Donor Beware: the Big Nonprofit Secret
BY KELBY HARTSON CARR
Times Staff Writer
There is a dirty little secret about charities.
Insiders and the government have known it for years while many donors remained in the dark.
A dozen experts and insiders in the field of nonprofit agencies, from this region and across the country, all agree: there are charities that mislead or deceive the public about how much donated money goes directly to the cause.
The Times investigation examined every IRS Form 990 filed for fiscal year 2003 by nonprofit agencies based in Lake County, Porter County and Chicago’s south suburbs.
The Form 990 is a nonprofit’s equivelant of a 1040 tax form. It is the only nonprofit annual financial form that must be made available to the public under federal rules. Fiscal year 2003 is the most recent year in which all data was available.
This eight-month inquiry revealed that 70 percent of Calumet region nonprofits that raised public donations report they spent nothing to attract those dollars.
Is it really possible local agencies brought in hundreds of thousands of dollars each without spending a dime? Experts say it’s highly unlikely.
“Zero is not credible,” said Jean Hardy Robinson, an area nonprofit consultant, past board member of the Association of Consultants to Nonprofits in Chicago and member of The Alliance for Nonprofit Management.
“People are having the wool pulled over their eyes, and there’s deception by the nonprofits,” asserted Daniel Borohoff, president of the American Institute of Philanthropy, a Chicago-based charity watchdog group that publishes the Charity Rating Guide & Watchdog Report.
This is a critical deception in the eyes of those who watch the nonprofits. Donors might believe their entire donation is going straight to the cause, when actually little or none of it is.
In the fine print
Some nonprofits didn’t even do a good job of hiding the deception.
For example:
- Christian Community Action of Porter County in Valparaiso listed zero spending for fund raising on the first two pages of its 17-page 990. However, an attachment to the report includes two “fund-raising expense” items totaling $28,634 on Page 13.
- Schererville Town Baseball reported zero on the Page 1 question about fund-raising expenses, but a $4,057 item listed on Page 16 was called fund raising. Instead of categorizing it as fund raising, however, it was listed as a program expense, indicating the money went directly to the cause.
- The Montessori Academy in the Oaks in Hobart claimed the organization spent nothing on fund raising on Page 1 of its form. On the second page, however, it lists an itemized “professional fund-raising fee” of $1,377, which was categorized as a management expense.
- Nurturing Development and Learning Center in Calumet City reported no fund-raising expenses, yet its itemized spending listed $943 under “professional fund-raising fees.” They considered this a program service.
The Rev. Carol Nordstrom, executive director of Christian Community Action in Valparaiso, acknowledges that her organizaton and other nonprofits mis-categorize fund-raising expenses.
In fact, she said part of her salary should fall under fund raising, as well as that of a part-time staffer devoted to fund raising.
“Historically, the government has let it go under general management, and they’ve never questioned it,” she said. “It’s been slower in coming for most of the nonprofits to move most of those costs and acknowledge they are fund-raising costs.”
Just recently, however, she discussed the issue with the agency’s accountant and decided to directly designate fund-raising expenses. The newly filed 2004 fiscal year return reflects $73,405 in fund-raising costs.
Nordstrom noted that the IRS always accepted the 990s with zero fund-raising expenses without raising an eyebrow.
“As long as the federal government was allowing us to simply group it together, that’s what we were willing to do.”
Three studies, the same revelations
Two independent studies — one government and one collegiate — have come to the same conclusion in recent years: the fund-raising and overhead expenses reported by charities are simply not plausible. Even a third report from nonprofit leaders themselves recommends improving IRS oversight of their peers.
Inaccurate financial reporting isn’t just a problem confined to Northwest Indiana and the South Suburbs.
The Center for Philanthropy at Indiana University and Urban Institute in Washington, D.C., recently completed a study into overhead expenses at nonprofit organizations. It concluded that a low number of charities that rely on public donations — 42 percent — actually reported fund-raising expenses.
