Steering Clear from the Fallout

A Call to Action: Organizing to Increase the Effectiveness and Impact of Foundation Grantmaking suggests that it will take nonprofits across the nation mobilizing together to change the way foundations provide grants. This is quite a challenge considering the variety of nonprofits in the sector and the lack of communication between them.

Do you think that nonprofits are hesitant to speak up about changes in foundation support out of fear of losing funding altogether? How can nonprofits, of various sizes, missions and regions, become mobilized to call for better grantmaking?

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Making Donor-Advised Funds More Effective Instruments for Giving

No doubt, donor-advised funds can be extraordinary vehicles for millions of Americans to get involved in philanthropy. But this cannot overshadow the glaring need for increased transparency, disclosure and mandatory payout rates to ensure that nonprofits and the public get the charitable benefit they deserve from foundations and donor-advised funds.

What is Transparency and Accountability Worth?

A common argument by those against mandating disclosure for donor-advised funds is that such a requirement would be administratively burdensome and costly. This is the same argument foundations used prior to the advent of public accessibility of the 990PF.

The public has a right to know who or what is exactly is getting supported by charitable donor-advised funds. The public has a right to know who is benefiting from the foregone tax revenues it has entrusted to donor-advised funds to distribute.

For well-intentioned fund managers, the kind of review, analysis, and reporting that would be required with increased transparency will help them weed out donors hiding behind the anonymity of donor-advised funds to do things that might not be all that charitable. In an era where the Council on Foundations is asking for a public discussion of the substance of philanthropy, such substantive accountability should apply to the billions of dollars held by donor-advised funds as well as foundations.

Exceptions to the Rule Don’t Make Regulation Unnecessary.

A number of people have cited exceptions to the rule to justify the continued minimal regulation of donor-advised funds—or even to roll back much of the Pension Protection Act. They claim that entities like the Domini Global Fund or some of the small donor-advised funds set up by community residents for community improvement projects that might be adversely affected by a 6 percent mandatory payout or by disclosure requirements.

To protect those worthwhile examples of donor-advised funds by allowing the thousands of others to go along their ways is upside-down policy-making. There are vehicles for charitable giving that exist or can be created, not to mention the opportunity to make sure there are built-in safeguards in future regulatory policies, to allow these worthwhile entities to function and continue without giving carte blanche to the ones that do not quite exhibit the same community or redistributive benefit.

Legal Doesn’t Mean Right.

A spokesperson for the Council on Foundations noted that most donor-advised funds have lawyered up to stay this side of legal. Of course everyone has lawyered up. How else can the continued operations of the National Heritage Foundation, profiled in the summer 2005 issue of Responsive Philanthropy, be explained after several IRS legal assaults? As the Boston Globe’s Fall 2003 Spotlight Team series on foundations [1] amply demonstrated, some egregious foundation behavior failed to attract what the then head of the Council referred to as “perp walks” because the foundations were well lawyered to operate through the lacunae of laws and regulations. The notion that DAFs have also sought legal advice to operate “legally” doesn’t make some of their grantmaking and operations necessarily right, especially in an environment of weak regulations and even weaker IRS oversight.

Be Wary of the Average.

As the Chronicle of Philanthropy’s recent study on donor-advised funds noted, many officials from donor-advised funds claim that there’s no need to minimum distribution requirements because the distribution rate for these funds averages above the current 5 percent mandatory payout rate for private foundations.

However, the high payout rates reported by some donor-advised funds managers are not the equivalent of private foundation payouts; they are the averaged payouts of dozens, sometimes hundreds of funds. Therefore, the reported payout rates of 10, 15, or close to 20 percent really reflect the existence of some very high payout funds in the portfolio covering up funds that are paying out sometimes well less than 5 percent.

Also, there is a lesson to be learned in foundations’ own payout history: their annual payout increased when the government increased their minimum distribution requirement. The payout rate should be increased to 6 percent for both private foundations and donor-advised funds to make more funding accessible to the nonprofit sector that continues to be in dire need of financial support.

Donor-advised funds can be effective instruments for charitable giving. But the nation need not rely in all cases on blind faith to assume that what these funds do is automatically always charitable. Wearing the toga of charity does not obviate the need for strong standards and government oversight to ensure that nonprofits and the public get the charitable benefit they deserve from foundations and donor-advised funds.

