ACORN in Hot Waters

By Aaron Dorfman

A couple of weeks ago, the New York Times revealed in a piece by Stephanie Strom that the Association of Community Organizations for Reform Now (ACORN) kept secret for eight years the embezzlement of nearly $1 million .The embezzler was Dale Rathke, the brother of ACORN founder Wade Rathke.

As an outrageous breach of the public’s trust, ACORN’s case is a textbook example of horrendously weak governance combined with extremely poor judgment. While the National Committee for Responsive Philanthropy (NCRP) serves primarily as a watchdog of foundations and other grantmaking institutions (not of all nonprofits), this case is certainly worthy of comment due to the scope of the issues involved.

In the interest of full disclosure, I should point out that ACORN is a member of NCRP, that I worked for the organization from 1992 to 1997, that a senior ACORN executive served previously on NCRP’s Board of Directors, and that current NCRP board members are executives with foundations that fund extensively ACORN and its affiliates. Additionally, NCRP is currently working on new research that documents the positive impact of policy advocacy, community organizing, and civic engagement, and ACORN’s work will be included in that research.

Despite these connections between ACORN and NCRP, it is important to stress that no organization should be arrogantly allowed to take the public’s trust for granted.

ACORN’s first mistake in weak governance and poor judgment came in allowing the brother of the organization’s founder to be in charge of finances for so many years. What were they thinking? The board should never have allowed that kind of arrangement to go on for so long. Nepotism never serves nonprofits well. In spite of the fact that dozens of staff members regularly objected to the arrangement, Wade Rathke insisted on keeping his brother running the finances for decades and the board never forced him to do otherwise.

The second mistake, related to the first, was the board’s consistent failure to exercise its fiduciary responsibility and engage in sufficiently rigorous oversight. From my understanding, the board did not have an audit committee and the auditors were answering to Wade Rathke, not to the organization’s board. This is absolutely inexcusable for a nonprofit whose annual budget, when combined with its affiliate organizations, was more than $40 million in 2000.

Once the theft was uncovered, there were several acts that were clearly unethical and just plain boneheaded. First, the auditors followed Wade’s instruction to record the theft as a “loan,” which may make them criminally negligent in this matter. The staff who allowed Wade to keep the matter a secret bears a significant amount of blame too. These are people who show a tremendous amount of backbone everyday in their campaigns against injustice but who lacked spinal fortitude at precisely the moment when it was needed the most to protect the long-term interests of their organization and its constituency. As difficult as it would have been to stand up to the organization’s founder, they should have insisted on full transparency and accountability eight years ago.

While Wade’s argument for protecting the organization from those that would like to harm it has some merit, no organization should think it can operate outside of the basic principles of integrity and transparency. Every time a nonprofit is involved in this kind of wrongdoing, it hurts the entire sector; we cannot take the public’s trust for granted.

ACORN’s funders have made it clear they are willing to continue supporting the organization if ACORN overhauls its management and governance structures. In fact, some funders were pushing ACORN to address these internal issues long before news of the embezzlement leaked. While a foundation should not be in the business of telling nonprofits how to run their organization, it’s proper and necessary for funders to push the issue when basic accountability and governance are lacking.

ACORN does some fantastic work locally and nationally. [For a full description of that work, along with some insightful analysis of the current crisis, please read Peter Dreier’s recent piece in the Huffington Post.] But the fact that they do some great work doesn’t excuse how they handled this situation. All nonprofits need to function with the highest standards of integrity. To their credit, ACORN’s board acted quickly and decisively in removing both Rathkes from their posts once the story became known to them. Additionally, Bertha Lewis has now been named interim chief organizer and seems absolutely dedicated to fixing the underlying governance issues, not just in glossing over the public relations nightmare it has caused.

Out of this crisis comes an opportunity for ACORN to improve its operations. If they get it right, I expect that the organization will thrive in the coming years, that donors will maintain or increase their support of ACORN and its affiliates, and that the public will benefit as a result. If they don’t take this opportunity to improve their operations, I expect that their fundraising will suffer. Other nonprofits should use this case to examine their own commitment to accountability and transparency. Proper governance goes a long way to preventing abuses in our sector.

Aaron Dorfman is the executive director of the National Committee for Responsive Philanthropy (NCRP).

Nonprofit Executive Compensation – Who Decides What is Fair and How?

