How to Vet Nonprofits Before You Give
By Derek Willis, Mike Tigas and Sahir Doshi / ProPublica
This piece originally ran on ProPublica.
Charity solicitations are as much a part of the holiday season as decorations. If you give, it’s a good idea to know what the nonprofit organization does with your money. Here’s one way: use ProPublica’s Nonprofit Explorer, a tool for researching the financial details of nonprofits.
Organizations that receive a tax exemption from the Internal Revenue Service and take in at least $50,000 a year have to file an annual report, called a Form 990, which can serve as a guide to how they operate and what their programs are. Nonprofit Explorer summarizes the financial data in 990 forms and also provides links to the documents. While not a complete picture of an organization’s activities, the form does provide insight on how a nonprofit operates. Here are a few things to look for when deciding whether to make that contribution:
Charities often tell donors that a certain amount of every dollar goes directly to “programs,” which usually mean direct services provided to the recipients of their assistance (the homeless, for example, or children). But read the fine print, says CharityWatch: sometimes these statements say “of every dollar spent” and sometimes they say “of every dollar donated.” Those are two different numbers, as ProPublica’s reporting on the Red Cross demonstrates. The Form 990 not only lists the totals for money coming in and going out, but in Part III (often the second page of the completed form, as with the 2013 form for the New York-based Coalition for the Homeless), the group also describes the program services that it performed, how much they cost and indicates whether there were any significant changes to existing programs. If you’re unsure about exactly what a charity does, Part III can help clear up that uncertainty, but it is also the place where charities promote their accomplishments.
Amount Spent on Professional Fundraisers
Charities rely on volunteers to ask for donations, but many also pay for-profit companies to help them raise money via telephone and mail solicitations. In its investigation of “America’s Worst Charities,” the Tampa Bay Times and the Center for Investigative Reporting identified nonprofits that raise millions via professional fundraisers and “regularly give their solicitors at least two-thirds of the take.” One organization, the Committee for Missing Children in Lawrenceville, Ga., paid its fundraisers nearly 90 percent of the $27 million it raised during the decade the report examined. The more that charities spend on fundraisers, the less money they have for direct program spending – the reason the organizations exist. On a 990 form, look for this amount on line 16a of the first page, labeled “Professional fundraising fees.”
Charity organizations are also required to list officers, directors, trustees, key employees and the five highest-paid employees of the organization — and the amount each person was paid — in Part VII of the 990 form. Because of this public disclosure, executive salaries are sometimes contentious, as recently highlighted during a congressional hearing on Planned Parenthood. (In 2013 the organization’s president, Cecile Richards, was paid $590,928 in salary, retirement contributions, bonuses and other pay.) But a high salary alone isn’t a red flag. The IRS requires only that compensation is “reasonable,” or what a similar position would be paid by a similar organization. A Charity Navigator study of charity CEO compensation noted that unsurprisingly, “as the size and to some degree the complexities of running a nonprofit increases, so does the salary of the institution’s top executive,” recommending that donors compare an organization’s executive salaries to other charities for a better assessment.
The study also points out that organizations that show $0 paid to executives may also warrant a closer look. “There are very few individuals that can afford to work full-time managing complex, multi-million dollar organizations without receiving any compensation.” There may be legitimate reasons for this, or the compensation figure may have been misreported to the IRS.
According to Ray Madoff, director of the Boston College Forum on Philanthropy and the Public Good, this could also be caused by a nonprofit outsourcing staff and management duties, essentially hiding the individual salaries of an organization by reporting it within an aggregate contractor payment. She points to Fidelity Charitable, the second-largest nonprofit in terms of donations: Although officers are listed in Part VII of the form 990, all salaries are listed as “$0*”, with the asterisk noting that “all services are provided to Fidelity Charitable” by FMR LLC, the parent company of the for-profit Fidelity Investments. A Fidelity spokesperson confirmed simply that “Fidelity Charitable does not report individual salaries because it does not itself pay any salaries” and that “it hires FMR LLC […] to provide a wide range of services.” They also point out that the charity “does, of course, report the fees paid to service providers, including FMR LLC.” According to Schedule O of the 990, FMR received over $32 million in “contractor compensation” from Fidelity Charitable.
Beyond the 990
While the 990 can help you root out scammers and gross underperformers, it does not tell you how effectively money spent on programs translates into results on the ground. In the words of the Foundation Center’s Luz Rodriguez, “some not-so-great charities are just really good at finances.” To examine a charity’s reputation in its target community, Rodriguez suggests looking through its social media for positive testimony or service complaints. Greatnonprofits.org aggregates crowd-sourced reviews of nonprofits. GuideStar has experts in the field weigh in on their favorite nonprofits on Philanthropedia.
In the absence of robust data on results, GuideStar CEO Jacob Harold said donors should look for groups that set out their work and measures of success with clarity and specificity. “Clarity is all too rare in the nonprofit sector,” he said. “Look for groups that clearly articulate the solution rather than just talking about the problem.” He recommends GiveWell, one of the more quantitatively rigorous nonprofit watchdogs, which weighs charities by lives improved per dollar spent. Its list is far from exhaustive, but incorporates the concept of scalability — it selects groups that have “room for more funding,” and can do the most with your money
Giving Overseas — One Thing To Remember
Sometimes your charity of choice’s mission could cause more harm than good by having unintended consequences for the recipients of its donations.
This is particularly relevant to “gift-in-kind” donations — those old clothes, shoes, toys and food that well-intentioned Americans send in bulk to the developing world. These influxes of free, second-hand goods can undercut and destroy local industry. Indigenous manufacturers are priced out of the market, and the community is denied the growth benefits of textile and food processing industries that placed countries like Mexico and South Korea on the development ladder. Countries like Kenya and Haiti are having this first rung broken right under their feet by good intentions.
Charity evaluators like GiveWell prioritize health and infrastructure sectors instead, in which nonprofit interventions have an exponential impact on the local economy by attacking the problems of poverty at their core. They also recommend GiveDirectly, a direct cash transfer charity with a 90 percent program-to-overhead cost ratio that consistently ranks among GiveWell’s top performing nonprofits. GiveDirectly sends donor money straight to the poorest families in Uganda and Kenya through mobile banking. The mobile route ensures that the entire sum reaches the target family, and is even safer than in-kind donations, which can be siphoned off to the black market.
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