WARNING: Do Not Stick Your Head in the Sand!

I’ve warned the nonprofit sector.

Over the years, I’ve warned the nonprofit sector many times.

Most recently, I provided a warning last month in my post “Special Report: America’s 50 Worst Charities Named”:

As a profession, we must do more to self-regulate. If we do not, we can expect others to fill the vacuum. The ["50 Worst Charities"] investigative report is one example of how those outside the nonprofit arena are filling that vacuum. It’s only a matter of time before government regulators become even more engaged.”

Well, sticking one’s head in the sand did not work. Declaring that most community benefit organizations efficiently do good did not work. Instead, just as Head in Sand by tropical.pete via FlickrI predicted, government has stepped into the void. Due to the nonprofit sector’s failure to self-regulate or to lead the way with government officials, politicians are taking action to further regulate charities.

Oregon has become the first state in the nation to “eliminate state and local tax subsidies for charities that spend more than 70 percent of donations on management and fundraising, rather than programs and services, over a three-year period,” according to a report in The Statesman Journal. This might be a model law that other states soon consider.

Recently, the good leaders at GuideStar, Charity Navigator, and the BBB Wise Giving Alliance penned a Letter to the Donors of America. In the open letter, the authors stated:

We write to correct a misconception about what matters when deciding which charity to support.

The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as ‘overhead’—is a poor measure of a charity’s performance.”

Reading the opening paragraphs of the letter, one might be led to believe that overhead costs should not factor into our giving decisions. However, the authors are quick to point out:

That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management.”

In Oregon, state legislators were clearly motivated to act by the behavior of charities at the extreme.

The Statesman Journal reports:

The Oregon Department of Justice has already identified the top 20 ‘worst of the worst.’

They include charities such as Michigan-based Law Enforcement Education Program, which spent just 2.7 percent of its funds on programs over the past three years; California-based Shiloh International Ministries, which spent 3.2 percent on programs; and Florida-based American Medical Research Organization, which spent just 4.2 percent on programs.”

As a result of the Oregon law, donors to the disqualified charities will no longer be able to take a state tax deduction for their contributions. Also, the disqualified charities will no longer be exempt from property taxes.

State officials expect the Oregon law to withstand any potential constitutional challenges. In 1980, the US Supreme Court struck down state laws that prohibited charities from soliciting for donations if state-mandated overhead ratios were not adhered to. Unlike those old state statutes, the Oregon law does not prohibit the disqualified charities from soliciting donations; furthermore, disqualified charities will have an opportunity to appeal. Therefore, the law likely does not run afoul of the US Constitution.

The time has come for the nonprofit sector, and everyone who works in it, to call out the unethical organizations that harm the reputation of the entire sector. We must do more to self-regulate. Moreover, we must partner with government officials to help craft legislation and regulations that protect both the public and the nonprofit sector.

Yes, organization such as the Association of Fundraising Professionals, the AFP Political Action Committee, Independent Sector, the Charitable Giving Coalition, and others have engaged in the process. However, more organizations and more individuals need to become more active as well.

Ethical nonprofit organizations share a common interest with the public. There’s no reason the charity sector cannot work closely and proactively with government officials.

Moving forward, here are some of the leading issues that the nonprofit sector can expect the federal and/or state governments to examine:

Oregon Law. Expect other states to consider adoption of legislation mirroring the new Oregon statute. The action by the Oregon legislature and the recent investigative report about the “50 Worst Charities” will fuel interest in this issue.

Compensation. Various state legislatures have already looked at the issue of nonprofit compensation. Some have considered measures that would cap executive compensation. The issue is not likely to go away.

Licensure. In the past, a number of states have considered various licensing proposals for fundraising professionals. Licensure is seen as a way for states to protect the public interest. Licensure also has the potential to be a new source of revenue. For those two reasons, we can expect this issue to surface again.

Charitable Tax Deduction. The Obama Administration continues to back a plan to cap the deduction for charitable giving. That proposal could cost the nonprofit sector as much as $5.6 billion per year in contributions. As the federal and state governments continue to look for additional revenue, expect some changes to the deductibility of charitable donations in the near future.

 For the sake of the nonprofit sector, we must all commit to the following:

 -Do not donate to unethical charities.

-Do not contract with unethical service providers.

-Ensure that our own charities function ethically and efficiently.

-Do not work for unethical organizations.

-Condemn unethical behavior in our sector.

-Advocate for sane legislation and regulation that strengthens the sector and protects the public.

-Partner with government officials to proactively rather than reactively work toward viable solutions to legitimate problems.

Now is not the time to bury our heads in the sand. It is the time to take action. Without our robust participation, government officials may make ill-informed, arbitrary decisions that will be difficult to fix after-the-fact.

With or without us, government is on the move. We have a choice. Either we can watch from the sidelines, or we can be part of the process. What will you do?

That’s what Michael Rosen says… What do you say?

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6 Comments to “WARNING: Do Not Stick Your Head in the Sand!”

  1. Michael,

    As you know, some people refuse to listen to the voices in the wilderness or read the writing on the wall. It is unfortunate that there are those organizations and or leaders who misuse the gifts given to them and abuse the trust given to them by their supporters. Although they are a very small percentage of the many organizations out there, they are the reason for greater government oversight in states like Oregon and New York. The nonprofit sector must do a better job of weeding out these individuals and organizations.

