Monday, January 26, 2009

Is There a Hierarchy of Giving?

As we continue down the road of the worst economic crisis since the Great Depression, questions remain about how this will impact individual giving of time and treasure (i.e. volunteerism and individual contributions) to charity. As I noted in my recent blog entry - Is Giving Recession Proof? - the evidence from previous recessions indicates that we give more than one would expect when our personal finances suffer. However, donations do decline and as one expert warned, "We are in uncharted waters". Therefore, what has happened in the past may not apply, given the scale and scope of our economic crisis. Furthermore, our new President has called all of us to volunteer as a duty of every citizen. So how do we prioritize our giving of time and treasure? Based on the data I have seen on the subject, I believe there is evidence of a hierarchy of giving for most people that follows the pattern - Spiritual first, Everything Else second.

In other words, giving begins with matters that affect the eternal destiny of an individual. Not surprisingly, I believe the greatest indicator of this type of giving relates to the religious category of charities. I suspect that, for those who believe in a higher power (either within themselves or in a deity); religious giving is the first priority. It is reflected in the fact that the largest share of individual contributions go to religious organizations. According to a study by the Center for Philanthropy at Indiana University, 61% of household giving in the US went to religious organizations ($1,703 per household, vs. $863 to secular organizations). This household giving totaled $92 billion in the year of the study (2002). Furthermore, according to Giving USA, frequency of attendance at a house of worship is seen as a key indicator of ongoing donations to charity. In addition, religious organizations receive the largest percentage of volunteers at 35%, according to the Nonprofit Almanac.

Here is how Everything Else fares by comparison. The second largest category of household giving is to the needy at 16%. All the other categories of charity see single digit percentages of household giving. The good news is in the area of volunteering. Two categories of charities get a sizable block of volunteers (the others are all single digit percentages) - educational or youth service at 26.4% and social or community service at 13%. The bad news about volunteering is that some research shows that it declines during times of economic troubles according to the non-profit group Independent Sector.

So what does all of this mean? I think it indicates that if people reduce the amount of money they give to charity due to financial hardship, the charities who will suffer the most are non-religious. As we have noted elsewhere (here and here as examples), we are already beginning to see evidence of this problem across the board. However, when it comes to giving time to volunteer, some non-religious charities may be well positioned to provide the opportunities for people to fulfill the duty to service that President Obama is asking for. Even though volunteerism may normally decline during times such as these, the call from our new President may bring us into "uncharted waters" in the direction of an increase.

As the President advocates for greater community service (here and here), the facts and figures noted above should be borne in mind. We are a religious nation and are most likely to respond to calls to volunteer within that context. Even with the social service, youth and educational programs that get a sizable percent of volunteers, I strongly suspect that for many, this giving of time also flows out of the same religious convictions noted above. The mandate to give to the poor is common in all of the major religions of the world. I think any program that is developed without this reality front and center is doomed to a tepid future as compared to what it could be. I pray that the President gets this right!

Monday, January 19, 2009

Rip-off Non-profit Hospitals

I mentioned a while ago about a professor I had in graduate school who argued that the difference between non-profits and for-profits is becoming more of a business decision rather than a meaningful distinction. He saw it as a way for an organization to better manage their profitability by getting a tax exemption. It turns out that the example he gave for this was a health care organization that made the transition from for-profit to non-profit charity. Twenty something years later, the relevance of his remarks are all the more startling.

Health care is the 800 pound gorilla in the charity sector. In the book, The Nonprofit Almanac 2008, we are informed that out of the roughly $1.14 trillion of revenues that all 9 categories of reporting public charities received in the most recent year of available data (2005), health care organizations received 59% ($672 billion) of the money. Number 2 out of the 9 categories of charities, is education at a paltry 16% of the revenues. Not surprisingly, the vast majority of the money that flows into the health care charities goes to nonprofit hospitals and primary treatment facilities - 73% or $492 billion out of the $672 billion. According to the IRS, of the over 5,700 hospitals in this country, over half (2,900) are nonprofit hospitals.

As I have stated before, when big money is involved, bad things invariably happen. However, the level of stench coming out of some of the nonprofit hospitals is really raising eyebrows. In a series of reports in the Wall Street Journal in 2008 (click here for one of the more recent entries, midway through the article it has a list of many other articles), it has been noted how a number of nonprofit hospitals have grown into profit machines in recent years. Basically, some of these places are barely providing any charity care at all. In some areas, if you provide as little as 2.5% on charity care you are considered the best in your class! What a low class group that is! At the same time they are garnering billions in tax exemptions and have massive surpluses.

