The end of December is a special time for donors and charities alike. Whether the increase in charitable giving is inspired by Uncle Sam’s year-end tax deduction, the Judeo-Christian values of the season, or Santa Claus himself, only the heart can reveal.
In America, the hearts of 81% of households inspired charitable giving of $228 billion in FY 2012. That is $900 per household according to the Lilly School of Philanthropy in Indiana; but where do we turn for advice in giving wisely?
Americans have a myriad of sources and services to help them determine which charities or non-profit organizations (NFPs) may be worthy recipients of their tax-deductible contributions. Sadly, according to the U.S. Treasury Department’s Inspector General for Tax Administration, the IRS should no longer be one of the go-to sources. In a report entitled “Inappropriate Criteria Were Used to Identify Tax-Exempt Applicants for Review,” we see that the IRS disregarded the rule of law as it pertained to approving certain organizations for tax-exempt status. According to the report, the IRS inappropriately delayed or denied approvals for organizations associated with or professing conservative values.
Yet President Obama, who initially claimed to be outraged by this abuse of power, now pardons the IRS by attributing bureaucratic issues and the desire to “streamline what is a difficult law to interpret” as the reasons for discrimination. According to Cleta Mitchell, an attorney at Foley Lardner who leads the fight in the IRS scandal, the proper criteria for tax-exempt approval continues to be ignored by the IRS. Thus, many of the conservative groups worthy of year-end giving don’t even make the Christmas List.
The IRS is not the only group undermining the reputation of conservative organizations. Charity Navigator and other independent charity evaluators are cautioning Americans against supporting charities that do not earn their seal of approval. The criteria they use actually discriminate against organizations that accept no government funding and those that use sound, free enterprise practices. Additionally, most charity evaluators base their ratings on a one-year snapshot review of the NFP’s IRS Form 990; in particular, they review compensation of management, advertising/fundraising costs, time frame for producing results, and overhead. If any of these measurements are too high (in the estimate of the evaluator) ratings suffer. This one-year snapshot fails to provide any context for the scale of operations and program growth achieved, and runs contrary to the proven principles of transparency and free enterprise.
To understand how misguided the ratings criteria are and why we follow the raters’ rationales, view the TED Talk by Dan Pallotta entitled “The Way We Think of Charity is Dead Wrong.” A telling statistic shared by Mr. Pallotta informs us that between 1970 and 2009 the number of charities that passed the $50 million mark in annual revenue was 144. The number of for-profit entities to cross that mark for the same period was 46,136 and they did so paying good salaries, taking risks, marketing and incurring tremendous overhead, all activities that would cause an NFP to lose rating stars.
According to a report from the Chronicle of Philanthropy, between 2000 and 2010, “the money charities received from governments at all levels increased 77 percent to $215 billion (not counting the money that goes to colleges and hospitals).” Obviously, groups that do not receive public funding suffer substantially higher fundraising costs, a metric which in turn incurs negative ratings from the evaluators. Conservative groups usually do not apply for government funds due to the strings attached and out of principle,and are therefore placed at a disadvantage in the ratings game. A review of Charity Navigator’s highest-rated organizations (four-stars) reveals that a majority do receive government funding. Furthermore, these charities that avoid fundraising costs by receiving government funds are often times exempted from evaluation. In other words, they get a pass even though they shift their financial burdens to the taxpayers while charities that rely on fundraising are scrutinized and criticized for every dollar spent on fundraising.
In the highly acclaimed book, Forces for Good: The Six Practices of Highly Effective Nonprofits, authors Leslie Crutchfield and Heather McLeod Grant conclude: “[Highly effective non-profits] don’t burn out their talent with entry-level wages. Indeed, a recent study confirmed that nonprofit executives who are very dissatisfied with their compensation are twice as likely to leave within a year as executives who are satisfied.” This results in the obvious financial downside of having to continually bring new hires up to speed. Charity Navigator and others, however, continue to downgrade a NFP if they believe the executive is compensated too much. This poverty mentality is not surprising when the Charity Navigator founder, Ken Berger, justifies low salaries to his own staff: “We can’t afford to pay them a lot, and many of them have advanced degrees . . . They’re less interested in the money that they could earn someplace else. They want to change the world.” The latent philosophy here is: if you’re doing “good” you should not be doing well.
Charity Navigator prides itself on rating an organization’s transparency and accountability yet Charity Navigator does not always follow such principles themselves. They tout their algorithm for calculating rating stars, but it is impossible to obtain the logic behind the algorithm. More disturbing is the fact that Charity Navigator just recently decided to dispense with Generally Accepted Accounting Principles (GAAP) in its evaluations. Of course, the IRS Form 990 upon which Charity Navigator relies is prepared strictly in accordance with GAAP by tax professionals. Charity Navigator substitutes the calculated opinions of accountants and tax professionals with its own, private methodology. Alarmingly, Charity Navigator’s website indicates that it will do away with GAAP but with “rare exceptions.” It is not readily apparent who receives GAAP treatment and who does not and accountability for their methods is therefore absent. The Direct Marketing Assoc. Nonprofit Federation “advises members that Charity Navigator ratings are arbitrary, misleading, and lack credibility. Endorsing Charity Navigator’s rating to donors undermines established guidelines.”
Whether accidentally or deliberately, it is clear that evaluators rate conservative groups unfairly. According to a study published by the liberal think-tank Center for American Progress (CAP), “Conservative organizations are spending between three times and four times more money each year on their programs and staff than their counterparts on the left.” The report bemoans the efficacy of these conservative charities’ financial strategies including owning and maintaining property. These very strategies are often times the cause of downgrades from the evaluators.
So, when it comes to choosing a charity for year-end giving, let the donor beware of the IRS and the charity evaluators. If you have any questions at all, give the organization a call; more than likely they will be happy to answer any and all of your questions or dispel any misplaced suspicion. Look for results in achieving their mission and for organizations that can demonstrate transparency and accountability, information an IRS form cannot reveal but which a little research and discernment can.
James Bruner is an attorney with a multi-jurisdictional practice (admitted in 4 states) concentrating in advising not for profits and churches on building capacity and responding to compliance issues. He is the former Executive Director of the New York Family Policy Council, an affiliate of Focus on the Family. He was appointed by President George H.W. Bush to serve as a Commissioner to the White House Conference on Small Business. Mr. Bruner lives in Tallahassee, Florida with his wife and six children.