    • Richard, thank you for sharing your thoughts. We’re in complete agreement about the need for the nonprofit sector to do more to self-regulate. Given the absence of solid self-regulation, I find the new Oregon law interesting. If it helps to weed out unethical “charities,” and if it helps to enhance public confidence in the sector, it will be a law worth replicating in other states.

  2. Yes, it is awful that really bad guys exist. But I’ve found that rather than doing the enforcement needed against the bad guys, it’s so much easier for legislatures to pass another law that scoops up the good guys or has unintended consequences in their attempt to take legislative action when enforcement action is really needed.

    Couldn’t the Attorney General of Oregon investigate these abusers and dissolve the board of directors for failure to perform their fiduciary duties, or for self dealing or acting in bad faith? Couldn’t the Attorney General of Oregon work with the Attorney’s General of the states in which these bad players are located to pursue the same remedies?

    The law as it is written will probably have no consequences for these bad guys. If they already don’t spend anything, then they probably have no property in Oregon. And chances are they are getting small donations in the majority of cases, likely from taxpayers who do not itemize or may not even file tax returns.

    So who gets hurt by the law?

    There are many nonprofits that don’t meet the 70 percent program ratio because they are small or getting started, or don’t understand full cost accounting or joint-cost allocation, or many of the many other ways that overhead can be reduced. Even the BBB’s standards allow for 40% overhead.

    • Gayle, thank you for sharing your thoughts and making some terrific points. I’ll try to address the issues you’ve identified.

      Just to be clear, the OR law disqualifies nonexempt charities that spend 70 percent or more on overhead based on a three-year average. Oregon officials estimate that fewer than 100 charities would be affected by the new law. OR officials have not yet identified specific charities that would be or have been disqualified. However, in just the past year, 158 charities soliciting in OR spent less than 30 percent on programs; of those, 88 are based in OR. Some of those charities spent 0% on programs! Some of the charities fall under an exemption from the new law for civic leagues, social welfare organizations and local employee associations. There is also an exemption for new organizations.

      Any organization that is disqualified under the new law can appeal. So, given the exemptions and the appeal process, the risk that legitimate charities will get caught up in the net has been minimized.

      Of those that are ultimately disqualified, no one knows if the organizations own property in OR because we don’t know who those charities will be. So, the new law might or might not result in new property tax revenue; time will tell.

      We also don’t know the impact the law will have on donors. I suspect that you’re correct that most of the donors to these questionable charities are not taking the deduction anyway.

      At this point, it’s difficult to predict the impact of the new OR law. It might end up doing little good. On the other hand, I’m not convinced that it will be particularly harmful. In other words, there might be a limited upside, but there’s also probably a limited downside. However, as you’ve suggested, we need to be aware of any unintended consequences. In any case, it sends a signal to the entire nonprofit sector regarding high overhead.

      I do not know what authority the OR Attorney General has when it comes to charity oversight. Such authority varies from state to state. However, I suspect there are already a number of laws on the books that the OR AG could use (i.e.: fraud laws) to protect the public interest. So, why doesn’t the OR AG take action? For that matter, why doesn’t the IRS consider the revocation of the nonprofit status for organizations that are abusive?

      Throughout the United States, there is a failure of the executive branches of government, at the state and federal level, to take aggressive action that could protect the public interest. For its part, the legislative branch is always looking for inexpensive public-protection options; passing such laws makes them look good and gives them something to campaign on. So, we see a strange dynamic: an executive branch that does not, for whatever reason, exercise its full power while the legislative branch looks for cheap, feel-good solutions. Meantime, the nonprofit sector does little to effectively engage either the executive or legislative branches, often leading to the creation of poor policies, regulations, and laws.

      I’m not convinced that the OR law is a bad thing. I’m also not yet convinced it’s a good thing. However, I do suspect that a wiser solution might have come about if the nonprofit sector had been more engaged in the process. And if the nonprofit sector did a better job of self-regulation, the need for policymakers to address the issue would be reduced.

      As you acknowledge, there are bad actors out there that give the entire sector a black-eye. The OR law might not be the right solution, but something must be done. And the nonprofit sector itself should be part of the solution.

  3. Michael:

    Thanks for the additional information on the law.
    I am so in agreement with your point: “an executive branch that does not, for whatever reason, exercise its full power while the legislative branch looks for cheap, feel-good solutions. Meantime, the nonprofit sector does little to effectively engage either the executive or legislative branches, often leading to the creation of poor policies, regulations, and laws.”

    In the advocacy work I’ve done on issues relating to nonprofits and philanthropy in my own state, the lack of understanding of this sector among legislators is extraordinarily high. Other states may be in the same situation as mine (RI) which is unfortunately too small to financially sustain an association of nonprofits (it’s been tried a number of times), without committed backing by local funders. It’s an ongoing challenge.

    • Gayle, the sad thing is, even in state’s with a nonprofit association, the advocacy efforts can hardly be described as stellar. At times, AFP, state nonprofit associations, and others have done an effective REACTIVE job. However, I seldom have seen robust PROACTIVE advocacy by the sector. I suspect there are three reasons for that: 1) limited resources; 2) an incorrect belief that government officials are born knowing the value and role of the nonprofit sector; and 3) a desire to focus on the how-to of our day-to-day jobs. Related to #3 is my belief that the sector is full of tactical thinkers and far fewer strategic ones.

      I wish you and your colleagues well in RI.

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