Fund-Raising Costs and Marketing Deals Get New Attention in Congress

By Suzanne Perry and Elizabeth Schwinn

Members of Congress are expressing increasing concern about charities that spend too much money on

their fund raising, and are raising the possibility that they will step in to impose new regulations on fund raisers. At the same time, some lawmakers are also considering new rules for marketing ventures by businesses that promise to help charities — but end up passing very little to the groups they pledge to help.

At a hearing last month, members of the House Oversight and Government Reform Committee blasted veterans charities that funnel tiny portions of the money they raise to veterans and vowed to seek legislation to rein them in. Meanwhile, in a separate hearing before the Senate Banking, Housing and Urban Affairs Committee, Sen. Robert Menendez, a New Jersey Democrat, slammed companies that use charities to promote their products while giving the charities little or no money in return.

Growing Questions

The two hearings — which were not coordinated in any way — show that interest in fighting charity abuses is spreading beyond the Senate Finance Committee, where Sen. Charles Grassley, Republican of Iowa, has questioned a range of charity practices, such as the value charities allow donors to place on gifts of goods or services and how much organizations pay their top fund raisers.

While some nonprofit leaders had expected little attention to fund-raising issues once the Republicans lost control of the Senate, and Mr. Grassley lost his powerful seat as chairman of the Senate Finance Committee, legal experts say that is not the case.

“Contrary to what people are asserting, there is still some interest on the Hill in addressing actual or perceived abuses in the sector,” says Karl Emerson, who last year stepped down as director of Pennsylvania’s Bureau of Charitable Organizations and now works in Philadelphia as a lawyer for nonprofit organizations. “You don’t hold hearings on a particular issue unless you are considering legislation to address problems that come out in the course of the hearing.”

But Mr. Emerson says that, while it would be good for Congress to crack down on veterans groups or other charities that spend little or nothing on their charitable missions, lawmakers will have to be careful that they don’t inadvertently harm legitimate organizations by focusing only on financial statements without looking at other factors.

A group that plans to build a museum, for example, may appear to be spending nothing on its mission simply because it has not yet collected enough money to begin construction, Mr. Emerson says. “You can’t just look at one number to determine whether a charity’s good or not,” he says.

Charities and their representatives had mixed reactions to the spotlight shone on them by Congress.

While several nonprofit leaders said they would support a move to rein in businesses that don’t provide enough benefit to charities whose names they use in marketing, others expressed concern about the possibility of legislation that would tell them how much they must spend on charitable programs or fund raising.

Fund-raising expenses vary at even the best-run organizations, and tend to be especially high at new charities, says Paulette V. Maehara, president of the Association of Fundraising Professionals, in Alexandria, Va. “To impose a rigid requirement on fund-raising costs I don’t think is good policy. It would almost eliminate any new charity from being formed.”

Congressional aides say lawmakers are unlikely to pass new laws to curb charitable abuses before the presidential elections, but some groups fear the hearings themselves — and the negative spotlight put on popular fund-raising approaches — may have turned off donors.

Anthony Conway, executive director of the Alliance of Nonprofit Mailers, which represents more than 400 organizations that rely on the mail to raise money, says the news coverage of the hearings could affect all groups, even those that don’t support veterans or participate in marketing deals with businesses. “It is a perception issue,” he says. “The average American reads the press on this, gets the impression of greedy operators, and applies it to all nonprofit groups.”

Paralyzed Veterans of America, a Washington group, says its fund raising has already been affected by the veterans hearing and news accounts. Mark Dowis, associate executive director for development, says he worried that his group could lose as many as 2,500 donors as a result of the attention it has received.

“We have received hundreds of calls and e-mails,” he says. “It is going to hurt us. We are worried that donors, both corporate and individual, will not contact us and just stop giving.”

One $500,000 corporate gift is at risk, he says, and he is concerned that donations in response to the group’s December mailing of 3.4 million pieces will be lower than expected as a result of the negative publicity.

Mr. Dowis challenged a report that was cited at the hearing and in news accounts. The report by the American Institute of Philanthropy, a Chicago watchdog group, said that Paralyzed Veterans spends as much as 60 percent of what it brings in on fund raising, mostly on mailed solicitations.

Mr. Dowis, however, says that his group believes it has spent just 35 percent of its income on fund raising. The American Institute of Philanthropy counted the entire cost of solicitation mailings as a fund-raising expense, he noted, but because the mailings also serve to educate recipients about the group, some portion of the costs should be counted toward its mission, he believes.

Overhead Costs

At last month’s hearing, lawmakers cited reports showing that several groups that help veterans of the Iraq and Afghanistan conflicts spend most of their donations on fund-raising expenses or salaries rather than veterans and their families.

