The Lightning Rod M/M Blog

The IRS Pushes For Nonprofit "Efficiency and Effectivenes."

As reported in the Chronicle of Philanthropy and elsewhere, Steven Miller, the commissioner of the IRS’s tax-exempt and government-entities division, has announced that the IRS intends to be “more aggressive” in monitoring the “efficiency and effectiveness” of tax-exempt organizations.  Fund-raising efficiency, compensation, and percentage of expenditures spent on programs are areas he has mentioned that need more oversight.

Good luck, Mr. Miller.  Your heart’s in the right place, but I fear you have set yourself a thankless task and probably an impossible one.  This is why:  Absent the most egregious cases of abuse of public trust, there is no consensus in the voluntary sector – or among the general public for that matter – as to what constitutes “efficiency and effectiveness” for charities.  Or how to measure it.  Or how to quantify it.  Or how to report it.  How can the IRS enforce policy when no one agrees what the policy should be?

Yes, I know it’s currently fashionable among nonprofit policy wonks to talk about “outcome-based measurement” and the like, but don’t be fooled by the jargon jockeys.  There is still no consensus, and for good reason.  “Efficient” and “effective” are adjectives inherently antithetical to the spirit of American philanthropy, as I’ll explain below.

Last year the IRS proposed that charities state up front on the Form 990 returns their fund-raising expenses as a percentage of total contributions, their compensation of top officials as a percentage of contributions, and the percentage of gifts received after paying their professional fundraisers.  The nonprofit community made such a fuss the Service had to drop the proposals. 

Why don’t charities want to publish these numbers?  It’s not because they are trying to hide inefficiencies or malfeasance.  It’s because they know that these numbers are just as likely to give a false impression of a charity’s “efficiency” as a true one.  And they fear that prospective contributors will misinterpret the numbers and forego giving as a result. 

Is that a well-founded fear?  Well, yes and no.  In our experience with at work employee charity fund drives, when prospective donors are told what the charities’ fund raising and administrative overhead percentages are, based on the 990 returns, that information does affect giving decisions.  Donors tend to choose the charities with the lowest overhead rates, even though this number has little or nothing to do with the “effectiveness” of a charity’s program.  Charities with just a few points higher rate are penalized, even though they may have superior operations.

But in those workplace drives where this information is not presented automatically, but is available to donors if they ask for it, the data is irrelevant to the selection pattern of charities by the donors.  Why?  Because the donors never ask for the information.

In my entire career I have never once been asked by a donor to provide a 990.  My federation clients go well beyond IRS-required disclosures in their 990 filings, and they post the returns publicly on their web sites.  In their annual reports, also posted, they go so far as to reveal the specific amount they raised for each member charity and how much each charity received after expenses, data their competitors never release. 

Total disclosure!  Good for them!  Except nobody visits those web pages.  All the traffic goes to the member charity human interest stories and the “click here to give” pages instead.   

That’s the irony here.  The IRS wants charities to report more and better information to the public in the interests of transparency.  The charities are concerned that if they do so the public will draw false assumptions from the data.  But the public doesn’t care about accessing the data.  All they can find in the statistics are reasons not to give.  Where’s the hopefulness and joy in that?

Voting with their feet, and their wallets, the public has shown they are willing to take the risk of making “inefficient” gifts rather than taking a “read carefully before you invest” approach to their philanthropy. 

And maybe that’s all for the good.  As I’ve said before on this blog, the most important contribution the voluntary sector makes to society is not program but experimentation.  The sector is vibrant not because is it well-organized and “efficient” but because it is adventurous and entrepreneurial.  Meaning it’s going to fail a lot, and post lousy numbers a lot, albeit with the best of intentions.

So I say, Go get ‘em, Mr. Miller.  Find the bad guys and take them down.  But in so doing, don’t make “effectiveness” and “efficiency” touchstones of public policy for the charity world.  For to do so risks getting…

“Organized charity, scrimped and
iced,
In the name of a cautious, statistical
Christ.”

