DATELINE: December 14, 2007, Chicago
Philip Rucker of the Washington Post had an interesting article in yesterday's paper covering veterans charities and their generally poor performance in terms of serving veterans. Study Faults Charities for Veterans: Some Nonprofits Shortchange Troops, Watchdog Group Says, Dec. 13, 2007. At the outset, we should point out that not all veterans charities are or should be suspect, but for purposes of this post, we focus on the troublesome ones when we refer to veterans charities.
The numbers will be shocking to the public, but will come as...
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no surprise to charity insiders. It's the same old story: high fundraising and administration costs, with some evidence of large salaries. The American Philanthropy Institute's Daniel Borochoff points to one particularly egregious example, Help Hospitalized Veterans (HHV), run by one Roger Chapin. HHV reported $71.3 million in income in 2006, according to the Post, but only spent about one-third of that on charitable work, according to the Institute. Mr. Chapin and his wife did pretty well, though, taking home over $535,000 in salary and benefits. As we have said before, we resist evaluating charities based on superficial fundraising metrics, but even we have to admit the one-third number is pretty disturbing. Out of fairness, we should note that Chapin strongly disagrees with the unfavorable characterization of his organization.
We are talking about veterans here. As a wise-old law school professor of ours once said, cases involving "widows, orphans, and drunken sailors" make for aberrational precedent. We certainly wouldn't suggest that veterans are drunken, but as a class they do tend to fall into that category of people that legislators and judges like to protect—and very understandably so.
It, therefore, should come as no surprise that Rucker's article is filled with quotes from irate politicians. Of course, Senator Charles Grassley's name appears in the article—he is always the first to jump on the populist bandwagon. But this time we also have Senator John Sarbanes, head of the Senate's committee that oversees veteran matters, and Representative Chris Van Hollen, a member of the House Committee on Oversight and Government Reform.
The article was obviously timed to coincide with hearings by the Oversight Committee. Rucker reports on those hearings in today's Post. Panel Probes Spending of Veterans Charities: Low Amount Going to Troops. The article mirrors the earlier one, with a variety of politicians given the opportunity to prance before the cameras, including Rep. Henry Waxman, Rep. Christopher Shays, Rep. Elijah E, Cummings, and Rep. Dan Burton.
It sure sounds like Congress needs to regulate these organizations, which was exactly the point of parading witnesses before the committee. As usual, there was no need to have a hearing for the politicians to reach that conclusion. They had their speeches written long before yesterday.
Don't expect us to defend the veterans charities. We receive the same phone calls from them that you do, and we hang up. What concerns us and should concern the nonprofit sector is the emphasis on fundraising metrics that came out of the hearings. It would be easy to tie tax-exemption to some sort of ratio—no more than one-third of expenses can go to fundraising—but where is the firewall that prevents legislators from applying the same metric to other charities. There are plenty of legitimate reasons why fundraising expenses might be high. As Judge Posner pointed out in United Cancer Council, imposing a percentage-based limit could impede the formation of new charities. Newer charities often have higher rates of fundraising expenses as they attempt to get their operations funded and off the ground. Limitations could also impede major capital campaigns, with their high upfront expenses. And what about organizations that are members of affiliated groups, where fundraising expenses may be concentrated in one entity with the sole purpose of raising funds for the group?
In short, the expedient and obvious solution in the case of veterans charities once again places too much emphasis on artificial metrics. That solution poses a threat to fundraising activities by legitimate charities. As is usual, we think the best solution is let the buyer beware. In recent years, watchdog groups have published the results of their studies, GuideStar has become an easily accessible source for Form 990s, the IRS has devoted considerable resources to improving the Form 990, and state regulators and the sector have been working toward improved transparency. The resources are available. If donors do not take advantage of them, then they have only themselves to blame if their money goes to waste.
But we have no doubt that even legitimate charities will take issue with our buyer-beware position. They will counter that the egregious practices identified in yesterday's hearings give all charities a bad name and divert valuable resources from the many legitimate ones. We hear you, but be careful. Unfortunately, government regulation doesn't always stop with the obvious abuses.
We view the IRS as a potential resource in stopping the abuse. It can look to the intermediate sanctions, and the private inurement and benefit doctrines to curb abuses. Those rules proved very viable in combating abuses by some credit counseling organizations. Rather than more regulation, Congress might find that providing more funding to the IRS's EO division is far more effective.
Now if everyone who is concerned with this issue wants a legislative solution, here is a better one. Congress should expand the jurisdiction of the Federal Trade Commission to include charities; at least as far as the Do-Not-Call list goes. Although our observations are only anecdotal, we have noticed that legitimate charities generally do not rely on tele-marketing to solicit us for contributions. We do, however, receive frequent calls from police, fire fighter, and veterans charities. As we said, we just hang up, but others obviously don't. By expanding the ban, Congress would not only make it more difficult for the veterans charities to fundraise, but honor the wishes of those Americans who have asked that they not be called at home. While Congress is at it, they should also expand the Do-Not-Call list to cover politicians. No free speech issue there. Just as politicians and charities have the right to speak, consumers, donors, and voters have the right not to listen.
If you don't like our views, send us a letter, but don't call.
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