Monday, March 30, 2009

Spring Break

I am taking a week off from this blog for a Spring Break! See you next week.

Monday, March 23, 2009

Making Wise Giving Decisions - A "Two-fer"

1. For those who missed it, here is the transcript of the webinar that was held on 3-17-09 regarding Making Wise Giving Decisions.

One correction to the transcript. In my answer on the question regarding the book Uncharitable there was a typo in a critical sentence. It should have read as follows:
Fundamentally, I disagree with his premise that a charity should be operated like a for profit.

Also, I recommended a book by Renata Rafferty, but she is publishing an updated one this week. The new book is called - Smart Generosity-Everything You Need to Know About Charity, Philanthropy, and Giving Wisely.

2. An interview on 3-19-2009 regarding measuring outcomes and charitable giving on the PRI show - The World.

One important point I neglected to mention in the interview. The core reason that charities should do outcome measurement is not because others will demand it. They should be conducting outcome measurement because it is critically important for them to know that they are doing the right things to have maximum impact! Thanks to David Hunter for pointing out my oversight!

All of the above reiterates the imporance of continuous improvement!

Monday, March 16, 2009

We Are A Critical Friend To The Charitable Sector

I believe the most common perception of Charity Navigator is driven by the label we are given by the media as a watchdog organization. Due to the sad reality that most media stories require conflict and controversy, we are most often contacted for comment when they suspect unethical behavior of some charity. Hence, we are most often thought of solely as a watchdog organization that highlights bad charity leaders and practices. Charity Navigator does much more than that. The essence of our desired relationship with charities as a whole is to be a critical friend, incorporating the two most common definitions of the word “critical”.

Firstly, we provide critical analysis and, like an honest friend, plainly and openly provide feedback on the strengths and weaknesses of the charities we evaluate. Specifically, we analyze financial data reported on IRS form 990 by relatively large; US based charities (over 80% of all revenues go to just 4% of the charities in this country). We focus in on those charities which derive at least one-third of their funding from direct public support because our users tend to be individual and corporate donors. We then evaluate the charities on a zero to four star scale according to their relative financial strength. If a charity does not score well under our methodology, our intention is not to play “gotcha” and see them wither away. Rather, we hope that they will use our feedback as a motivator to get a better handle on financial management. Our perspective is that good charities must always keep both money and mission in focus. It is a sad reality that some do not. As a friend to the sector, we feel it is imperative to tell the honest truth about poor financial efficiency and capacity to those who are performing badly.

Secondly, we believe we are a critically important friend in leveraging donations to charities. From all the research we have seen, there is a real hunger for objective third party information from donors to charity. In addition, given the many scandals in charities both large and small, the public has become more skeptical of the self reporting of charities. They are looking for independent experts to help them understand which charities are doing the best job. We believe our work has helped to increase the amount that is donated to charity as we have helped to restore the trust of many donors. Charities which rate highly have told us often that they have seen a marked increase in donations when they promulgate their Charity Navigator 4 star seal. In a survey we conducted, we found that 92% of the over 3 million people who annually visit our site have changed their giving decisions based on our ratings. A recent study by researchers from the Universities of Idaho and Wisconsin corroborates this fact.* An estimated $10 billion per year of donations are influenced by our work.

I believe we have also been critically important in educating donors and the public at large about the charitable sector. We are frequently asked to speak on the national and increasingly on the international stage. We are contacted by the local, regional and national media on a daily basis for commentary on issues of concern to the charitable sector. In this role as critical friend, we have always highlighted the fact that 65% of the charities we evaluate are rated Good to Exceptional. This tells us that, at least when it comes to financial effectiveness and capacity, most charities are doing a good job. However, as noted earlier, our friends in the media do not seem to find such information particularly newsworthy.

Before joining Charity Navigator, I worked for charitable organizations for over 25 years. I know the challenges that are faced day in and day out by both front line staff and charity leadership. I also know how critically important their work is to this country and to the world. Two of my core beliefs are that the best organizations are collaborative and strive to continuously improve. We hope that this blog will further this relationship between us and the charitable sector as critical friends.