By Niki Jagpal

The issue of appropriate levels of compensation for nonprofit executives and CEOs is making headlines once again after investigative reports by WCNC-TV and The Charlotte Observer. The United Way of Central Carolinas’ (UWCC) president and CEO Gloria Pace King will receive more than $1.2 million, following the addition of $822,507 to her retirement plan. As the two media outlets have noted, the increase in Pace King’s benefits package places her level of compensation above that of many other United Way executives in different parts of the country.

UWCC board chair Graham Denton defended Ms. Pace King’s compensation, saying she deserved the package given to her.

The Chronicle of Philanthropy’s 2007 survey of executive compensation, however, shows that among the various chapters of the United Way, Pace King’s compensation relative to her organization’s fundraising is significantly higher than that of her counterparts in similar-sized United Way chapters. The Charlotte Observer provides the following examples of other United Way CEO salaries compared to their annual fundraising in FY 2007:

• UWCC raised a record $44 million and Pace King’s salary was $365,000 (excluding benefits).
• In metropolitan Atlanta, the United Way chapter raised nearly $79 million; their outgoing CEO was paid a lump sum of nearly $1.6 million when he retired, on top of a salary of $352,611.[1]
• The United Way of Greater St. Louis raised close to $69 million; the CEO was paid $254,487.

The Observer also highlights a 2002 study it conducted in which the newspaper’s investigations revealed that Pace King was the fifth-highest paid executive of the 50 chapters they analyzed. Her current compensation package places her third among the nation’s 42 United Way chapters as noted by WCNC. These figures raise many questions, including to what extent should the level of fundraising be tied to CEO compensation? And if Denton defends Pace King’s salary on the basis of her fundraising, why is there no consistency in the pay rates of other UW CEOs who out-fundraised her?

So, what are the appropriate ratios to determine a ‘fair’ level of compensation for nonprofit executives? NCRP received a note defending UWCC, highlighting the small percentage of the UWCC budget that comprises Pace King’s compensation. Based on the organization’s 2006 990 form, according to the note, Pace King’s salary was 1.25 percent of her organization’s total operating budget. The writer compared this figure to NCRP’s 2006 990, which showed its executive director’s salary at 15.47 percent.

S/he raised a valid point for consideration in the discussion of what constitutes an appropriate level of compensation and what factors are considered to determine it. For example, while a CEO’s salary may only account for a fraction of an organization’s total budget, is there an absolute figure after which this statistic becomes irrelevant? What of the nonprofit operating with a very small budget that employs only one person who has the title of ‘CEO’? Surely this person’s compensation would comprise a significant proportion of her or his budget, perhaps even 50 percent, give the “multiple hats” the CEO wears in this scenario. In short, is the CEO’s salary as a percentage of the overall budget a valid measure to determine appropriate levels of compensation?

The author of the comment also pointed out that NCRP’s overhead costs in 2006 (17.1 percent) were higher than UWCC’s (13.6 percent). The rate and what constitutes overhead or administrative costs[2] that keep an organization functional vary from organization to organization. It can cover not just staff salaries and benefits but also other costs that enable an organization to work and thrive, such as rent, technology infrastructure, staff training and unplanned program expenses. Moreover, the transaction costs of conducting business in different parts of the country make the local context far too important to ignore. Keeping a small nonprofit in the greater DC metropolitan area functional, paying employees competitive wages based on the local market and cost of living will affect a nonprofit’s overhead.

Finally, the comparison of NCRP with the UWCC assumes that a nonprofit that depends largely on foundation grants should have the same metrics for reasonable compensation as an organization that receives majority of its income from individual donors through workplace giving programs. If this is the case, then what about private foundations, which receive minimal, if any, contributions from individuals?

So how do we select the criteria that ought to determine appropriate levels of executive compensation? Is it realistic to expect foundations to account for local and regional variability in the costs of living when determining how much money to allocate for compensation? Is it fair for a nonprofit executive of an organization funded largely by individual as opposed to institutional grantmakers to disclose how much of the public’s contribution will go toward compensation versus the actual business of the nonprofit? The answers to all the above questions will certainly vary by organization, mission, strategy and personal values. If nothing else, the UWCC case highlights the need to discuss these difficult issues to ensure philanthropy serves the public good and not private interests.