Thankfully, there are also some very high class nonprofit hospitals out there that really do have their heart and soul in service to those in need. In fact, IRS Commissioner Miller noted in a speech on 1-12-09 that the average "profit" margin for the nonprofit hospitals, based on an IRS survey, was 5% and 20% of the hospitals were running a deficit. So we should not throw out the baby with the bathwater here and need to laser in on those piggish outliers that are abusing their tax exempt status.

One of our blog readers, who suggested I write this piece, made this observation:

...why this whole issue is so important: we all need health care and literally can't live without health care providers. So even if a nonprofit hospital isn't a charity to which the average person would make a donation/contribution, the average person will, at some point, use such a hospital's services. (After all, everyone had to be born in a hospital! At least, most everyone.) And such hospitals are supported to a large extent by payments from Medicaid and Medicare -- in which respect they are supported by public donations/contributions. So it's my money and your money that's driving their profits, and that just ain't right.

Commissioner Miller also noted that, under federal law, the requirement for a nonprofit hospital to be tax exempt is unlike that of other charitable organizations. He stated that, "We ordinarily expect a charity to provide for a charitable class of people - a prime example is providing food, clothing and shelter to the poor or distressed." For nonprofit hospitals, the expectations is that they provide a "benefit to the community" which can include, according to Miller, "services provided to persons commonly thought of as being outside the traditional definition of a charitable class - the poor or distressed". Commissioner Miller wonders if the community benefit standard may be "outdated" and in need of a "tune-up". My opinion is, yes it is, big time!

It appears that Senator Grassley, who is on the U.S. Senate Finance Committee, is considering legislation that would require more accountability by the nonprofit hospitals for the billions they get each year in annual tax exemptions. The legislation would require these hospitals to spend a certain minimum amount on charity care. It would also set caps on executive compensation, among other things. Hurray for the Senator!

For about ten years of my career, I had the honor and privilege of working for a community health center. These organizations dedicate themselves entirely to the cause of the providing quality health care services to the poor. Their outstanding work often goes unnoticed as they are largely out-financed and out-marketed by nonprofit hospitals. I hope that Senator Grassley and his colleagues also consider dedicating more resources to these worthy organizations, if and when (I hope) some of the shady nonprofit hospitals lose their tax exempt status.

Monday, January 12, 2009

Is it a Sacrifice to Work for a Charity?

A friend recommended that I read a new book called Uncharitable. So I followed his advice and, although I disagree with much of what was argued in the book, I am glad I read it. I believe the author, Dan Pallotta, is a very smart guy who has called into question many of the assumptions people have about the charitable sector. Even though I think many of his arguments are wrong, they help us to reevaluate our own assumptions and look at things from a different perspective. On a couple of points at least I think we agree, one of them is that the outcomes of a charity's work should be considered when donors decide on where to make a donation. No disagreement there.

However, in this blog I would like to hone in on another central point of the book where we disagree. As my friend, who agrees with the author on this matter, summarized the point to me -

... taken as a whole, his book sets forth the argument that doing good in the world is not always best served by “sacrifice”... It is this belief that sacrifice equals doing good that creates the mindset that great for-profits might invest heavily in great people, great technology, great infrastructure, but that great nonprofits should do the reverse and keep costs low.
One core focus in the book regarding "investing heavily" revolves around CEO compensation. It is argued that there should be no set upper limit on CEO salaries provided that they provide good outcomes. As I read his argument for this, I kept thinking of a line from an old Jethro Tull song, "I don't believe you, you've got the whole damn thing all wrong..."

To begin with, I refer my readers to the last two blog entries written here - Ten Ebeneezer Charities and Tales of the Dark Side. I believe these entries help chronicle one of the sad stories within the charity world -the tendency of some of those at the top to abuse their power and influence for their own self-interest. The idea of further freeing them to make more money scares me to death. I know that the author says this would not be done willy nilly and would be based on performance, but I have lived and breathed this stuff long enough to know that it would not work that way. If we were to allow charity CEO's to get even higher paying salaries, I believe the abuse of power would only increase. The theoretical argument is nice, but reality tells a very different story.

I understand that Mr. Pallotta believes that, since in his case he was not a thief like those we described in the earlier blogs, he should not be penalized. However, it gets to the core question of why people do this work. I do not see it as a sacrifice to get a salary that pays less than in the for profit sector. If that is what I wanted, I would've have chosen a different career path. I believe that people who do this work for the long term see it as an honor, a privilege and a great blessing to be able to dedicate their lives to doing good work. Money is nice, but there are plenty of other things that can give one satisfaction.