*Gordon, T & Knock, C., “The Role of Rating Agencies in the Market for Charitable Contributions”, University of Idaho & University of Wisconsin-Milwaukee, 2008.

Thursday, March 12, 2009

Talk To Me Online

Do you have questions about how charities work, how they spend your money and how to make the best possible decision about where to donate?

Then, join me on Tuesday, March 17, at noon (Eastern time) for an online discussion, "Making Good Giving Decisions," when I'll be answering these questions and more. Pose your own question or just follow along at the Chronicle of Philanthropy.

Monday, March 9, 2009

A Horrible Idea From The Obama Administration

On Friday, February 27th, a film crew from CNN came to my office to tape my answer to the question, "What do you think of the Obama administration proposal to decrease the charitable tax deduction for those who make $250,000 or more?" As usual, my 15 minute answer on camera was edited down to about 20 seconds on CNN. It aired on The Situation Room show with Wolf Blitzer, the Lou Dobbs show, and AC360 with Anderson Cooper. The piece on AC360 can be viewed if you click here. The bottom line - I said the proposal is a horrible idea.

CNN chose to close the report (on some shows) with the remark (paraphrasing), "A study by the Bank of America indicates that only 7% of the affluent based their giving decisions on the tax advantages." That is not what I read. The Chronicle of Philanthropy News Update of March 3, 2009 summarizes from the Bank of America survey that, "... 47% of people in the survey reported that they would give less" based on a removal of the deduction (the survey posed an all or nothing question, not a % reduction). Furthermore, the head of the Center on Philanthropy which conducted the study with the Bank of America, concluded that:

"Tax incentives do stimulate more giving, and challenges facing the nonprofit sector in 2009 suggest that this might be a good time to provide additional [emphasis added] incentives, rather than reduce the value of the tax deduction for high income households, so that donors with the greatest capacity to give have more reasons to do so."

Since then, the Obama administration has also put out a follow-up from the Office of Management and Budget. Their response to the criticism from me and others (including The Independent Sector, The Partnership for Philanthropy and The Council on Foundations) was threefold. I present their arguments below and my reaction to them:

1. OMB argument: The proposed tax changes would not be imposed during a recession ... Instead it would begin in 2011 - at which point we expect the economy to be recovering.

Reaction: There is no guarantee that the economy will be better and to what degree it will be "recovering". This is all hypothetical. The one thing that is certain is that the Obama administration intends to impose a reduction in the deduction regardless.

2. OMB argument: The money raised from the limits on itemized deductions would be used as part of the historic $634 billion reserve fund to fund health care reform.

Reaction: This tax change is taking from donations to all categories of charities to give to an array of health care charities and others. It is penalizing the generosity of the affluent. Many charities, both large and small, garner 80% or more of their private contributions from a handful of affluent donors. If these donors reduce their donations, it could have horrific consequences for these charities.

Furthermore, government funding is often the worst type of funding a charity can receive. I know from years of running government funded programs that many of these contracts pay no more than 10% for overhead costs. Charity Navigator considers the best charities to have an overhead rate of 25% (15% for administration and 10% for fundraising) or less. Most 4 star charities are in the 20 to 25% range. So when a charity gets a government contract, it typically is "shooting itself in the foot", financially speaking. The charity will usually have to raise the additional 10 to 15% of its overhead costs from the public. A public where the affluent (80% of the donation pool for many charities) will now be less inclined to give as much. In addition, most government contracts have onerous, time-consuming reporting requirements which further increase overhead costs beyond the normal.

3. OMB argument: There is a question of fairness...If you're a teacher making $50,000 a year and decide to donate $1,000...; you enjoy a tax break of $150. If you are Warren Buffet... you get a $350 deduction...

Reaction: Fairness! The OMB neglects to mention that the overall tax rate for the more affluent households is going to increase from 35% to 39.6% and they are also proposing to eliminate other deductions for this group of tax payers (mortgage interest, as well as state and local taxes). At the same time, that $50,000 teacher (assuming two children) will on average have their overall tax rate go to zero! So let's be fair in our comparisons!