[1] The salary figure was taken from the Chronicle of Philanthropy's 2007 survey.
[2] NCRP recognizes the importance of providing nonprofits with adequate general operating dollars to be truly effective in achieving their organizational missions. It has been urging foundations to increase funding general operations and provide more funding for administrative overhead costs in programmatic grants.

Niki Jagpal is research director at the National Committee for Responsive Philanthropy (NCRP).

New Foundation Center Head A Reason for Optimism

by Yna Moore

The appointment of Bradford K. Smith as the Foundation Center’s new president beginning in October is welcome news (view press release here). He was strongly supportive of social justice grantmaking when he led the Ford Foundation’s Peace and Social Justice Program. There is much reason for optimism that under his leadership, the Foundation Center will continue its efforts to shed light on the amount of foundation dollars that go toward meeting the needs of the many marginalized groups in the country.

Kristina ("Yna") Moore is communications director at the National Committee for Responsive Philanthropy (NCRP).

Diversity Debate Rages On

by Yna Moore

The debate over California's AB 624 legislation continues. The bill would require the state's largest foundations to disclose diversity information regarding their board, staff, grantees and vendors.

Many foundations and their trade associations have strongly opposed the bill, arguing that their decision to fund an organization is based solely on their likelihood of achieving the most impact.

However, “improving the societal impact of foundations and improving their support for diverse communities need not be mutually exclusive propositions,” said Aaron Dorfman in a recent posting on this issue. “In fact, there is growing evidence that diversity and effectiveness go hand in hand.”

In a recent commentary on the Chronicle of Philanthropy (Foundations Should Be Required to Disclose Data on Charity, May 1), Pablo Eisenberg[1] notes that despite being “poorly crafted,” the legislation’s purpose—to require foundations to disclose race and gender information of their boards and grantees—is fundamentally sound. The bill will “provide the public and the foundations, at least in California, with a more accurate picture of the extent of diversity at foundations and their grantees,” said Eisenberg. “Armed with this information, as well as their growing awareness of the problem, foundations hopefully will begin to take much more seriously their responsibility for adequately supporting what has now become the majority of Americans.”

In a separate article (California’s Legislation Won’t Achieve True Diversity At Foundations), Mark Rosenman argues for foundations to truly reflect on their missions and how they translate this into practice. Beyond the numbers, the issue of diversity is about redistribution of power among foundations and nonprofits.

In an earlier post on this blog, Pete Manzo suggests that we’ll need better information than what AB 624 mandates to improve how philanthropy responds to the needs of underserved communities. He proposes a system that allows us to view where foundation dollars are going, the demographic attributes of those places, and information on the subsets of people being served by those grants.

Do you think it’s necessary to have legislation like AB 624 requiring foundation disclosure of diversity information? Why or why not? Do you think AB 624 is an effective way to channel more foundation funding to nonprofits serving communities of color and other marginalized groups? If not, how might this legislation be improved (assuming that you think legislation is needed)? Are there other ways to go about measuring and disclosing more accurately and effectively the current state of diversity in foundation practices and grantmaking? Tell us what you think!


[1] Pablo Eisenberg is a co-founder and former board chair of the National Committee for Responsive Philanthropy.

Yna Moore is communications director at the National Committee for Responsive Philanthropy.

Are grant application and reporting procedures impediments to efficiency and effectiveness?

by Niki Jagpal

This week Project Streamline, a joint effort of grantmaking and receiving organizations to improve reporting and application procedures, released a new report Drowning in Paperwork, Distracted From Purpose. The report identifies ten ways that current application and reporting systems inhibit nonprofit effectiveness including insufficient net grants and lack of trust between nonprofits and funders. The report makes four recommendations for grantmakers based on the study’s findings.

Project Streamline’s report comes at an opportune time; a recent article in the Chronicle of Philanthropy (subscription required) highlights efforts by the Internal Revenue System (IRS) to increase the effectiveness and efficiency of charitable organizations. Steven T. Miller is the current commissioner of the IRS’s tax-exempt and government-entities division. As the Chronicle notes, he made a series of remarks at a conference on tax-exempt organizations convened by Georgetown University Law Center Continuing Legal Education Department this week. One strategy Miller suggests is for the IRS to “create and enforce a standard to ensure that organizations spend in line with their resources.” While monitoring is not currently the purview of the IRS, Miller said that the IRS would be “more aggressive” in keeping a watch over the “efficiency and effectiveness” of charitable organizations.

