A Victory for Charities Is a Loss for Donors

June 15, 2006 | Read Time: 7 minutes

The failure of the House and Senate to pass any meaningful legislation this year to crack down on nonprofit groups means that charities have won, while donors have lost — again.

Charities have banded together to quash legislation because they seem to think that any effort by lawmakers or regulators is dangerous. It’s almost as if charities that operate honestly and efficiently — the vast majority of nonprofit organizations — are willing to let the misdeeds of other groups continue, because acknowledging that some nonprofit groups are operating outside the lines of ethics will open the door to stiffer regulation for all.

This code of silence is short-sighted. Lawmakers, regulators, donors, and others who have been calling on charities to change their ways would probably stop seeking legislative solutions if the “good” charities would turn on the “bad” and publicly admit that some groups have betrayed the public trust and need to overhaul their operations.

Before charities try to kill any future efforts by Congress to curb abuses, they should ponder the following questions — questions that average donors pose regularly:

Why aren’t charities required by law to spend a minimum percentage of their budgets on programs?

For years, charities have complained that such a requirement would be un-American and would make it impossible for those advocating on behalf of unpopular but legitimate causes. That would be a relevant argument if only it were true.

Most charities working for difficult causes are unable to hire a for-profit telemarketer and are compelled to be thrifty, smart, and efficient. The most egregious fund raisers are often affiliated with the most-celebrated and supported causes, those of veterans, police officers, and firefighters.

Since this idea is so controversial, as a first step, how about setting the bar low by requiring that at least 50 percent of an organization’s budget be spent on charitable programs and services? Who has a problem with demanding that charities spend half of what they raise on their programs?
Why not ask donors to give their permission if their names and contact information are to be given away to another organization?
The unauthorized release of donor information is the chief complaint that contributors, especially older Americans, make about charities.

Donors who make small gifts to a charity never hear from that particular group again, but subsequently spend the rest of their natural lives trying to dig out from the endless solicitations in their mailboxes each day. These frustrated donors try to find a way to stop the appeals and are shocked to learn that a charity they contributed to sold or traded their name to countless others and that stopping the appeals now is virtually impossible.

If, as many charities say, donors really don’t mind this practice and actually enjoy being exposed to new groups, why not require donors to check a box stating that they would indeed like an organization to sell or trade their name to others?
Why shouldn’t organizations that operate as single organizations be expected to report information to the public as a single entity?

It is not rational to allow a single group, housed in one building, with one cause, and one set of managers, to legally sever its operations into disparate entities when they report on their finances and operations to the public and to regulators. That only causes confusion for donors, which I assume is the point.

Even the most savvy donors have difficulty finding financial information on charities from which they receive appeals when the name and reply address on the appeal do not match the names and addresses on the informational tax returns charities file and must disclose to the public.

In addition, some charities are able to pay their CEO’s through multiple affiliated organizations — allowing them to report a lower salary on any one tax return, satisfying donors who want to keep the number low. If the massively complex and decentralized Red Cross can consolidate its operational activities into one entity, with one financial reporting mechanism, is it really acceptable for a local performing-arts center to disclose its information as if it is six separate institutions?
Why shouldn’t charities that don’t do charity work lose the right to be a charity?

Every year, organizations raise millions of dollars from unsuspecting donors but don’t spend a single dime on their charitable purposes. The money they raise simply vanishes into a sea of administrative, consulting, and fund-raising expenses.

Those organizations rarely get shut down by the Internal Revenue Service or state regulators. Why shouldn’t groups that don’t spend any money on charity lose their nonprofit status, and be required to go back to the IRS and make a new case for tax exemption?

Similarly, little effort is made to demand that charity hospitals provide free care to the poor, even though the institutions are excused from paying income or property taxes.

In Illinois, the attorney general, Lisa Madigan, says that tax- exempt hospitals are spending less than 1 percent of their total hospital charges on charity-related work. Can this refusal of charity hospitals to serve the public good logically be defended?
Why do charities get to follow different rules, based on the state where they are located?

Regulation of charities is now left up to the whim of each state, even though many charitable solicitations are made across state lines — either by mail, telephone, or the Internet. The federal government should protect Americans from charitable fraud, not leave it to the states, which often pay little attention to regulating charities.
Why aren’t charities punished if they don’t tell the truth?

Charities that take steps to deceive donors, whether it is by hiding the real amount they pay their CEO’s, how much they pay outside consultants to raise money on their behalf, or the true nature of their operations, do not deserve to be trusted by anyone about anything.

An organization that says it is an international medical-relief organization, but does not provide medicine or doctors to anybody, has violated the social compact with its donors — in effect, committed fraud. Such examples of fraudulent activity abound, but charities are rarely held accountable for failing to do what they say they will do.
Why is it so easy to obtain nonprofit status?

Every time a natural disaster happens, amateurs race to incorporate new nonprofit groups, as if existing ones weren’t up to the task. And if the cause is politically popular enough (as it was with Hurricane Katrina), the IRS actually moves these groups to the front of the line for approval.

Why should the federal government make it easier for people who have never done charity work previously to compete with reputable, experienced organizations, especially when experience suggests that most of the newcomers will simply fail?
Why should questionable charities have a legal right to adopt names that make them sound like legitimate organizations?

Scam artists often use sound-alike names to trick donors into thinking they represent a legitimate charity, especially a well- respected one. Neither established charities nor donors are well-served by the lack of prohibitions on such naming policies.
What’s wrong with asking charities to follow “insider trading” rules?

Should charities really be allowed to do financial business with family members of the people who run or support the organization?

Charities are allowed to award multimillion-dollar contracts without a competitive or open bidding practice, even though government agencies would never be allowed to do so. The rules for nonprofit groups should be at least as stringent as those for government.
Why are charities exempted from the federal do-not-call legislation?

People hate the intrusiveness of being interrupted at home; that’s why more than 60 million Americans have signed up for the federal do-not-call list. Unfortunately for those who value their peace and privacy, nonprofit organizations are exempt from this legislation.

Even worse than the invasion of privacy is the fact that most of these calls are being made by professional fund raisers who pocket 25 to 95 cents on the dollar of every contribution they raise. Donors are misled into believing that they are giving to worthy causes when, in reality, most of their contributions are ending up in the pocket of telemarketers.

Charities argue that limiting calls would intrude on their First Amendment rights. But shouldn’t donors have the right not to receive these calls if they so choose?

Donors deserve answers to these questions. If charity officials cannot answer them, it might be time to accept the idea that a little more regulation would be good for the people charities serve and solicit.