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 forgo 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

Purchase Email Addresses? ICA Members Say Don't Do It

Recently I surveyed the 1,000 members of Independent Charities of America asking them if they had any experience with prospecting for contributors via email using 3rd party lists (i.e. lists purchased from email list brokers). The response to my inquiry was overwhelming.  More than 400 members replied.

And the answer to my question was – overwhelmingly – DON’T DO IT!

The majority of respondents had not tried 3rd party email lists, but they had thought about maybe trying them in the future and wanted to know what I learned. Those who had tried them had nothing but tales of woe: Too expensive, poor response rate, lots of bad addresses, and internet service providers threatening to cut off their service for spamming.

Example: Email solicitation sent to a targeted list of 150,000 addresses, with a repeat of the solicitation to the same addresses one month later. Total response clicks: 57. Revenue from the 57: $0.00.

This experience explains why the list brokers want their fees up front and not based on percentage of dollars raised or on number of responses.

Some member charities reported they had experimented with services that “append” email addresses to postal addresses the charities already have on file. Again, the results were not promising.  It seems lots of folks don’t like the idea of you getting their email address if they didn’t send it to you themselves.

Several members had experimented with www.care2.org.  It’s a social networking site organized around causes.  You can post a petition there which people can sign if they wish, and they may also opt-in your email list.  You can also buy targeted lists from the site.  The consensus was that the site works pretty well for getting your word out but not so well for raising money.  Signing your petition is one thing.  Sending you money is another.

Swapping lists with another organization?  Also a no-no.  Trading links with another organization on your respective web sites?  Don’t bother.

A couple of respondents have very sophisticated postal direct mail operations in addition to their email fund raising. Often when one uses postal mail the cost is not recouped by the initial solicitation but is amortized by repeat donors over time. Email, these charities told me, generally doesn’t work as well as postal mail in this regard. (I have no data to prove this assertion or not; I’m just passing it on).

Some members mentioned www.papilia.com.  It works like this: You send your postal house list a postcard asking them to go to the papilia site, where they make an online gift and get a tax receipt immediately. The site claims this technique results in a higher response rate than postal mail alone and at the same time allows you to collect the email addresses of your supporters so you can solicit them by (cheaper) email in the future.

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OK, so what DOES Work?

ICA members reported much, much more success using their “house lists” – that is, lists assembled from people who have asked to be contacted for one reason of another.  Members, newsletter recipients, web site visitors who sign a guest book or who made a previous donation using your “give now” button, etc.  Soliciting these people via email is a no-brainer PROVIDING you craft your message carefully and don’t go to the well too often.

So how do you build your house list?

The #1 way is obvious. Put your "give button" front and center on your web site. When you collect a donation you collect the email address of a web-savvy giver who now has a relationship with you.

Another obvious method is to invite your web visitors to sign up for your online newsletter or for email "alerts."

Some members also reported success with "viral marketing" techniques – such as giving visitors to your web site an opportunity to send email messages to their friends, directly from your web site, encouraging them to join in supporting you as well. In the process, you’ve captured those friends’ addresses. (Caveat: Personally, I would suggest you never write those addresses independently unless they respond back to you to make a gift or otherwise engage you. Just because you harvested an address doesn’t mean you should use it without at least implied consent.)

Some members also reported success purchasing electronic display ads on commercial web sites (usually news sites) to drive traffic to the charities’ own web sites. That can be expensive but it may be worth testing for those who can afford it. What we have learned from managing the federations’ web sites is the more online traffic we get the more online gifts we receive.

I anticipate some of the federations may experiment this fall with other email-based venues. Possibly Google. I’ll keep you posted.

Kudos To These Regulators

"I'm from the government, and I'm here to help you."

Actually, sometimes that's true.

The annual process of registering to do business and/or obtaining a license to solicit in multiple individual states is a requirement for many charities.  And -- with each state having different rules and different forms (many of which are truly confusing and opaque) -- the process is an administrative nightmare.  Indeed, there are a number of law firms whose main book of business is assisting their charity clients with this chore.

We'd do well, however, to keep in mind that the state staffers administering these programs aren't the ones who make up the rules and aren't the ones who designed the forms.  In fact, it's been my experience that if one calls these offices and politely asks for assistance, the staffers will go out of their way to assist you.

