Winning the Battle for the Soul of the Social Sector
Thursday, March 27, 2014
State of Nonprofits: Nudity, Ghosts and Perpetual Indulgence
Originally published on Linkedin on March 25, 2014.
What do nudity, ghosts and perpetual indulgence have in common? They relate to the core mission of a variety of US registered (IRS-approved) public charities. This is no joke! If you use these keywords to do a search of all the 1.4 million plus US-registered nonprofits on theCharity Navigator website, you will find organizations that include: nudist research libraries,ghost hunters and various chapters of a worldwide coalition of the “Sisters of Perpetual Indulgence” (they state that they dress in drag as nuns to "use humor and irreverent wit to expose the forces of bigotry, complacency and guilt that chain the human spirit" as well as raise money for certain causes). Since they are all public charities – aka 501(c)3 nonprofits – it means that not only do these organizations not pay taxes, but you also can get a tax deduction if you donate to these “worthy” causes.
Some observers have given these kinds of wacky – at least on the surface – examples of charities as proof that we have too many nonprofits in the USA. This evidence is bolstered by the fact that the number of nonprofits has risen dramatically over the past decade or so, while the for-profit sector has been in the doldrums. Some experts argue that it is not in our societies’ best interest to allocate precious philanthropic resources to organizations of this ilk. They would further suggest that all of these groups could function just fine without that nonprofit designation. The nudists would pay the full freight to get their research libraries maintained, the ghost hunters would still find willing clients and the sisters would still perpetually gather to promote their indulgent lifestyle and raise funds for causes they care about.
However, I think that all of these kinds of seemingly bizarre charities are really more a symptom of the problem rather than the main event. Nearly half the charities in the USA are roughly $50,000 or less in annual revenues and almost all nudist, ghost hunting and perpetually indulging groups fall into this category. In fact, collectively roughly 94% of US charities garner only about 6% of the approximately $1.6 trillion that comes into the public charity (501(c)3) portion of the nonprofit sector each year. So if we follow the money, we need not be too concerned with an occasional nudist librarian, hunter of Caspar, or self-identified fundraising drag queen. So where DOES the money predominantly go? The Urban Institute estimates that 4% of US public charities garner 86% of that $1.6 trillion each year (I believe it is only 1%, but why quibble). So, the much larger and more important question is, “Is there a problem among the big guys?” I believe so!
A case in point can be found in the operations of some nonprofit hospitals. These entities are all in that top revenue-generating 4% of charities. Analysts have noted for many years that these hospitals sometimes do not show evidence of operating in a more charitable way than their for-profit counterparts. In particular, the charity care that these nonprofit hospitals provide (which is supposed to be one of their distinguishing features) is sometimes no different than the for-profits'. In these instances, it appears that the only difference is that they have a strategic business advantage over the for-profit hospitals because they do not have to pay taxes. Is providing tax exemption to the subset of nonprofit hospitals that behave just like for-profits an appropriate allocation of precious philanthropic resources? I don’t think so.
So what is to be done? We need policy changes at the federal level (and at the state level) to much more clearly delineate what is a truly charitable (501(c)3) undertaking which provides a public benefit and warrants this type of nonprofit tax exempt status. In addition, we need the regulatory body that oversees tax exempt organizations, makes these determinations and then enforces them, to be as apolitical as possible and not housed within a unit of government that has as its core purpose to collect tax revenue! That is a herculean task and not likely to happen any time soon (although the battering the IRS is taking at the moment could be an opening for such a discussion) but I see this as critically important to get past the current madness. Therefore, I think that all of us who care about helping others through philanthropy should be advocating for this change.
At the same time, there is a second effort that we can work toward that requires no government intervention. This is where the focus on results that I discussed in last month’s article comes in. I have a dream that someday every charity of a certain size (certainly that 4% of big charities at the very least) will be required every year, to not only have an independent accountant conduct a financial audit, but also to conduct a results audit. Managing, measuring and then reporting on results performance in a standardized, objective fashion could revolutionize and positively transform the operation of public charities. On top of that, we would want funders to be engaged in the discussions and decision making process for setting these standards. Through this process the majority of foundation funders might come to fully understand how it is in their best interest, as well as their grantees, to replace the current chaos of reporting to them on widely varying metrics with a collectively agreed upon focus on what matters most – mission-focused results reporting. Furthermore, the charities would be willing to pay for these results audits themselves because they would see it as a time and resource saver. That is because all or at least a significant number of the funders would agree to use these reports as a common standard. Ah what a day that would be! I hope to live to see it and will do my part to try to make it happen. I hope you will too.