A yearlong investigation by the Tampa Tribune and the Center for Investigative Reporting has uncovered serious fraud and abuse in the charity world. It’s a tale not just of the public being ripped off for the benefit of unscrupulous fundraising firms, but also of hapless state regulators with a nearly empty toolbox.
The investigators named 50 charities as the worst in America, and it’s not hard to see why. The Kids Wish Network, the worst, raised $127.8 million in a 10-year period using solicitors who were paid $109.8 million. Only 2.5 percent of the money raised was spent on direct cash aid.
The issues go deeper than fundraisers hogging the lion’s share of the money being raised in the name of charities. Solicitors hired by charities often engage in deceptive practices, such as misleading people as to how much money is going to charity.
Bad actors flaunt state regulators, too, simply starting a new company when one draws too much scrutiny. Essentially, regulators are playing Whac-A-Mole with extremely limited resources.
Other oversight avenues are broken. If you look up some of the 50 worst charities named in the investigation, you might not see anything from nonprofit watchdogs. Charity Navigator, which bills itself as “your guide to intelligent giving,” doesn’t have a profile for nearly half the 50 worst charities. (It does give “zero star” ratings to some.)
The Better Business Bureau’s Wise Giving Alliance is even less helpful. The WGA’s seal program rates fewer charities and has a conflict of interest, taking money from charities it rates through a seal-licensing program that provides 67 percent of its budget.
Both evaluation groups also allow charities to engage in deceptive accounting practices. For example, a charity may classify millions of dollars in fundraising expenses as “educational” expenses. This makes a charity seem more efficient than it is. The Humane Society of the United States, to name one example of many, says it spends nearly 80 percent of its budget on programs. Yet that figure is actually as low as 50 percent, according to the financial analysis of the American Institute of Philanthropy.
Elsewhere, charities inflate the value of goods they donate in order to make it seem like they are more efficient than they are. Charities can offset high fundraising costs by puffing up the value of the goods donated, pricing pills that go for pennies at $10 a pop.
The public is being shortchanged by too many charities. Here are some possibilities for federal and state reforms:
1. Hold congressional hearings on nonprofit abuses. Since deceptive practices occur nationally, it’s time to get the IRS involved in cracking down. It may be a way forward out of the IRS’s current mess, too.
2. Update federal and state deceptive practices laws. Many states have outdated laws that apply only to deceptive or misleading business practices. These states need to apply tough standards, with tough civil penalties, to charitable solicitations.
3. Increase federal and state fines for bad actors. Higher fines can help fund more consumer protection efforts without having to dip into the taxpayer well.
4. Increase transparency for the public. Some states, such as Kentucky and New York, already publish reports of fundraising campaigns showing how much money solicitors keep in fundraising campaigns. Charities should have to report a more realistic figure of financial efficiency that does not count fundraising expenses as “education” or “program” spending.
5. Name and shame. An attorney general or secretary of state can use the bully pulpit to keep the public informed about low-performing charities. South Carolina, for example, publishes a “Scrooges and Angels” list. Sunshine is the best disinfectant.
6. Stop directing donors to Charity Navigator and the Better Business Bureau Wise Giving Alliance (which gets paid by many groups it rates) until these so-called watchdogs get tough. A viable alternative is the American Institute of Philanthropy, which carefully examines financial reports and cuts through accounting gimmicks.
State regulators are hampered and the crisis is national. It’s time for the IRS to make new fundamental decisions about financial metrics of charities, and for states to give regulators more teeth. The charity sector is thankfully large; now it must be more accountable.