Oregon Puts the Spotlight on How Charities Spend Their Money

A bill that has been introduced in Oregon has once again put charities across the country with high fund-raising and administrative costs in the spotlight.

The legislation, approved last month by the state Senate, would disqualify charities that devote less than 30 percent of their expenses to their programs from getting gifts that are eligible for state tax deductions. The charities would be required to disclose to potential donors that they are not eligible for the tax breaks, and the attorney general’s office would publish a list of the disqualified organizations online.

“It’s certainly on the cutting edge of state efforts to require charities to deploy more of their revenue into the community,” says Hugh R. Jones, a charity regulator in Hawaii.

The law would ensnare only a small percentage of charities nationwide, but some fund-raising experts worry it could set back efforts to persuade donors to consider factors other than overhead costs when deciding where to give their money—and that it could spread to other states.

Others, however, are hoping that Oregon can craft a law that passes muster with the U.S. Supreme Court, which has ruled several times that the government may not restrict the activities of charities simply because they devote big chunks of their budgets to fund-raising or administrative expenses. (See article.)

Steering Donors Away

John Kroger, Oregon’s attorney general and the state’s top charity regulator, has gotten this far with the bill partly because he won support from the Nonprofit Association of Oregon, an alliance of charities that says the legislation could help donors avoid the small number of groups that channel most of their donations to professional fund raisers.

Carrie Hoops, the association’s executive director, told a Senate committee in February that a handful of nonprofits, almost all from out of state, have signed “sweetheart” contracts with fund-raising companies that receive 80 percent to 90 percent of the contributions they collect. For the most part, these would be the groups that the proposed law would affect.

“To some extent, these outliers siphon away charitable donations from effective charities providing essential aid and services to our local communities,” Ms. Hoops said.

But while the bill has support from many nonprofits, Mr. Kroger is wading into one of the most controversial issues of the charitable world—how much weight donors should give to administrative and fund-raising costs when evaluating whether a charity is doing a good job.

Controversial Issue

Critics say an overemphasis on keeping those costs low has forced charities to scrimp on spending that would help them operate more efficiently.

Opponents say it is also impossible to design a law that takes into account the wide variety of circumstances facing nonprofits.

Some groups might have high fund-raising costs simply because their causes are hard to sell to donors, says James Phelps, development director of the American Civil Liberties Union of Oregon and president of a local Association of Fundraising Professionals chapter.

“That doesn’t mean anyone is being fraudulent,” he says.

The Direct Marketing Association’s Nonprofit Federation, the only group that has formally opposed the Oregon legislation, said in a letter to the state Senate that “spending benchmarks” alone do not tell donors much.

“Each nonprofit must be assessed in its totality with reference to each donor’s specific values and goals.”

The group has drafted a substitute bill that it hopes it can get the state House to consider, says Robert Tigner, its regulatory counsel. It would allow charities to be excused from requirements to register in Oregon if they post tax and financial records online and include a conspicuous link to them on their Web site home pages. That would let donors decide for themselves whether a charity is “worthy,” Mr. Tigner says.

However, by setting the threshold at 30 percent, Oregon would be taking aim at groups that fall far outside common standards for good practice. The Better Business Bureau’s Wise Giving Alliance, for example, suggests that charities channel at least 65 percent of their expenses to charitable programs.

A list that Mr. Kroger’s office compiled in 2010 of “Oregon’s 20 Worst Charities” includes groups that spent from a low of 3.6 percent to a high of 24.5 percent on programs. All of those organizations would be at risk of losing their ability to get gifts that are deductible from Oregon taxes.

But some of the groups that would be targeted say the bill is unfair and that it puts too much emphasis on a single number.

The Dakota Indian Foundation, in Chamberlain, S.D., one of the groups on Oregon’s worst-charities list, spends only about 24 percent of its expenses on its programs, which include scholarships for Native American students and grants to help preserve Native American culture. The group relies heavily on professional fund-raising companies that are expensive but are also necessary for an organization that is working to build its donor base, says Ron Kjonegaard, the group’s executive director.

“It really ticks me off,” Mr. Kjonegaard says of the Oregon bill. “We’re doing something that these poor people on the reservation wouldn’t get if it wasn’t for us. … We have a lot of donors out of Oregon, and if it passes in Oregon, other states might do the same thing.”

But Ken Berger, president of Charity Navigator, a charity-ratings service, is enthusiastic about Mr. Kroger’s approach.

He says his organization has been revising its own ratings system to give less weight to overhead costs, but that doesn’t mean such expenses should be discounted altogether, especially in “extreme” cases.

Charity Navigator gives zero stars (out of four) to any charity that spends less than 33 percent on programs—a rating earned by fewer than 2 percent of the 5,500 groups his organization evaluates, he says.

Exceptions to the Law

Mr. Berger also praises the Oregon legislation for taking account of some “subtleties” of the nonprofit world.

The bill would calculate the 30-percent figure as an average over three years so charities would not be penalized for having unusually high overhead costs one year.

It would apply only to charities that are at least four years old since new organizations sometimes spend less on programs during their early years. It would cover only charities that must file federal the full Form 990 tax return because their annual revenue is at least $200,000.

And it would allow the attorney general to waive the rules for groups that are saving donations for a special purpose, for example to construct a building.

The issue of administrative costs has also been popping up in some other states. For example, a bill was introduced recently in North Carolina to bar nonprofits from getting state money if they spend more than 15 percent of their budgets on administrative costs.

But Oregon would be the first state to single out the charitable deductions received by donors. The law would also be largely symbolic unless other states followed suit since disqualified charities could just concentrate their fund-raising efforts elsewhere, says Mr. Jones, the Hawaii charity regulator.

In 2008 the National Association of State Charity Officials, which Mr. Jones headed at the time, told Congress it should consider removing the federal tax exemption from charities that did not devote at least 75 percent of their expenses to programs.

That idea never went anywhere. And Theresa Pattara, tax counsel to Sen. Charles Grassley—the Iowa Republican who is Congress’s most vocal nonprofit watchdog—says she is not aware of any Congressional efforts to go that route.

Because it would face strong opposition from nonprofit advocates, Jeff Tenenbaum, a nonprofit lawyer in Washington, says any effort to regulate fund-raising costs at the federal level “would face a steep uphill fight.”

However, he and others say that if Oregon enacts its legislation, it would probably serve as a laboratory for other states. And if the law withstands a legal challenge, “this would be like mushrooms,” says Dan Moore, a vice president at GuideStar, a nonprofit research organization, and a former charity regulator in New Mexico. “It’s going to pop up all across the country.”

The Bill

Lisa Chiu contributed to this article.