On top of all of the increased taxation mentioned above, most of us have seen a decline in our investments of 50% or so. We are in uncharted waters here. Whereas historically, half of affluent givers may have said that tax deductions do not impact their giving decisions, that does not mean it will continue to be so. As one of our users commented on the Charity Navigator blog,

"Although I don't give to charity for the tax benefits, I may have to give less because I can't afford to give as much if my obligation to the government is increased. It's that simple. I do [emphasis added] think this proposed change could have a direct, negative effect on charities, and I hope it gets re-evaluated."

Of course we agree with those who say that often the primary and very best reason for giving is out of benevolence, but incentives and self interest have also been important factors. That is the basis of our capitalist system isn't it? The charities I spoke with in Russia and China are desperate for, and envious of, our tax policies. The reason our rate of donation is the envy of the rest of the world (more than double anywhere else) in part rests on the heart and soul of the American people, but it also rests on pragmatic government policies that lead to enlightened self interest. I hope the Obama administration will wake up and smell the coffee. As I originally stated on CNN, the proposed reduction in the Charitable Tax Deduction is a horrible idea.

Monday, March 2, 2009

From Russia With Love And Fear

Having attended a conference in China in November and two weeks ago in Russia, I have gotten a somewhat unique glimpse into a couple of completely different worlds from our own. In China, Jet Li used his star power and influence to bring together many nonprofit leaders from around the world, as well as high level Chinese business and government leaders. A 500 person, shiny new auditorium could hardly hold the attendees and the media was swarming the place. Jet Li has set as his goal to spur philanthropy in China and worldwide with his one dollar a month donation from every person on the planet. Jet's high profile, pragmatism and dynamism mixed with humility, appear to be getting things moving in spite of the challenges of the Chinese political system.

In Russia, there were no celebrities, only 5 international representatives, no one from the Russian government and very limited business representation. I think there may have been a couple of reporters. About 100 people showed up and sat in an old and somewhat worn out looking auditorium. The primary goal announced at the conference was to spur the development of a countrywide media campaign called, "It's That Simple." The message: Giving is a very simple thing to do.

In all of this, you can see the difference in culture and energy. Whereas China seems to be taking steps forward (albeit still in the early stages), Russia is still at the starting gate. In China, they are talking about how to give, in Russia they are talking about the idea of giving. The symbol for the Russian campaign is a heart that you make with your hands. I remember thinking how ironic it was that the heart was empty inside. The problem that was noted at the conference is that many of the Russian people are very cynical and skeptical about the nonprofit sector. They believe that it has lots of corruption and that it is more the role of government to take care of things (at least on an organized level) rather than nonprofits. The campaign is meant to begin to push back against that attitude.

From what I heard at the conference, there really is a significant problem with bad apples in the nonprofit barrel. Since there is so little regulation, there are no clear guidelines on what can and can not be done. Therefore, some people have created charities as their own personal money tree (sound familiar?). At the same time, the government has a pretty adversarial relationship with the sector. What little regulation there is discourages growth of the sector. The seminal moment in all of this came for me when one of the participants from a human rights organization said that, "Transparency of nonprofits" (which was the main topic of the conference), "is not a good idea when it can be used for social control by the police state." Wow! That really blew my mind. I realized I was on the other side of the world in more ways than one.

My impression is that the Russian nonprofits are ambivalent (to say the least) in relating to their government. Some of the speakers countered the human rights advocate by saying, "Tell us how the government will use transparency of nonprofits against us?" However, the fact that they were even debating this point is a real nonstarter for development of the sector! I understand that on day two in one break out meeting, participants almost came to blows during the debate. On the one hand, they need government policy and regulation to foster and encourage the development of the nonprofit sector. To achieve this, the nonprofit leadership would need to work closely to advise and guide the government to get to the right result.

On the other hand, do they want to get all cozy with a "police state"? Can they do so even if they want to? I was told privately that the government is wary of them because of the risk of an independent voice on issues related to human rights and all things political. What an irony that the theme of the conference was transparency in a country that has so little of it. I suspect that Russia's nonprofits will be lumbering along at slow speed for quite a long time to come, short of major political change. How sad for the people who need their help. Once again the trip deepened my awe at the breadth and depth of the nonprofit sector in the USA.