News and analysis
June 26, 2013

'Worst Charities’ Report Prompts Calls for Charities to Respond

A yearlong investigation by three news outlets that identified America’s “50 worst charities” has revived the perennial question of what the nonprofit world should do to drum out unscrupulous nonprofits and fundraisers.

The inquiry by the Tampa Bay Times and the Center for Investigative Reporting, joined in recent months by CNN, highlighted charities that channel most of the money they raise to professional solicitors, mimic other charities’ names, deceive donors on telemarketing calls, divert money and contracts to people with ties to their organizations, and use accounting tricks to inflate the amount they report spending on their missions.

While anyone who follows nonprofit news knows such practices persist, the project broke new ground by packaging a wealth of information in one place, including the first national database of charities and fundraisers that have been cited by state regulators.

And the investigation is continuing. The news organizations have asked members of the public to share tips on “suspicious charities” and have received about 275 suggestions, including requests to examine some “well-respected” organizations, says Mark Katches, an editor at the Center for Investigative Reporting.

Criticizing Journalists

Two fundraising trade groups­—the Direct Marketing Association Nonprofit Federation and the Association of Direct Response Fundraising Counsel—say they are examining the findings. But the only major nonprofit association to issue a statement on the investigation, the Association of Fundraising Professionals, appeared to be more critical of the reporters than of the practices they uncovered.

“The list and accompanying article also miss several key points about fundraising and what ethical charities do and don’t do,” the association said in a statement. “The 50 organizations in the list are such extreme cases that they are not representative of what a typical charity looks like or how it operates.”

The Charity Defense Council—a fledgling organization started by Dan Pallotta, an author and consultant who has crusaded against evaluating charities based on their fundraising and administrative costs—sprang into action even before the articles were published. Mr. Pallotta wrote on his blog that he and the head of the council’s media committee urged the reporters “not to write a story based on overhead and fundraising ratios but to write a story based on impact.”

His verdict after reading the first article in the package: “Any story written by only two reporters that purports to know which 50 of the 1.5 million nonprofits in America are the 'worst’ is clearly using a headline to grab readers and is suspect to me from the start.”

'Turning Our Backs on the Donor’

But other fundraising experts praised the depth of the “worst charities” research and said the nonprofit world should not remain silent and hope the issue blows over.

“It’s easy to stand by and shake our heads at all this shocking data and commentary and note that a few bad apples ruin the barrel of good fundraisers,” Roger Craver, a direct-marketing expert, wrote on his blog the Agitator. “These 'that’s a shame-but-what-can-I-do-about-it’ rationalizations amount to nothing more­—or less—than the collective turning of our backs on the donor.”

Doug White, a philanthropy-ethics expert who teaches at Columbia University’s master’s program in fundraising management, says ethical charities “should embrace this report” and propose ways to crack down on bad actors, perhaps by setting up a committee of nonprofit experts with the following mission: “We as a community of 1 million organizations are trying to serve society in a way that business and government can’t, and we acknowledge that not everyone is doing it the way it should be done. And we want to lead the way in doing it right.”

He says Independent Sector, a leading coalition of nonprofits and foundations, would be well suited for that task.

But when asked about the “worst charities” investigation, Diana Aviv, Independent Sector’s president, said she does not have enough information to make a judgment.

“You’re making an assumption these are bad operators, and I don’t make that assumption at all,” she says. She criticized the coverage for focusing on the percentage of money the charities spent on overhead, which she says is not a good way to evaluate whether a charity is doing a good job.

Paying For-Profit Solicitors

The news outlets unveiled their findings just before three major charity-information groups—GuideStar, the BBB Wise Giving Alliance, and Charity Navigator—published a “letter to donors” urging them to look beyond administrative and fundraising costs when trying to decide whether to support a charity and instead focus on an organization’s impact.

However, other experts say the “overhead” argument doesn’t apply to the kinds of operations that were highlighted in the “worst charities” project.

“We should not condone practices in which the bulk of the donor’s contribution, often without his or her knowledge, goes into a for-profit fundraising company’s coffers rather than to a nonprofit,” says Phil Buchanan, president of the Center for Effective Philanthropy and a Chronicle columnist.

The project did not focus on overhead per se. It aimed to select the 50 charities that sent the biggest percentage of the money they raised to for-profit solicitors over 10 years. It included only groups that paid those companies the bulk of the money raised in at least 75 percent of all campaigns over the years.

