on topics such as how to assemble a board of directors and handle accounting.

“We say, ‘Here’s how you get from a concept to something that can really come to fruition,’” he says. “The people starting these charities have good ideas, but they don’t know how to make them happen.”

Some observers question whether nurturing is the right approach for struggling newcomers in the charity world. The Edna McConnell Clark Foundation, in New York, makes big, relatively long-lasting grants to only about 10 youth-related organizations a year as a way to help the best groups get the money they need to grow.

“The youth-services pie is still pretty small, and if you put more organizations into the mix, it’s just going to make it harder for everyone,” says Bruce Trachtenberg, the foundation’s director of communications. “So one of our goals is to beef up the organizations that are good.”

Mr. Egger of D.C. Central Kitchen argues that the surest way to get more capital to the top-performing nonprofit groups is to let the weaker ones go out of business.

“Businesses close every day and nobody says, ‘Oh my God, the dry cleaner just closed — let’s have a fund raiser to save it,’” he says. “But people say that with nonprofits every time it happens. We can’t keep running back to say, ‘I know there’s good in there somewhere.’”

Holly Hall and Harvy Lipman contributed to this article.