--John Boyle O’Reilly 

Direct Mail Study Mirrors Workplace Giving Trends

As reported today today in the Chronicle of Philanthropy, a new study finds that the number of people giving via direct mail is declining but those who are still giving are giving more.  The study was conducted by Target Analysis Group, a Boston-based consulting firm.  A summary of the findings is posed on the company's web site, www.targetanalysis.com.

That same trend has been evident in employee at-work fund drives for more than a decade.  The percentage of employees participating has been decreasing, but the average gift has been increasing.  So far the increase in gift size has offset the decrease in number of givers.  As a result, overall revenue has actually increased.  In the long term, however, fewer givers giving more is an unsustainable trend.  Everyone in our business is worried about it, but nobody has been able to reverse it.  That's not for lack of trying.  The United Ways, the Combined Federal Campaign, the workplace federated groups, and many companies have tried various techniques designed to increase campaign participation.  None of them have worked.

For both direct mail and workplace giving, the cause of the decline of the number of people giving appears to be the same --  those who have traditionally responded well to direct mail/workplace appeals (that is, older people) are moving out of the pool of givers while younger people are not replacing them.  (It is unclear whether younger people are in fact giving less or just giving differently).

The conventional wisdom is that direct mail is not as effective with younger people in our brave new online world.  There are fewer likely theories as to why the fewer givers/larger gifts trend is happening at work.  The integration of web-based, online solicitation in at-work fund drives, which presumably is more effective with younger workers, is well established in private sector corporate fund drives.  So why isn't it working to increase the percentage of employee participation?

If you think you know the answer, I'd sure like to hear it.

Should Charities Get The Vote?

Charities lobbying government for attention and support is nothing new.  Indeed, such activity is an important part of the nonprofit sector's work.  But the charity/government connection seems to be morphing into a charity/politics connection.  Time Magazine reports that charities are actively seeking "face time" with the presidential candidates.  Bill Gates is spending $60 million for "Ed in 08" to put education issues on the candidates' platforms, and the Chronicle of Philanthropy reports that numerous foundations are taking similar steps to get their issues traction in the upcoming elections.  Some pundits worry that this activity at the campaign level gets dangerously close to violating the "don't advocate for any political party or candidate" rule.  Not me.  I say revoke that law. 

Charities are affected by who gets elected,because those who get elected make the laws that affect charities.  Government regulation of nonprofits at all levels is increasing and proposals are afoot to have government policy affect which charities givers choose to support and how much charities must spend. 

It is entirely appropriate, therefore, for charities to ask candidates to declare their positions on the issues that affect them, but since the real issue is "who gets elected" that is not enough.  It's time we eliminated the restriction that nonprofit groups must not advocate for any political party or candidate.  Give nonprofit corporations the same rights to affect politics as for-profit corporations have.  Nonprofits have just as much at stake.  Let them endorse, let them organize, and -- most importantly -- let them send money.  When the various interest groups within the nonprofit sector start forming their own PACs, watch the candidates beat a path to their doors.

Of course it's not going to happen.  But maybe it should.

 

FASB 157 Heads Up

In case you missed it, here's a friendly heads up that the Financial Accounting Standards Board, the organization that develops "generally accepted accounting principles," has issued new guidance regarding how your CPA should report the "fair market value" of your organization's assets and liabilities in your financial statements.   It is effective for financial statements for fiscal years beginning after November 15, 2007.

FASB 157 requires your CPA to determine "fair market value" (FMV) of your assets and liabilities rather than "book value."  It specifies three methods to determine FMV and requires the financial statements to disclose which method was used.  This shouldn't be a problem if your organization owns publicly registered securities, but determining the FMV of other non-cash assets, such as real estate, collectibles, closely-held stock, etc. can present lots of challenges to determine value.  That , in turn, could lead to an increase in your CPA fees.

If your organization does in fact have such assets or liabilities, I suggest talking to your CPA sooner rather than later so you are prepared to mitigate the potential impact of 157 on your audit expenses.

Is Harvard A Charity?

In yesterday's edition of the Los Angeles Times Robert Reich, who was Secretary of Labor under President Clinton, proposed the following:  If a charitable donation goes to an institution or agency set up to help the poor, the donor should get the full tax deduction.  If the donation goes to any other nonprofit, the donor would only get to deduct half the contribution.