I hear "state regulator" horror stories from charities all the time.  I know that dealing with bureaucracy can be frustrating.  But I don't hear commendations when state staffers act like advocates, not enemies.  I witnessed two examples of that last week, in the states of Washington and Virginia.

In the interests of privacy I won't name names, but here are the stories.  I had a client member charity come to me with a problem.  The charity's executive director had mis-read the due date on the annual registration form; she had confused last year's due date with this year's new and different date.  She was facing a penalty, and worse, she was going to miss the due date for applying to the state's own employee fund drive, for which state registration was a pre-condition.  This is a small charity.  The penalty and the campaign loss would have hurt.  I told her I couldn't help her, but that she should call the regulators office and explain the situation.  She did, and guess what?  They gave her an extension so she could avoid the penalty, even though the availability of an extension was never mentioned in the registration instructions.  Then they fast-tracked the issuance of the registration so the charity wouldn't miss out on the fund drive.

In the other case, the charity asked me to explain how to answer a question on a registration form.  I read the question several times.  I had no clue what it meant.  So the charity called the regulator's office.  "Oh, dear," said the pleasant lady who answered the phone.  "We've told 'them' nobody understands this question."  She proceeded to explain in plain English what the question intended; then she asked a few questions about the charity's operations and offered pointers on how to answer the question.  Simply.

Kudos to these staffers and their states.  Keep hiring people like that, please.

If you have any stories about regulatory staff that have gone out of their way to help you, please share them here.

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.

Online Giving Is The New Direct Mail

"GiveDirect" is the online credit card gift processing system my company developed for Independent Charities of America/Local Independent Charities of America. 462 charities use it on their respective web sites.

In calendar year 2006 the GiveDirect system raised $9,364,446.  In 2007 it raised $12,399,546, a 32.4% increase. What's really interesting is not the revenue increase per se. It is that the increase came about with only a 20% increase in the number of contributors and only six more charities using the system in 2007 than used it in 2006.Yes, there is a healthy increase in the number of people giving online, but there's an even greater increase in the size of their gifts. The average gift in 2006 was $164. In 2007 it was $180.

Another interesting trend. Every year the number of recurring gifts increases, too. Recurring gifts are those where the giver instructs us to automatically deduct a specified amount from his or her credit card each month or each quarter. Recurring gifts now account for seven percent of the total amount GiveDirect raises.

If our experience with GiveDirect is indicative of growth in online giving for the nonprofit sector as a whole -- and I believe it is -- we are in for a sea change in how contributions are solicited and collected. Online giving is the new direct mail.

Another "Only Inside The Beltway" Idea

If you think "inside the beltway" mentality is confined to politicians and bureaucrats, consider this tale...

It happened like it always does. 

In the 1980s all the national CFC federations would get together in Washington once a quarter to meet informally with the CFC managers at the US Office of Personnel Management (OPM) to trade ideas, observations, and information.  It was a collegial group.

Then, in the 1990's one of the federation representatives to the group (one of my former clients, I'm embarrassed to say) sold his peers the bad idea of "visualizing our mission" and "securing the resources" to fund that vision.

All of which quickly led to:

*     Rules for "membership" in the "committee" (now grandly named the National Combined Federal Campaign Committee, although in fact it had and has no official CFC status)

*    Mission creep (in addition to meeting with OPM the members would conduct CFC "market research," publish a web site, and produce the annual CFC film, among other things)

*    Membership creep (the committee would be open to representatives outside of the national federations)

*    And, of course, a dues assessment system to fund all this important work. 

Within a year or two it became apparent that nobody on the committee knew a thing about market research, web sites, or making films.  In any case, these things were already being accomplished by OPM and CFCs in the field.  Not being able to justify the expense, federations began leaving the committee, and it dwindled in size to just a third of the national CFC federations.  Most of the federations remaining stopped sending their senior executives to the meetings, and OPM put less importance on working with the committee.

All of which, in a rational world, would have led to the committee's unmourned demise.  But wait.  Kalman Stein of EarthShare has proposed that the CFC levy a tax on contributions that would raise about $278,000 to fund the committee.  (The present committee budget is about $70,000). 