“While there are plausible reasons why some organizations are reporting no fund-raising costs — all fund raising is done by volunteers, for example — the magnitude of the contributions and the large percentage of organizations reporting no expenses suggest such explanations are inadequate,” the study concluded.
Patrick Rooney, project co-leader and director of research for the Center on Philanthropy at Indiana University, said the study was revealing.
“It draws into question the plausibility that many nonprofits would have that little fund-raising costs,” he said.
The U.S. General Accountability Office conducted a study into the issue in 2002. The conclusions also were that 990 reporting is unreliable, and showed that 62 percent of charities receiving donations reported zero fund-raising expenses.
The study noted there is no reliable way to determine the accuracy of 990s, and that charities have liberal discretion when they decide whether to categorize spending as program services, fund-raising expenses or administrative overhead. It also determined there are inconsistencies in the reporting.
Tip of the iceberg
In the region, numerous agencies use questionable reporting practices. In some cases, organizations stated their only purpose was to raise funds for a parent organization, yet they also claimed they spent nothing on fund raising. Some spent six-figure amounts on fund-raising gift shop inventories, yet claimed no money was spent to raise funds. Some had costly special events, yet they reported no money spent on fund raising.
In certain instances, groups shifted most or all fund-raising expenses to one entity. An examination of the charity’s main 990 would make it appear nothing was spent on fund raising, when in fact a subsidiary agency claimed all those expenses on a completely separate 990.
For example, Schererville-based Campagna Academy’s main Form 990 lists only $6,322 in fund-raising expenses for 2003, while the Form 990 for Campagna Foundation lists $32,640. The Visiting Nurse Association of Porter County in Valparaiso lists zero under its main filing, but the Visiting Nurse Association Foundation reports $80,556 in fund-raising expenses.
While there are ways to raise money without spending money, experts say it is no easy task and zero-expense fund-raising claims always should be questioned.
“The only way it’s possible is if all the money came from the board of directors without a single postage stamp going on a single letter,” said Evelyn Brody, a professor at Chicago-Kent School of Law and expert in nonprofit regulations.
“Unless they’re really lucky and someone just dropped a big check on their desk, they are not accurately reporting,” noted Bob Ottenhoff, president of Guidestar, a Web site on nonprofits that posts 990s.
Some area nonprofits insist they do, indeed, raise significant donations without spending any money.
Timothy Cottingham, executive director of Greater Hammond Community Services, said his board of directors doesn’t believe in spending to raise funds. Similarly, SenUSA, which has offices in Hobart and other international locations, said it does missionary work. Funds are raised by unpaid missionaries via their friends or churches they visit.
Patricia Huber, executive director of the Crown Point Community Foundation, acknowledged the group spends money on special events. She insisted, however, that all the group’s events are held only to educate the public, not to raise funds.
Errors and inaccuracies are common
Beyond any questions about fund-raising costs, the area’s 990 forms were riddled with errors and omissions.
Many local agencies failed to state how many clients they served. When asked details about how many hours an employee or board member worked, agencies either left it blank or entered something vague such as “part-time” or “as needed.” This makes it impossible to gauge a person’s hourly pay rate.
One might assume it’s just a problem for little grassroots nonprofits confused about the law. In many cases, The Times investigation revealed the error-ridden tax forms are prepared by hired accountants for some of the area’s major nonprofits.
“Yes, everyone might fill them out, but they fill them out incompletely or inaccurately, or the math doesn’t add up or the spelling is incorrect,” Ottenhoff, the president of the Web site on nonprofits, said. He said Guidestar’s most popular training session is called, “990 Bloopers.”
Fear of scaring away donations
There’s plenty of pressure to fudge the numbers.
“Nobody wants to say, ‘The $20 I sent in was used to cover postage on the mailings,’ ” explained Christian Community Action’s Nordstrom. “They always want their $20 to go to a child at the shelter. But part of that is using a stamp to raise money for the shelter.”
Although people in society generally accept that individuals and businesses have to spend money to make money, Nordtsrom said that courtesy is not always extended to charities.
“People think we should be able to print money off a tree, and that makes it tough,” she said.