The broader idea is that gifts to institutions that do not provide a "public benefit" or that cater to the wealthy elite  should not merit an underwriting from the  public at large in the form of foregone taxes on that money.  A gift to the Salvation Army deserves a deduction; a gift to Harvard does not.

I have great respect for Mr. Reich.  His recently published book, "Supercapitalism: The Transformation of Business, Democracy, and Everyday Life," is on my to-buy list today. 

But this idea that some charitable gifts are more "worthy" than others is a non-starter for anyone who cares about donor freedom of choice.  Unfortunately, it is being talked up by numerous social policy wonks around the country and even in Congress.   

The problem, of course, is who decides if a nonprofit is "meritorious" enough?  The IRS?  Congress?  Sure, most of us could argue that helping the poor, who need assistance, is more important than helping Harvard, with its $30 billion endowment.  But why is helping the poor more important than, say, rescuing stray animals?  Or funding medical research?   Or cleaning up a creek?

Even if we expend the idea of "public benefit" to include the above examples, what happens when the money goes to a "public benefit institution" but doesn't get spent on a public benefit.  My favorite example is money going to United Way which then spends it on public service announcements reminding us to talk to our children.  This is a "public benefit?"

Yes, it might be great if the wealthy were more generous to the poor and less generous to the arts, but I suspect meddling in the giver decision-making process would result in less money to both the poor and to the arts.  Like they say, the devil is in the details, and the path to hell is paved with good intentions.

The real question is whether, as a matter of public policy, gifts to nonprofits should be tax-deductible at all.  Who wants to tackle that one?    

Too Many Charities?

With the number of US charities now past one million -- and counting -- I'm hearing more and more pundits and self-appointed watchdogs saying that there are too many of them.  "We've got 700 breast cancer related organizations in this country" said Trent Stamp of Charity Navigator to the New York Times recently.  "If there were less there might be more money for a cure."

Really?

Personally, I think that those who believe there are "too many" charities are mistaken.  Individal acts of charity are manifestations of "the better angels of our nature," as Lincoln put it.  But charitable organizations exist not only to organize our angels but also to experiment with them to determine which of the myraid possible combinations of organized good work work best.  That's work better done by thousands, not hundreds.  And a byproduct of all that activity is that it "pollinates" society's collective conciousness on the possibilities of doing good.  In other words, organized charities' most important contribution is not as "service providers" (though that's a nice side benefit) but rather as "incubators."  In fact, once they have raised our conciousness about an issue, and demonstrated a model successful enough to address that issue that a majority of us agree on, then it is probably time for them to dissolve and let the government run the model.   I'm serious. That's how alms houses morphed into Social Security and how charity hospitals morphed into Medicare. 

Too many charities?  That's like saying there are too many businesses, too many entreprueneers, too many dreamers.  Charities are not like factory-farmed vegetables, best planted uniformly and thus harvested "efficiently."  No.  Charities are more like wildflowers -- unruly, opportunistic, cross-pollinated, and mostly short-lived.  And beautiful.  Let millions bloom.

Penurious To The Point of Poverty

So it's come to this.  According to the Chronicle of Philanthropy and other observers, foundations increasingly won't make grants to sustain charity operations.  Many United Ways now take the same position.  They want to fund "programs" that have "metrics" to engender "measurable solutions" for "community problems."  But nobody wants to pay to keep the lights on.

The same dynamic operates at the individual giver level, too.  Donors equate "low overhead" with "program efficiency," even though the two usually have little in common.  And there are plenty of self-appointed "watchdogs" and "consumer advocates" around repeating the low overhead mantra as if it were gospel.

I'm not saying low overhead shouldn't be a goal.  I'm just saying that the nonprofit sector had better wake up and deal with this over-emphasis on program to the exclusion of operating expenses.  If the overhead doesn't get bought, the program doesn't get done.

This should be self-evident, especially to institutional funders like foundations and the United Way.  But they're like everybody else I guess.  Like the song says:  Everybody wants to go to heaven, but nobody wants to die.