Members of the House criticized the American Veterans Coalition, in Gig Harbor, Wash., for spending more than 78 percent of its donations on fund-raising expenses, and the Disabled Veterans Association, in Parma Heights, Ohio, for spending 90 percent of gifts on such costs.

Both Robert Friend, president of the American Veterans Coalition, and Pamela Seman, executive director of Disabled Veterans Association, said they were small organizations and depended on professional companies that charge high fees to solicit donations for them.

Lawmakers expressed frustration that no laws exist to prevent charities from spending the vast majority of their donations on fund-raising activities, or to require them to reveal that fact to donors. They explored several possible ways to prevent such abuses, such as new laws or even the creation of a federal agency that would specifically oversee charities.

Rep. Tom Davis of Virginia, the senior Republican on the House oversight committee, said that while he was generally reluctant to set up new federal agencies, “seeing some of the outrageous actions that are brought to our attention today, I think it may be merited.”

“At the federal level, we should examine whether the Internal Revenue Service or the Federal Trade Commission should do more and what laws should be changed to stop this outrage,” said Rep. Christopher Shays, Republican of Connecticut.

‘The Jig Is Up’

Watchdog groups and fund-raising organizations say they expect Congress will take action to reduce the high fees charged by some professional solicitation companies.

“Charities need to realize that the jig is up,” says Daniel Borochoff, head of the American Institute of Philanthropy, who testified at the House hearing. “When they sign contracts where they let fund raisers keep 88 percent of the money, this is not going to be hidden anymore. It will make people more careful about who they donate to.”

Ms. Maehara, of the Association of Fundraising Professionals, says Congress should enact a ban on arrangements where solicitors keep a percentage of the amount they raise. “The one single reform proposal that would make the most difference in stopping fraud and strengthening public trust in the charitable sector would be for Congress to ban percentage-based fund raising,” she says.

Precisely how Congress might rein in excessive fund-raising costs is far from clear, particularly when it comes to telephone or mail appeals. The U.S. Supreme Court has restricted the ability of states to require charities to divulge fund-raising costs to donors, or to limit the percentage charities may spend on fund raising. The Court noted that for many charities the process of raising money is often intertwined with advocacy or education, so fund raising should be considered a form of free speech protected by the First Amendment.

An aide to a Senate Republican, speaking on condition of anonymity, says it might be possible to impose fund-raising restrictions on charities as a condition of tax-exempt status. “You can’t enforce speech, but you can require charities to meet rules for exemption,” he says. “If we can make people put a label on a cigarette carton, we can make you put a label on your appeal.” Another option, the aide says, might be to impose requirements on charities that receive discounted postal rates, such as requiring them to disclose on their mailings what percentage of a donation will go to the charity.

Legislative experts say Congress also has other options.

Gary Bass, executive director of OMB Watch, a government watchdog group in Washington, says that the House committee, which held the veterans’ groups hearing, has the power to regulate federal grants and contracts.”It could construct a law in such a way that any organization that intends to receive government grants or funding of any type must not have fund raising that is in excess of, say, 20 percent of its annual budget,” Mr. Bass says. While such a rule would apply only to groups that receive money from the government, it would set a standard for other organizations, he says.

Lawmakers may discuss their options in more detail next week when they plan to hold a snother hearing on veterans groups.

Marketing Deals

In the Senate, lawmakers are focusing their attention on charitable promotions by companies that promise to give part of the proceeds from a purchase to a particular charity. At the hearing, Senator Menendez said that some charities have received little or no money from the promotions, and sometimes a company has used a charity’s name in a promotion without the knowledge or permission of the organization.

“We must open up this process to ensure that when a consumer thinks they are giving a donation, the money actually ends up in the hands of the intended recipient,” he said.

After the hearing, Mr. Menendez proposed a bill (S. 2529) that would require companies to reach agreements with charities on how their name will be used and how much money they will receive before using it in promotions, and to inform consumers how much money will go to charity. The Federal Trade Commission would be told to enforce the agreements.

Kandy Ferree, president of the National AIDS Fund, which has engaged in several marketing promotions with companies, says it’s a good idea to require companies and charities to inform customers how much money will go to charity, and to make sure charities have agreed to let their names be used in a promotion.

“It’s very important for anyone who participates in a campaign to understand what part of the money goes to charity,” Ms. Ferree says. “It’s absolutely critical that any company that wants to work with a charity inform the charity about their intent and develop a formal agreement. Our name is as important to us as any corporation’s name is to their business.”

Holly Hall contributed to this article.