Many charity watchdog groups rate charities based on their efficiency, or how much of their money goes directly to program services. Some larger agencies, such as United Way, have a maximum percentage of fund-raising and overhead expenses for any agency receiving funds.
In some cases, faulty financial reporting is just a natural side-effect for nonprofits.
“The people who are really interested in money don’t tend to be drawn to this kind of work,” Robinson said.
She also noted there is intense pressure on nonprofits to spend nothing to raise funds.
“It’s a very mixed message,” she said. “We don’t believe you that you’re not spending any money, but you better not spend very much.”
Who’s afraid of the IRS?
The IRS has done little to discourage the deception.
The IRS director himself conceded his agency’s oversight of nonprofits is lax. “Our enforcement presence faded in the late 1990s,” IRS Commissioner Mark Everson said during U.S. Senate Finance Committee hearings on the issue this spring.
IRS officials say their hands are tied. Despite astounding increases in the number of nonprofit, tax-exempt organizations, IRS staffing levels have hardly changed in three decades.
The department that oversees 990s, as well as providing other duties, barely increased to 2,122 employees in 2004 from 2,075 in 1974. During that time, the number of 990s filed more than doubled, to 1.5 million from 670,000.
A U.S. General Accountability Office report pinpointed this issue in 2002: “IRS has acknowledged that it lacks sufficient data to effectively find and address noncompliance among tax-exempt entities.”
The IRS initiated aggressive plans in 2002 to conduct more than 30 studies into compliance on 990s by various types of charities. Then, most of the studies got delayed because of higher priorities.
In response to Everson’s statements during the Senate Finance Committee hearings, Sen. Charles Grassley, R-Iowa, expressed alarm at the current situation.
“It’s a seminal letter that rips off the rose-colored glasses with which we usually look at tax-exempt organizations,” said the committee chairman. “What’s going on isn’t a pretty picture in the harsh light.”
Regardless, Morris Cochran, of the Better Business Bureau, said he believes nonprofits are playing a dangerous game if they misrepresent their spending on 990s.
“I would not want to horse around with the IRS for 10 seconds,” he said.
A big, old, rusty barge’
Progress has been slow to come.
“The last time we thoroughly revised the laws governing charities, a man first walked on the moon,” Grassley said.
The IRS is starting to shift its focus to electronic filing. Starting in 2006, any tax-exempt organization with more than $100 million in assets will be required to file electronically. This won’t affect most charities, however.
There are significant advantages to e-filing, nonprofit experts agree. Primarily, it will keep organizations from filing error-ridden forms with key information missing. “It will tell you, ‘Wait a minute. One and one does not equal three here.’ Or it will say, ‘Whoops, you forgot to fill out this last line,’ ” Ottenhoff said.
Joshua Estrin, president of Concepts in Success, said nonprofits traditionally have resisted change. His Florida-based firm specializes in business development for both nonprofit and for-profit entities.
“In many ways, philanthropic America is a big, old, rusty barge,” he said. “To turn that barge is going to take some time.”
There are potential changes on the horizon, however. With Senate Finance Committee hearings on the issue, insiders expect legislation to be proposed soon to improve oversight of nonprofits.
Regardless of the laws, experts say donors need to take control of the issue.
While experts warn against giving carelessly, they strongly recommend giving. People need to simply do their homework first.
“Any donor that gives their money blindly, shame on the donor,” Estrin said.
When people give foolishly, Cochran said, they waste money that could be spent to truly help those in need.
“We know that each year charities get about $200 billion,” Cochran said. “My belief is about 10 percent of those people are liars, cheats or bandits, and that’s a lot of money.”
Worse yet, Cochran said every time a nonprofit misleads its donors, it hurts all the worthy, honest charities by turning people off from contributing permanently.
“People say, ‘I got skinned and won’t give again,’ ” he said. “Well, that will really make the world better.”
Sidebar
Playing the Shell GameCharities have found creative ways to mask or hide fund-raising spending. Here are some of the ways they play the shell game: The foundation The public service announcement The special event The independent fund-raiser |