If nonprofits are to be truly empowered to achieve their missions by focusing on effectiveness and efficiency, it is clear that cumbersome application and reporting procedures have to be addressed. But the process of grant applications and reports is only part of the solution; as Miller states “[…] every charity should be make responsible and appropriate use of its resources to achieve its charitable purposes. That is what the tax-exempt subsidy is for.” [emphasis added]

Moreover, while the Chronicle article and Miller’s remarks discuss revisions to the IRS’s 990 form, the publicly available informational tax returns filed by nonprofit grant recipients, the same standard of effectiveness and efficiency ought to apply to the form 990-PF, the IRS’s tax form filed by private foundations. While efforts to include “efficiency indicators” in the revised 990 forms failed, the new forms will include questions about nonprofit governance and management policies. Miller sees the link between increased transparency and enforcement: “the question is no longer whether the IRS has a role to play in [governance] but rather what that role will be.”

Project Streamline’s work is commendable and adds value to sector-wide attempts to improve the grantmaker-grantee relationship. Now, imagine what the charitable sector would look like if we had simple criteria on the 990 PF forms for measuring philanthropic management and governance to support Miller’s vision of more effective and efficient charitable organizations?

Niki Jagpal is the research director at NCRP.

California Foundation Diversity Bill: Best Way to Boost Results for Low Income Communities of Color?

A California Assembly bill is causing quite a stir in the philanthropic and nonprofit worlds. Spurred by a series of studies by the Greenlining Institute, the bill, AB 624, sponsored by 23^rd District Assembly Member Joseph Coto (D-San Jose), would require California foundations with assets over $250,000,000 to collect and make public information about:

• the ethnicity, gender and sexual orientation of foundation board and staff members;
• the number of grants and grant dollars awarded to organizations reporting that 50% or more of their board or staff members are ethnic minorities;
• “the number of grants and grant dollars awarded to “organizations specifically serving African-American, Asian-American, Pacific Islander, Caucasian, Latino, Native American, and Alaskan Native communities, lesbian, gay, bisexual, and transgender communities and other underrepresented communities”
• “the number of grants and grant dollars awarded to predominantly low-income communities"; and
  
• "the number and percentage of business contracts awarded to African-Americans, Asian-Americans, Pacific Islanders, Caucasians, Latinos, Native Americans, and Alaskan Natives."

The current draft of the bill is available here.

The problem is, if the ultimate result sponsors hope to achieve is increased benefits from philanthropy flowing to either communities of color, or low income communities[1], compliance with the bill, as written, looks very unlikely to accomplish that.

First of all, complying with the bill would not be easy, both because of the fairly vague or uncertain definitions of the information to be collected, and also because of the amount of energy that would go into collecting that information, both at the foundations and on the part of their grantees. The bill is imperfectly drafted, so much so that the Nonprofit and Unincorporated Organizations Committee of the California Bar Association’s Business Law Section, a group of attorneys expert on exempt organization law, have issued a statement of opposition raising numerous objections, and concluding that the bill is “fatally flawed.”

The problem I see in the bill is that it does not require information be collected that would establish who is served by grant dollars (more on the feasibility, and wisdom, of trying to establish that below). Rather, it simply requires foundations to tally up the numbers, grant dollars and percentages and publish those. In its current form, a foundation could simply publish the aggregate figures (e.g., “300 grants, in the amount of $400 million, to organizations specifically serving communities of color”, or “250 grants, in the amount of $300 million, predominantly low income communities.” While it would be interesting to track whether those numbers go up or down, they are practically useless, otherwise, for advocates. The data likely wouldn’t provide any evidence that philanthropic support to low income people of color living in particular regions or geographic communities is rising or falling, or how the distribution of grant funds within those communities is shifting over time. (Also, the data likely would not be aggregated somewhere, so to get the bigger picture, advocates would have to cull information from dozens of foundation sites.)

As Aaron Dorfman, NCRP’s Executive Director, has pointed out in this space, if diversity in grantmaking is important, it should be measured. Opponents of the bill actually agree on this point, but object that the challenge will be how to measure it completely, and how to measure it in ways that are most useful to advocates for more responsive grantmaking. The leaders of The California Endowment, The William & Flora Hewlett Foundation and The James Irvine Foundation all have published op-eds or letters to the editor opposing the bill. Ironically, these three foundations are among the handful of large foundations with statewide reach most prominent in pushing policy advocacy and systems change to benefit low income communities of color. The controversy over AB 624 seems to be an example of what a friend of mine calls “heated agreement,” where people who basically agree and should be pulling in the same direction instead divide and argue over minor points.