[1] The Boston Globe, “Some Officers of Charities Steer Assets to Selves,” Oct. 19, 2003; “Charity Money Funding Perks,” Nov. 9, 2003; “Foundations Veer Into Business,” Dec. 3, 2003; “Foundation Lawyers Enjoy Privileged Position,” Dec. 17, 2003; “Philanthropist’s Millions Enrich Family Retainers,” Dec. 21, 2003; “Foundations’ Tax Returns Left Unchecked,” Dec. 29, 2003.

Where Were You Mr. Vice President? What Were You Thinking Mr. Chief Justice?

There apparently is one single thread that ties the nonprofit sector together…there is little self-interest in transforming the sector into one that is accountable and transparent. With outsiders more interested in taking up that mantle, the consequences are going to be enormous.


Take a look at Outsiders looking in

The scene is the Senate Committee on Rules and Administration investigating the problems and deficiecies at the Smithosian Institution and another museums.

The scene is the Senate Finance Committee trying to ensure that billions of dollars in tax breaks given to hospitals actually are effective in helping those in need.

The scene is Senators Grassley and Baucus calling for regulations on family charitable foundations. IRS says that millions of dollars in tax deductions through charitable foundations, called the tax structure, the Type III supporting organization, one of its "Dirty Dozen" tax scams.

The scene is the ranking member of the Committee on Finance, asking the Congressional Budget Office to review the economic benefits received from the tax-exempt status of college athletics and the practice of colleges and universities’ maintaining a large untaxed portfolio of assets while simultaneously borrowing with tax-exempt debt.

The scene is the Congressional Joint Committee on Taxation releasing a report which includes 117 pages of recommendations concerning exempt organizations.

The scene is the Senate Finance Committee Hearing on Charitable Organizations seeking legislative reforms that will strengthen charitable governance and address a tax gap.

The scene is the Internal Revenue Service beefing up the number of nonprofit examinations it conducts aimed at showing that it means business. “The IRS has revised audit techniques to make it harder for nonprofits to get away with bad behavior”, said the director of the IRS’s exempt-organizations office.

The promises:

“We are raising the bar on accountability"…Brian Gallagher, president and CEO of the United Way of America…:

• In 1995, the tone was set by United Way chief executive William Aramony president of the United Way for 22 years when he was convicted on 25 counts for an estimated $1/2 million or more embezzlement;
• In May 2004, Oral Suer the CEO of the United Way of America in the Washington, DC area from 1974 to 2002 was convicted and sentenced to 27 months in jail for defrauding his organization of several hundred thousand dollars;
• In April 2006, the NYC United Way revealed misappropriation of assets ($227,000) by CEO Ralph Dickerson. He walked away with retitution and becoming a paid consultant with other United Ways. No sooner did the Dickerson affair cool down, the United Way of New York City staff, in 2007, were stunned with the announcement that the president and chief executive would be “retiring” in a couple of months following an internal investigation into the group's handling of its assets. Several other top executives have left the organization during the last two to three years.
• At least 30 local United Ways have been involved in misdeeds.

“ We recognize the problem, and we’ve apologized for the problems", Jack McGuire, Interim CEO; “We need to change who we are…”, said senior vice president Joseph C. Becker.

• The tone was apparently set in the the mid 1990’s when the about-to-leave Red Cross executive Elizabeth Dole faced the organization’s largest deficit--$113 million. But the conflicts-of–interests became her most glaring legacy.
• With over $10 million in fines…“We keep assessing fines…but we aren’t sure they (Red Cross) get it yet”, FDA assistant commissioner in the Federal government’s attempt to hold Red Cross in contempt of a 1993 consent decree because of numerous blood collection violations, including contamination.
• At least 44 agency instances of offenses totaling million and millions of dollars and continues to this day.