Furthermore, Pallotta assumes that the best and the brightest will avoid the field because we don't pay the same as for profits. My first reaction is, "What am I, chopped liver?" My second reaction is, even if I am chopped liver, I am continually impressed by the intelligence and competency of many of the people who do this work. In addition, if anything, I have seen more people leave for profits to enter the charity sector than the other way around. My next reaction is that, I think Pallotta is wrong when it comes to the specific point of CEO salaries - the average charity CEO makes $150,000 in this country. That's plenty. Finally, even if Pallotta was correct (which he isn't), his recommendation has as much chance of success as pigs learning to fly. Just check out the most frequent donor comments on any charity we review. It's all about CEO salaries already being too high!

Having said all that, I do agree with Pallotta when it comes to front line staff (see my blog entry with Kaitlin Woolf - The Front Line vs. The Bottom Line). When compared with comparable positions within government, front line workers in the charitable sector make about 47% less (interestingly enough, I believe charity CEO's make as much as or more than their governmental peers). Of course Pallotta's solution is better salaries. I agree, but again probably not as much as he would recommend! It just isn't realistic or necessary. A decent living wage is important, but comparability with for profit salaries is excessive. Further, it is not the only option. I concluded our blog entry this way-

... I believe the most important thing a charity has to offer is its mission... If ... staff has a sense of the important role they play in achieving the mission, we have a leg up over the competition from the other sectors. In addition, I have emphasized in another blog the importance of having core values that are truly embraced by the agency from top to bottom, which nurture staff and clients. Having a dynamic, transparent, creative, inclusive, team culture is a rare commodity that will help with staff retention even when the offers of higher pay come along.
In summary, my answer to the question - Is it a sacrifice to work in the charity sector? is that, if you are doing the work for the right reasons and the agency has the right culture, it isn't a sacrifice at all. It is a gift.

Monday, January 5, 2009

Tales of the Dark Side

I'm a big Star Wars fan. The story line resonates for me in a personal way in part because of what I have seen in my years of helping to manage public charities. I have observed the same story over and over again: a CEO or Executive Director rises to the top, and as their authority grows, they take the path to the dark side. Some started out of the gate that way and others evolved into it, but the end result remains the same. They focus on getting whatever they can for themselves out of the charity, rather than serving the mission. I submit three examples to corroborate this point.

In the first case, the Executive Director started right off on the dark side. He formed a charity in a field where he saw financial opportunity for himself. He aggressively grew the company and secured as many grants and donations as he could for the primary purpose of lining his pockets. He hired a strong number two person to run the day-to-day operations while he spent his days watching his stock investments and brainstorming new ways to take from the company. He successfully became a millionaire and pilfered from the charity for many years. In the end he was investigated and fired. However, he remains a wealthy man and I am sure he will go on to do more awful things.

In the second case, the Executive Director had worked for many years in the sector at a middle management level. She then secured the top position at a small non-profit and began her tenure with the mantra, "Stupid people have made a fortune. We are smart so we should have no problem doing so." That mantra would be fine if she were running a for-profit, but in a charity dedicated to serving the poor, the perspective had frightening consequences. Once again, she hired a decent number two to run the day-to-day operations and spent her time reading novels, balancing her checkbook or talking for hours on end with friends. However, her mantra of becoming wealthy grew louder and louder as her number two grew the organization. She eventually found a willing partner in her scheme to draw money out of the organization and was found out and fired a couple of years into her wealth building scheme.

In the final case, the CEO was much cleverer. He was more careful to stay technically within the bounds of the law. As a result, he remained in the position of leadership of a large charity for over 30 years. He also amassed a significant amount of money, did little to no work day-to-day and manipulated the board into thinking that every good thing that happened at the agency flowed from his genius. Because he was slicker, he was more dangerous than the two earlier examples because the damage he caused to the mission of the organization was sustained over a much longer period of time. As a result, the morale within the organization was abysmal and their ability to maintain a financially and programmatically strong agency was even more dramatically reduced.

I have intentionally not named names here because I do not want the many wonderful programs within these charities to suffer any more than they already have. There are also stories of wonderful leadership that is reflected in the fact that 65% of the charities we evaluate rate Good to Exceptional. I believe these are the places where self-interest is less focused on and mission is front and center.

However, my emphasis in this particular blog is to highlight how important transparency and accountability are in the charitable sector. These terms are becoming buzz words that almost everyone in a management position seems to be using. Anyone who calls for less regulation of charities to unleash their full potential needs to be reminded of the stories such as those above. The temptation to go to the dark side is strong when big money is involved. Some people believe they are above the normal rules and regulations once they reach the top tiers. What a sad day it is for any charity that has to endure the kind of selfish, myopic leadership I described above. As a result, I believe there is a need for more oversight, not less, in the charity sector. Given what is happening in the for-profit sector at the moment, I suspect the same could be said for them!