As Dr. Ross of the Endowment observes, for all the debate about transparency, “the real issues are: poverty, equity and opportunity in communities of color and other underserved communities.” If the purpose is to improve the use of philanthropy to tackle those challenges, we’ll need better information than AB 624 mandates, and advocates for more responsive grantmaking and leaders of foundations like the Endowment, Hewlett and Irvine should be able to come up with much better solutions by working together.

A better place to start would be making visible the flow of grant dollars to specific places, the demographic and other attributes of those places, and even the specific subsets of people served in those places. (Another irony: the specific reach of grants for policy advocacy or systems change will be harder to define, but this challenge can be solved, as I will explore in a future post). To do so, we’ll need to make the grants data already disclosed by foundations more accessible to advocates, and supplement that with data about the geographic and demographic reach of those grant funds. This would mean bringing the grants databases out from behind the firewalls of services like the Foundation Center or Foundation Search, or paying the costs of providing free public access to that data. It also would entail beginning to map the reach of grants. With a modest investment of time and resources, we can determine which census tracts are served by which organizations, and show the amount of grant dollars relative to the numbers of people living in an area or, more specifically, the particular characteristics of people actually served. This is not a technological pipedream, it can definitely be done[2], and likely for far less cost and effort than compliance with AB 624 would entail. The design and development of such a system, however, is something that can’t very well be done in advance through legislation.

In the end, AB 624 is unlikely to become law anytime soon (It has a rough road ahead in the California Senate, and if it passes both houses, Governor Schwarzenegger is likely to veto it.) That should give all supporters of responsive philanthropy, within foundations and the broader community, plenty of time to develop approaches more targeted to improving results for low income communities of color.

Peter Manzo is an NCRP board member and the Director of Strategic Initiatives for the Advancement Project, a civil rights advocacy organization based in Los Angeles and Washington, D.C. His opinions are his own and do not necessarily reflect those of NCRP or the Advancement Project.

[1] 1) Oddly, there is no such straightforward statement on Greenlining Institute’s Web site that this is the purpose, as opposed to more generically making foundations more “effective and efficient.”
[2] 2) HealthyCity.org, a partnership of nonprofits in Los Angeles sponsored by the Advancement Project, already has built tools and methods for making the flow of grant dollars visible, for public agencies and private funders, to help them assess their grants in Los Angeles County and throughout California. (Full disclosure: I am a proud co-founder of HealthyCity.org.).

A Compromised Charitable Sector

A Compromised Charitable Sector
By Gary R. Snyder

If anyone thought that the bright light on nonprofit misdeeds was going to fade with the change in Senate Finance Committee leadership they are grossly underestimating the festering problem. Granted the loss of Dean A. Zerbe as a principal staff point person on this matter to Ranking Member Senator Charles Grassley is a significant blow. The direction may have changed but the intense interest in setting the nonprofit sector straight has not subsided.

The Senate Finance Committee’s ongoing concern in nonprofit ineptitude was joined by the House Oversight and Government Reform Committee, which held hearings. Among the embarrassing issues was how veterans’ charities gave small proportions of revenue to veterans and their families. An article in the Chronicle of Philanthropy stated that committee members used terms such as “immoral”, “fraud” and “sickening betrayal” with a promise to have additional hearings as the issues unfold.

These terms of endearment are consistent with the donor’s diminishing confidence in the charitable sector. Heightened scrutiny has resulted in increased stories in the media with the recent study on $30-40 billion annual nonprofit fraud (Greenlee, Gordon) being unveiled in an arresting New York Times (March 29, 2008, Report Sketches Crime Costing Billions: Theft From Charities) article. The cumulative effect of the focus of the public attention on charity malfeasance is still unknown, but certainly isn’t going to play well in Congress or at the local nonprofit agency.

The problems continue to center on the abuses by the board, executive and volunteers. All have failed to be diligent in exercising their fiduciary duties. As the Independent Sector notes, few know what their responsibilities are. Even if they did understand what their role is supposed to be, few have the skills to adequacy address the misdeeds.

