Lawmakers Consider Whether to Require Charities to Detail Spending

Lawmakers are showing increased interest in finding ways to require charities to tell donors what percentage of their revenue they spend on programs related to their missions.

At a hearing last month, members of a House committee grilled a leader of several veterans charities in a follow-up to a hearing in December that focused on questionable fund-raising practices by such groups.

But charity experts say they could find it difficult to come up with a solution that is both enforceable and compatible with U.S. Supreme Court decisions offering free-speech protection to fund-raising activities.

“If Congress enacts some kind of additional legislation, who’s going to enforce it?” said Eugene Tempel, executive director of Indiana University’s Center on Philanthropy. “Unless there’s somebody to investigate these things, we’re back to square one.”

Members of the House Oversight and Government Reform Committee said at the hearing they wanted to let the public know more about organizations that spend a small percentage of the money they raise on programs and the rest on fund-raising costs, salaries, and perks.

“We ought to shine a finer light on charities, all of them,” said Rep. Henry A. Waxman, a California Democrat who chairs the committee. “Any charity ought to use a majority of its funds to benefit the purpose of that charity.”

“Wrapping a commercial activity in the flag, and parking it behind the First Amendment, cannot shield sharp practices indefinitely from responsible public scrutiny,” said Rep. Tom Davis, of Virginia, the committee’s senior Republican. “Sooner or later, donors will see through flowery direct-mail rhetoric to the baser realities of exploitative, self-serving charities. We just want to make sure well-meaning contributors have the tools to do so.”

The lawmakers did not specify what kind of action they had in mind, although Mr. Waxman raised the possibility of reserving reduced postal rates for charities that break down their spending for donors. “Perhaps we ought to consider taking away that low rate unless they disclose this information,” he said.

Karen Lightfoot, a spokeswoman for Mr. Waxman, said the chairman was still evaluating all of the information presented at the House hearings.

“Right now, we’re at the early stages, trying to see what the options are,” she said.

$1.5-Million in Compensation

At last month’s hearing, the committee zeroed in on Roger Chapin, founder of Help Hospitalized Veterans, in Winchester, Calif., and the Coalition to Salute America’s Heroes Foundation, in Ossining, N.Y.

Committee staff members calculated that from 2004 to 2006, those organizations raised $168.7-million and spent only $44-million, or about 25 percent, on goods and services for veterans. During that time, the committee found, Mr. Chapin and his wife earned $1.5-million in compensation.

Mr. Chapin contested those figures, said his compensation was not out of line with comparable nonprofit and for-profit executives, and presented documents outlining the ways his groups had helped wounded veterans, including providing craft kits to help restore coordination and motor skills and cash to help them pay for mortgages and other expenses.

The differences in the calculations offered by the committee and Mr. Chapin highlight the difficulty facing regulators who want to give donors a true picture of a charity’s spending.

To determine the percentage of dollars that Mr. Chapin’s groups spent on programs, the committee excluded money spent on advertising, public service announcements, and direct mail that included “educational” content.

Yet federal rules allow charities on their informational tax forms to count as program expenses a portion of their solicitation costs if the pitch includes a message such as “hire a veteran” or “buckle your seat belt.”

Richard Viguerie, chairman of American Target Advertising — a direct-mail company in Manassas, Va., that raises money for Mr. Chapin’s organizations — accused committee members at the hearing of failing to understand that “advertising mail serves multiple purposes.” Thanks to direct mail from veterans charities, Iraq war veterans are being treated significantly better than Vietnam War veterans, he said.

Supreme Court

The U.S. Supreme Court has restricted the ability of states to regulate charitable solicitation on the grounds that it is so entwined with advocacy and education that it merits First Amendment protection.

In a series of rulings since 1980, the court has said that regulators may not dictate the percentage of money that charities spend on fund raising or require them to volunteer their fund-raising costs when asking for money.

However, a 2003 ruling, Madigan v. Telemarketing Associates, allows them to prosecute fund raisers for fraud if they mislead donors about how their donations will be used.

If Congress finds a constitutional way to force charities to provide more information to donors, it will also have to devise a way to monitor compliance. Some Oversight Committee members have suggested giving the Federal Trade Commission jurisdiction over charities, or expanding the Internal Revenue Service’s reach over tax-exempt organizations.

But some experts wonder how the federal government will enforce new laws when state regulators and the IRS lack the resources to enforce effectively the existing laws that apply to more than a million nonprofit groups nationwide.

Belinda J. Johns, a lawyer in the California attorney general’s office, told the House committee that her office of 29 people monitors more than 92,000 charities that have registered in California. She said 50,000 of those are delinquent in meeting reporting requirements, and approximately 45,000 additional groups that have incorporated in California and should have registered with her office have not done so.

Her office is in the process of automating its registration system, which now requires charities to file by paper, and that should make it easier to track abuses. But, she said, it is challenging “to effectively protect charitable assets given our limited staff and budget resources.” Regulators investigate alleged fraud primarily when they receive complaints, she added.

Voluntary System

Mark Fitzgibbons, president of corporate and legal affairs at American Target Advertising, says he has a solution that would both give donors more information about charities and survive a constitutional challenge because it would be voluntary.

In a proposal he submitted to Rep. Christopher Shays, a Connecticut Republican who sits on the Oversight Committee, Mr. Fitzgibbons suggested that charities be invited to post online a standardized form giving details that are now demanded by state regulators — such as address, names of board members, executive salaries, source of revenue, as well as the amount spent on fund raising and the names of outside fund raisers.

The organizations would also post their contracts with fund-raising firms and would include the Web address on all solicitation materials. Charities could choose that “opt-in” system as an alternative to the cumbersome and costly process of registering in multiple states where they raise money, he says.

Critics of a voluntary system say that charities with high fund-raising costs would just opt out. “The problem with the self-policing thing is that the real outliers are not going to participate,” says Karl Emerson, a nonprofit lawyer in Philadelphia who headed Pennsylvania’s Bureau of Charitable Organizations until last year.

Another problem with any reporting system, experts say, is that charities can manipulate the numbers to diminish their fund-raising costs, something they already do on their Form 990 informational tax forms.

“That is certainly one of the difficulties in coming up with a system,” says Daniel Borochoff, president of the American Institute of Philanthropy, a watchdog group in Chicago that has highlighted the high fund-raising costs of some veterans charities. “But it could be done.”

Others worry that Congress will try to impose a one-size-fits-all remedy without taking into account the valid reasons a charity might have high fund-raising costs — for example, a new, small charity that is trying to build a donor base.

Mal Warwick, who heads a direct-marketing consulting firm in Berkeley, Calif., says too much emphasis on fund-raising can obscure a more important issue for donors: “What kind of bang am I getting for my buck?”