DATELINE: February 5, 2008, Chicago
We may not have been posting while we were in Cambodia, but we read the Chronicle of Philanthropy online every other day or so. We were struck by an article penned by Suzanne Perry and Elizabeth Schwinn. Lawmakers Consider Whether to Require Charities to Detail Spending (February 7, 2008). The political peacocks are preening, but we aren't sure why.
In the aftermath of recent congressional hearings on charities that aid veterans, a number of politicians are giving serious consideration to federal legislation that would force charities to...
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disclose information about their fundraising expenses. We've heard these proposals before. As is always the case, the emphasis is misplaced. If there must be legislation, we would much prefer to see legislation that forces charities to detail their accomplishments—what the sector's lingo refers to as outcomes. But many politicians can't resist what boils down to the tried and true rhetoric of class warfare. If somebody is making money, particularly if the source of the earnings is a charity, they are evil. Too many politicians believe that earning a living is a sin.
But let's assume the advocates for more detailed disclosure of fundraising expenses have a legitimate concern. We still would argue that these elected officials don't have any idea what they are talking about. Where have they been for the last six months as the IRS has launched the revised Form 990? Representative Henry Waxman told the Chronicle, "We ought to shine a finer light on charities, all of them." Sounds like he views "all of them" as vermin. When we read that line, we hear the voice of Yosemite Sam. How much more light need we shine on charities? Isn't an 11-page Core Form with 16 supplemental schedules enough?
One proposal being considered focuses on disclosure of the "names of board members, executive salaries, source of revenue, as well as the amount spent on fund raising and the names of outside fundraisers." Before coming up with a new form, we suggest Congress take a look at (i) Core Form, Part VII—names of officers, directors, key employees, and highest compensated independent contractors; (ii) Part VII—executive salaries; (iii) Core Form, Part VII—sources of revenue; (iv) Core Form, Part IX—functional expenses, including Column D, fundraising expenses; and (v) Schedule J— fundraising activities, including a listing of paid individuals or entities (fundraisers) that receive at least $5,000 in fees. Part II of Schedule J asks for information for the organization's two largest fundraising events and the aggregates for all such events. Part III of Schedule J asks for information pertaining to gaming activities. In other words, all of this information already is or will now be publicly available.
Representative Tom Davis proves that he knows nothing about the existing regulation of charities in this country. He told the Chronicle, "We just want to make sure well-meaning contributors have the tools to do so." Although Davis doesn't offer specifics, that quote strongly suggests he favors some sort of disclosure mechanism. That's great, but the Form 990 is already a public document and GuideStar makes three years of returns available online for free.
The simple fact is that donors already have plenty of information that they can review before making a charitable contribution. For a longtime, our working hypothesis has been that the vast majority of donors don't review any of this information before making a contribution. We suspect that more disclosure will not change that fact. In short, donors already have all the tools they need to make informed decisions. Those who chose to ignore this information have only themselves to blame if their dollars are put to less than optimum use. More disclosure is not going to eliminate lazy donors. In fact donors are not lazy or unable to obtain information if they want to. Politicians simply don't understand donor motivations. For many, giving to charity is an expressive act. As hard as it is to believe, many donors are far more interested in finding a voice through their contributions than in how the contributions are actaully used.
Perry and Schwinn report that experts say, "that charities can manipulate the numbers to diminish their fund-raising costs, something they already do on their Form 990 informational tax forms." The Form 990 is filed under penalties of perjury, so it is unclear to us why the same numbers on another form will not be subject to "manipulation." The solution to false tax return filings is simple: more stringent enforcement efforts. Rather than imposing new requirements on charities, Congress should better fund the IRS and its enforcement efforts.
The political peacocks do not understand the industry they seek to regulate, making their efforts particularly troubling, as well as potentially destructive. There are legitimate reasons for high fundraising expenses relative to other expenses. New organizations must build a base of recurring donors. As anyone who sells insurance, magazines, or service plans knows, building a base requires high upfront costs. Even established charities are susceptible to high fundraising costs. Any cultural or educational institution that engages in a multi-year capital campaign is likely to see a spike in fundraising expenses during the initial phase of the campaign.
Moreover, the peacocks incorrectly assume uniform fundraising practices within a given organization. For example, most of the peacocks would applaud a university that is able to spend 90% of every dollar it raises on mission, while condemning a veterans organization that only spends 50% of every dollar raised on mission. However, the university may be using the same direct marketing techniques that are used by the veterans organization to raise 40% of the university's donations. The other 60% of donations might be attributable to a single $1 billion contribution. When the fundraising efficiency ratios are calculated for both organizations, the university will score much higher than the veterans organizations despite the fact that 40% of the university's fundraising effort is burdened with the same costs as the veterans organization.
In the end, we would not object to federal legislation of charitable solicitation. However, far more thought needs to be put into developing a comprehensive system than the peacocks are likely to provide. The peacocks are interested in headlines, but little else. That's why they put so much emphasis on disclosure. That's a highly visible solution, but not necessarily an effective one. It also can be a costly.
As a first principle, any federal system should pre-empt all the state registration requirements, while making sure that states have sufficient information to continue to regulate charities. In other words, we would be willing to support legislation that eliminates duplicative and differing submissions to various state regulators. We would not support federal legislation that proscribes minimum fundraising metrics, that outlaws certain fundraising techniques (e.g., direct marketing), or that turns enforcement over to the federal government.
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