This is underscored by the Independent Sector’s Panel on the Nonprofit Sector request for government assistance in educating board and professional leaders because both are not aware of the expectations and requirements imposed upon them.

While tens of billions of dollars are taken from those to which it is intended, sector leaders continue to say that it is a “few bad apples”. Last year, the General Accounting Office noted that nearly 55,000 tax-exempt organizations had almost $1 billion in unpaid taxes with some owing tens of millions of dollars.

The fallout in loss in the nation’s misdeeds from charities is profound. According to the National Priorities Project----a $20 billion loss is equivalent to any of the following:

• healthcare to 7.721 million people, or
• 438,768 public safety officials, or
• 1861 new elementary school, or
• 3.1 million Head Start places for children, or
• 290,081 elementary school teachers, or
• 299,496 port container inspectors
or, $54,794,520 per day

Leadership at the local, state, and national levels is virtually nonexistent. The use of words such as transparency and accountability have become jargon—buzzwords---that fail to be meaningful without substance behind them.

The sole of the charitable world is under scrutiny. Integrity, credibility and effectiveness are proxy measures of the soundness of any organization. Without those, the sector is severely compromised


Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: http://garyrsnyder.com, phone: 248.324.3700.

Foundations Should Embrace Diversity and Effectiveness

By Aaron Dorfman

Last week, six hundred foundation leaders from across the nation were in San Francisco, Calif. for a conference on grantmaker practices that improve nonprofit results while a major controversy involving foundations continues to brew in the California Legislature.

The conference marked the tenth anniversary of Grantmakers for Effective Organizations (GEO), a coalition of funders focused on maximizing the impact of their grants. GEO is the place where foundation leaders come together to share resources and ideas that help them most effectively contribute to the success of their grantee organizations. When the grantees achieve their missions, the foundations also achieve theirs.

The legislative controversy is about AB 624, a bill that would require the largest California foundations to disclose diversity data about their boards, staffs, grantees and vendors. The bill passed the California Assembly and is making its way through the Senate. Assembly Member Joe Coto introduced the bill because he feels that foundations aren’t meeting the needs of his constituents and other communities of color in California.

With any rigorous review of the available data, it is clear that communities of color benefit from institutional philanthropy at rates far lower than one would expect. Nationally, less than nine percent of grant dollars are classified as intending to benefit racial or ethnic minorities. As a percentage of total grants, that figure has been declining over time. And while the available evidence suggests that foundations have been making real progress diversifying their staffs at the middle levels of seniority, chief executives and trustees of foundations remain overwhelmingly white.

But foundations exist for the purpose of having impact on the issues and causes they were founded to address, not to provide grants or hire staff based on race or ethnicity. Opponents of AB 624 argue that they make their funding decisions based solely on which grantees are most likely to achieve maximum impact and that race shouldn’t enter into the equation.

So are we at an impasse? Must grantmakers choose between being effective or embracing racial equity and diversity? Not at all.

Improving the societal impact of foundations and improving their support for diverse communities need not be mutually exclusive propositions. In fact, there is growing evidence that diversity and effectiveness go hand in hand.

A recent book, The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools and Societies, by University of Michigan professor Scott E. Page shows convincingly that diverse organizations actually outperform more homogenous ones. “Diverse boards of directors make better decisions, the most innovative companies are diverse,” he states in an interview with the New York Times.

Foundation leaders who want results should consider seriously Page’s research. Grantmakers should embrace both diversity and effectiveness, and they should persistently seek to improve on both fronts. They need to go beyond race/gender/sexual orientation and should also include class to ensure that elites of different races aren’t the only voices listened to in philanthropy.

For the past decade, foundations have been advancing their ability to measure the impact of their work and that of their grantees. They’re getting better at knowing whether or not they’re making a difference. They should continue their efforts on this front.

But we also need better data on diversity in philanthropy. Improving diversity will help foundations increase their impact, but we won’t be able to tell if they’re making progress if they don’t measure and report on key diversity metrics. When the only diversity data that is available clearly shows that communities of color are getting shortchanged, elected officials can and should start raising questions. After all, foundations’ tax exempt status means these grantmakers are spending quasi-public dollars.

There are flaws with AB 624, but there is no question that foundations should embrace both diversity and effectiveness to ensure maximum public benefit from the valuable and limited resources that are entrusted to them.

Aaron Dorfman is the executive director of the National Committee for Responsive Philanthropy.

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/