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 
I 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?