“What more could we ask for…on any measure I can think of, his results have been outstanding” Roger Sant, chairman of the executive committee of the Smithsonian Institution Board of Regents speaking of Lawrence Small its former top official. (February, 2007); “…regret the circumstances that have led to a loss of confidence in the spending practices and oversight at the Smithsonian”, Roger Sant, (April 11, 2007)

• Small received over $1.15 million for making his house available for official functions in addition to his $915,000 compensation. He used his house only a handful of occasion. His salary doubled in seven years.
• Small stopped filing required monthly financial documentation “for administrative ease”. When brought to the attention of the Regents by the inspector general, they disregarded a recommendation to require more “record-keeping and reporting” and endorsed a $193,000 housing fee to the home that was free and clear of any mortgage.
• From the inspector general: “for some expenditures…there seemed to be no rules or limits”; “Regents were not fully aware of the provisions of the agreement (Small’s employment agreement)…or housing allowance”; “management withheld from the Regents”; “the Regents should have sought more information”; “issues of lack of compliance were raised, management did not act”; “there is a lack of understanding of the importance of public accountability”; “transparency is regarded as an intrusion”; only after Congressional involvement “our reporting relationship changed.”
• The board is at the heart of better accountability. Of the 17 members, eight are public officials, some of whom have never attended a meeting.

The results

Red Cross

The American Red Cross can not get its misdeeds under control with embezzlements in Michigan, Oklahoma and West Virgina in court this month and recently with an accountant in California squirelling away over $100,000 for personal uses and a manager in New Mexico admitting to taking $120,000. Recently, the American Red Cross did however agree to do backgroud checks of volunteers only after felon volunteers diverted millions of dollars in supplies and cash from those in need. The Red Cross board has fulfilled its promise to hire a President. After having an interim leader for 16 months, the board landed a leader---the head of the IRS. The interim executive for the last year and a half was the head of blood division which continues its dispute with the Federal Drug Administration and is regularly fined---totalling in excessive of $10 million. Under tremendous pressure from outsiders, the Board of the Red Cross has agreed to modernize and strengthen its governance structure and practice; full implementation date: 2012.

United Way

At the United Way, there apparently are issues that need to be addressed. Local United Ways affiliates have noticed that that there is slippage in the contributions from their core agencies and movement toward earmarking donations to nonprofits that are more to their liking. In Los Angeles about two-thirds of the $47 million that the United Way gave away went to nonprofits were selected by contributors and not core agencies.. Seattle saw a similar trend with 57% of its donations forwarded to designated nonprofits. The consequences of more focused donations are that the recipients of the past, namely the poor and disadvantaged, are giving way to large institutions such as museums, operas and universities. A competitor, America's Charities is a federation has nearly 200 of the “nation’s most-loved and best-known charities in the nation, including Make-A-Wish Foundation of America®, Feed the Children, Reading Is Fundamental, Junior Achievement and others”.

There is considerable shrinkage in the United Way national system. Some are unhappy with its allocation priorities, others are troubled with its standards, and still others are bothered with its leadership. Unhappy in the way the Central Maryland United Way allocates its funds, the county executive of Howard County wants to leave the UW system. Other nonprofits are complaining about losing money under a new United Way funding formula. In the past three to four years there have been more than 50 United Ways that have been disaffiliated by not meeting the increasing higher standards at the United Way.

The L.A. United Way President said that all fundraising became harder after the fraud in the 1990’s at the national United Way. A shrinking number of affiliates, a smaller number of agencies that are funded, a dwindling amount of dollars donated and decreasing confidence forebode a sad picture. With only 14% that trust how charities spend their money, the trend is clear.

Smithsonian

With Board of Regents asleep at the switch, the Smithsonian leader spent $90,000 for a private plane to take him to one function, spent $4800 on his assistant, $2535 to dust chandelier, $14,525 to add three new French doors; $13,000 for a conference table, $4,000 for two chairs all after pleading guilty and being sentenced to two years probation and 100 hours of community service for purchasing personal items protected under various international laws.. The problem is with the governing structure where the Chief Justice was the head and is reputed to have attended all meetings and the Vice President who attended none.

IRS

The IRS has revised audit techniques to make it harder for nonprofits to get away with bad behavior.


Gary Snyder is the author of Nonprofits: On the Brink and articles in numerous publications. His email address: gary.r.snyder@gmail.com; website: http://www.garyrsnyder.com/