July 24, 2003 | Read Time: 6 minutes
New York Attorney General Eliot Spitzer was in the news frequently after the September 11 attacks as he led a public charge to push charities to do more to help the victims. He got even more attention through his quest to clean up Wall Street after Enron and other corporate scandals.
Now, the attorney general is putting a spotlight on charities again. This time he has plenty of ambitious and controversial ideas of how Congress should overhaul the laws that govern philanthropy (The Chronicle, June 26). Some of his ideas, however, seem to be based on rather insubstantial evidence and sloppy thinking. In fact, they seem calculated to win him a political advantage with the voters, who may think Mr. Spitzer is doing what’s best to protect donors and charities.
Perhaps Mr. Spitzer’s most misguided idea is his proposal to consider abolishing small private foundations, perhaps organizations with less than $20-million in assets. He came up with that idea after his auditors randomly looked at a portion of the financial records filed with the state by 46,000 nonprofit organizations. Among the organizations he singled out for concern: the Grand Marnier Foundation, whose board, which consists of six people, was paid $3.4-million over 10 years while the foundation’s asset value fell from an estimated $11.3-million to $6.7-million, a drop of more than 40 percent. And this was in a good investment climate.
On the face of it something seems wrong with the foundation, but maybe not. That compensation schedule averages less than $60,000 per year for each person, including pension-plan distributions. While compensating nonprofit trustees is rare, the practice is more common at foundations.
As far as the asset-value drop, even when times are good, some investments don’t do all that well. It’s not a crime to lose money in the stock market. But this is Mr. Spitzer’s view of how nonprofit boards handle their fiduciary duties: “To a certain extent it’s the same issue we’ve seen in Enron or other types of organizations, for-profit or not.”
No one in philanthropy wants to see malfeasance among their own, and no one thinks that malice is completely absent among the hundreds of thousands of charities in the country. But while many people would sympathize with an understaffed Attorney General’s office doing a difficult job, even if the Grand Marnier Foundation and others are guilty of siphoning money away from the public good, the answer certainly cannot be to simply eliminate all the little guys. By doing that, will we next cast doubt on those funds with assets of less than $50-million, and then on those with less than $100-million? Once we start down such a path, it’s hard to stop.
It may also encourage the public to believe that a foundation’s usefulness to society should be measured solely by how much money it has. And as recent events show, even the biggest and most professionally run foundations don’t always make the wisest decisions. Witness the Ford Foundation’s decision this month to keep Paul Allaire as chairman of its board. Mr. Allaire, who was accused of accounting fraud while he was the head of Xerox, is not the kind of leader a foundation should have, especially at a time when the public’s trust in all of philanthropy is ebbing. (Mr. Allaire did not admit any wrongdoing in a settlement with the federal government.)
As questionable as Mr. Spitzer’s view on foundations is his approach to dealing with charities that hire professional fund raisers. He wants to disallow a deduction for the portion of a gift to charity that winds up in the hands of telemarketers and other professional solicitors. His concern, he says, is that many charities pay too much to solicitors, which results in a disturbing loss of revenue to federal and state governments. That’s another way of saying that charities don’t get enough of the money that solicitors raise.
But donors should not be penalized for supporting a charity whose fund raiser doesn’t pass along as much to charity as Mr. Spitzer hopes. The attorney general may just as well order charities to tell the public that they are using fund-raising tactics that he doesn’t approve of. What kind of effect on their fund raising does he think that would have?
What’s more, while Mr. Spitzer claims to be concerned about the money that charities are losing, he seems more intent on defining what is an acceptable percentage for a telemarketer to keep and what isn’t. He seems to forget that the Supreme Court has repeatedly made clear that doing so violates charities’ First Amendment rights.
Mr. Spitzer’s view of fund raising is naive. It’s not clear that charities lose out when a small percentage goes to their cause; even a small amount is better than what most charities would get otherwise. If the charity doesn’t spend 50 cents to make another 50 cents, how can it know that it would make the 50 cents, or more, anyway? Is it the attorney general’s job to do the business planning and marketing for charities?
While it is true that charities have an obligation to be as efficient as possible, it should be up to the public to determine when too much goes to fund raising and too little to good causes. Donors should be the ones who decide whether to support a charity that has high fund-raising costs, or whether they want to give only to those causes that spend very little on fund raising.
Not all charities that have high fund-raising costs are bad charities; some of them represent causes that are controversial or are not well-known, and therefore have difficulty seeking money. On the other hand, not all efficient charities are all that great.
Charities should communicate better with their donors and scrutinize scripts that telemarketers use to solicit donors to nonprofit causes. Mr. Spitzer is right, of course, to pursue the bad guys who lie, but he needs to better understand how charities operate so he can come up with an effective way to do that.
The Attorney General’s office is important in any state, but in New York, where so many rules relating to charity must be observed by donors in other states, what Mr. Spitzer says is particularly newsworthy. Both Congress and the public, well beyond New York State’s borders, pay attention to what the person in that office says. Nevertheless, for Mr. Spitzer to imply that small foundations are acting like Enron and that professional fund raisers waste money is simply hyperbole.
Doug White is a fund-raising consultant in Washington and author of The Art of Planned Giving (John Wiley & Sons).