The reporters vetted their methodology with three nonprofit experts before publication, including Robert Tigner, general counsel of the Association of Direct Response Fundraising Counsel.

Mr. Tigner says their approach was sound because it focused on the charities’ entire operations rather than on the costs of a single telemarketing campaign, as some attorneys general do when they issue reports about the percentage of donations kept by for-profit fundraisers. Critics say those reports don’t take into account how such campaigns fit into a charity’s overall fundraising strategy or how much money the charity reaps in the long term from the donors it acquires.

Mr. Tigner says his association is likely to discuss the findings since some of its members have done work for charities on the “50 worst” list and are subject to the group’s ethics rules, although he says it’s not yet clear they are guilty of any wrongdoing.

Senny Boone, executive director of the Direct Marketing Association Nonprofit Federation, says her organization is “digging through their reporting data and seeing what can be learned.”

Cash Aid

The charities on the “50 worst” list sent almost $1-billion to commercial solicitors and spent an average of less than 4 percent on direct cash aid to the needy over a decade, the investigation found.

The reporters said they focused on cash aid because they wanted to filter out expenses that “are easily manipulated to mask fundraising costs,” for example educational campaigns that are conducted along with fundraising activities or donated goods that charities can overvalue to make it look like they are spending more to help people.

Charities are allowed to count such costs, along with a certain percentage of salaries, as program spending on their Form 990 tax filings.

Rebutting the Findings

Some of the “50 worst” contested their rankings and some groups that are not on the list are trying to distance themselves from those that are.

The American Cancer Fund, a small charity that educates cancer patients about treatment options, has posted a notice on its Web site stating it is not the Cancer Fund of America, which ranked No. 2 on the “worst charities” list. “We have never paid a telemarketer to make calls for us, we have never called you and asked you for money.”

The Cancer Fund of America paid more than $80-million to solicitors over 10 years while spending less than $1-million in cash aid, the investigation found, while its founder and at least a dozen other family members earn $1-million a year in salaries from the cancer group and four spinoff charities.

That charity issued a statement saying it “has helped over 100,000 patients across our country since we started in 1983. The media wishes to report on cash only, thereby ignoring that we are able to purchase products in volume and save in order to serve more families.”

The American Foundation for Children With AIDS, No. 46 on the list, issued a detailed rebuttal, saying it no longer uses professional fundraisers and has “worked diligently to free itself of this inefficient source of revenue.”

It contested the reporters’ focus on cash aid, saying it “purposely does not provide direct cash aid to any of its partners” but uses money to ship donated medicine, medical supplies, food, and school supplies overseas.

Mr. Katches of the Center for Investigative Reporting says the charity was on the list because of its “fundraising history.” The inquiry found that the group raised $4-million from 2008 to 2011 alone and paid 76 percent of that to its for-profit fundraiser.

Regulatory Weaknesses

The “worst charities” investigation also highlighted regulatory gaps and “meager penalties” that hinder states from cracking down on high-cost solicitors and that permit fraudulent organizations to continue operations, sometimes by moving from one state to another.

Cindy Lott, a lawyer at the Charities Regulation and Oversight Project at Columbia University, says she welcomes “thorough and fact-based journalism” that highlights the shortcomings of the current regulatory system.

“The limitations of the states as to resources—financial, technological, and human—are well-known in the regulatory community,” she says, adding that she is now working with the Urban Institute to conduct the first nationwide survey of state charity regulators’ offices that will look at issues like staffing, technology, and revenue sources.

Meanwhile, some fundraising experts are urging their colleagues to step up their emphasis on ethical behavior in the wake of the “worst charities” project.

Jennifer Phillips, chief strategy officer at the Avalon Consulting Group, says some fundraisers fear that media scrutiny of abusive practices will backfire. “There is a concern that aggressive regulation might not target the truly fraudulent organizations and might penalize organizations that are trying to do the best they can in an honest and ethical way,” she says.

However, unethical fundraising “degrades the philanthropic spirit that is so essential for the common good,” she wrote on her blog, adding that fundraisers should push for conversations about ethical behavior, including the need for appropriate regulation, with professional associations, at conferences, on charity boards, and elsewhere. “In the long run,” she said in an interview, “this just really damages us all.”

Send an e-mail to Suzanne Perry.