Let me get this straight, Kal.  You want the Federal Government to deduct fees from CFC contributions and send the money to a self-appointed, non-official group representing a tiny fraction of CFC participating charities so this group can continue to produce useless programs to justify its existence.  And you are serious about this.

Only inside the beltway.

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.

Kaiser Permanente - Case In Point

If you follow this blog, or if you've attended the Independent Charities of America "Workplace 101" seminar, you know that more and more major companies are adopting the "non-federation/donor-choice/pay-direct/3rd party administrator" model for their employee workplace fund drives.  With this approach individual employees are empowered to select virtually any charity, church, or school to receive their payroll contributions.  Employee choice is not limited to the member charities of charitable federations (e.g. United Way or Independent Charities of America), and federations do not control access to the fund drive.  The "charities list," if there even is one, is generally a compilation of all the organizations employees have donated to in the past.  (Another method often used is to augment the employees' list with membership lists uploaded by federations.  For example, these lists are provided by Independent Charities of America and Local Independent Charities of America to Union Bank of California and other companies).  The employee gifts are sent directly to the designated organizations; that is, they are not distributed via the charitable federation the organization may belong to.   The company contracts with an independent 3rd party to confirm the recipient organizations' charitable status and to transmit the gift funds.

The Kaiser Permanente (Northern California) has used this model for two years now.   Yesterday Kaiser's campaign manager shared this bit of information with us:  Only eight days into this year's campaign and already 812 different nonprofit organizations have been selected by Kaiser employee-givers.  The majority of those are local schools and churches.  This selection spread is typical -- when you give employees freedom of choice in giving they will use it -- and it illustrates why it is so important for charities to remind their constituents and previous givers in the fall that the charities are available to receive gifts from employee at-work charitable fund drives.  Proactive PR is far more productive in raising money from this pool of funds than any other technique.  Letters, post cards, newsletters, etc. should include this message.

That proactive PR should also include asking contributors from all fund raising venues to reveal where they work and how to reach them by (personal) email.   Early contact to  achieve "top of mind" status is essential when employee givers have virtually unlimited choices.  It can also increase employer matching gifts.  Kaiser, for example, matches its employees' gifts up to $100 for the first 2,000 employee-givers.  Other companies, like Hewlitt-Packard, have similar policies.

If you follow this blog, or if you've attended the Independent Charities of America "Workplace 101" seminar, you know that more and more major companies are adopting the "non-federation/donor-choice/pay-direct/3rd party administrator" model for their employee workplace fund drives.  With this approach individual employees are empowered to select virtually any charity, church, or school to receive their payroll contributions.  Employee choice is not limited to the member charities of charitable federations (e.g. United Way or Independent Charities of America), and federations do not control access to the fund drive.  The "charities list," if there even is one, is generally a compilation of all the organizations employees have donated to in the past.  (Another method often used is to augment the employees' list with membership lists uploaded by federations.  For example, these lists are provided by Independent Charities of America and Local Independent Charities of America to Union Bank of California and other companies).  The employee gifts are sent directly to the designated organizations; that is, they are not distributed via the charitable federation the organization may belong to.   The company contracts with an independent 3rd party to confirm the recipient organizations' charitable status and to transmit the gift funds.

The Kaiser Permanente (Northern California) has used this model for two years now.   Yesterday Kaiser's campaign manager shared this bit of information with us:  Only eight days into this year's campaign and already 812 different nonprofit organizations have been selected by Kaiser employee-givers.  The majority of those are local schools and churches.  This selection spread is typical -- when you give employees freedom of choice in giving they will use it -- and it illustrates why it is so important for charities to remind their constituents and previous givers in the fall that the charities are available to receive gifts from employee at-work charitable fund drives.  Proactive PR is far more productive in raising money from this pool of funds than any other technique.  Letters, post cards, newsletters, etc. should include this message.

That proactive PR should also include asking contributors from all fund raising venues to reveal where they work and how to reach them by (personal) email.   Early contact to  achieve "top of mind" status is essential when employee givers have virtually unlimited choices.  It can also increase employer matching gifts.  Kaiser, for example, matches its employees' gifts up to $100 for the first 2,000 employee-givers.  Other companies, like Hewlitt-Packard, have similar policies.

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?

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?