One of the many things for which I am indebted to my friend Rob
McMillin is the education he has given me in the art and science of
vetting charities based on their fiscal practices.
For example, I am willing to
bet folding money that the number of
predatory and fraudulent veteran's charities outnumbers those that are credible
and effective.
I've developed fairly high-gain bullshit radar for uncharitable
charities – especially animal and public safety/SAR charities,
which is the world in which I typically move. By bullshit charities,
I have always meant people who don't do what they say they do, don't
stand for what they say they stand for, and aren't who they claim to
be.
Some notable offenders have been the
Bear Search and RescueFoundation, People for the ethical (sic) Treatment of Animals, and an
assortment of
fake,
fraudulent,
confabulous,
evil and
felonious SAR poobahs
and dog handlers. New cynical schemes involving
animals – a popular one now is
“service dogs” for disabled(often autistic, diabetic, or seizing) young children,
another is “
horse rescue” that is merely a
meatman's ransom scam – pop up all the time, and are transparent to the trustworthy
subject-matter experts in my circles.
Learn enough field marks for
the new species, and even a relative neophyte can spot them. Wherever
popular sentiment (or the strong loyalties of some discrete minority
or interest group) rests, reason and skepticism flee, and shysters
see the cavitation and rush in.
But bad intentions and incompetence at performing the stated
mission are not the only, nor even the primary, mode of charitable
failure.
When you are thinking about giving – money, time, your own
reputation – to a charitable cause, part of due diligence is
ensuring that what you give will be
spent honestly, effectively, and
sensibly.
When in doubt, check it out.
When you are sure, check it out anyway.
Disclaimer: Blogger is being a real douche about properly formatting this piece. It is choosing spacing, line breaks, fonts, sizes and styles as it wishes and contrary to my instructions. I give up. I think the links are working now.
A Cynic's Guide To Reading Nonprofit (501©3) IRS 990 Forms
By Rob McMillin
Introduction
We
live in an age of frauds, but that in no way changes the need or
desire to alleviate suffering. If anything, it amplifies the need to
do due diligence on those who would claim our charity, to ensure it
accomplishes the ends they say they seek. I confess a prejudice
against large charities, as such tend to have more ratholes in which
to hide revenue than smaller charities (and also, more overhead).
Part of the reason to engage in charity is the psychic benefits of
having helped someone in need, and large charities insulate the giver
from the act. So in some wise, the extremely short version of this
article may be summarized as,
Don't
give money to large charities.
Failing
that, we may at least learn something about how to avoid pitfalls in
giving, even with relatively small charities. This is not easy to do,
as organizations like CharityNavigator have discovered when they attempted to build an
automated scoring system to filter out some of the worst performers.
As we shall see, it is all too easy to game such systems – and
indeed, some of the most egregiously self-serving charities score
deplorably well there.
The IRS 990, And How To Find It
The
IRS Form 990 is a form most 501(c)3 nonprofits are required to fill
out annually. (Small charities may use the 990-N, which is a
postcard-sized variant available to organizations with $50,000 or
less in income. Religious charities, such as the Salvation Army,
churches, and certain other organizations are not required to file at
all.) All evaluation must start with this form, as it provides a
limited but valuable window into the operation of the charity, giving
information about who is involved, the types of activity the charity
engages in, and most importantly for the purposes of this discussion,
income, assets, and expenditures.
990
forms can be found at a number of sites online:
Charity
Navigator has 990 forms as part of their scoring system. It is a
reasonable first stop in evaluating a charity, but only in the sense
that if a charity has a bad rating, it is probably because the
operators are too lazy to bother beautifying their IRS 990 form to
score better. Charity Navigator does not claim to be comprehensive
(at present, “over
6,000”, which I take to mean “less than 7,000”, and the
acknowledge they do not analyze foundations or charities filing
990-EZ forms), but they will certainly cover the larger charities.
(They have lately increased
this number to 1.6 million, which they claim covers all
501(c)3 entities.)
The
Foundation
Center's 990 finder is vastly more comprehensive, but often
enough has search issues if the same charity is listed under
multiple names. Often, it is necessary to do a separate Google
search to find the same filing under a different name. (One example
of this came up recently when I was looking for the Associated
Humane Societies of New Jersey, which uses the Popcorn Park Zoo as
its 501(c)3.)
More
recently, I've been using GuideStar,
which seems to be at least as extensive as the Foundation Center
(they claim
1.8 million organizations and 5.4 million 990's, with 3.2 million
digitized). Their search seems to be a bit more flexible (they got
the Associated Humane Societies of New Jersey search correct, but
that's nothing like comprehensive).
IRS
990 Part One
Summary
Line 12 – Total revenue.
Obviously, how much they took in for this fiscal year.
Line 13 – Grants & similar
amounts paid out. This can mask some of the trickier means to
hide self-dealing, especially if the entities receiving grants
include the same executives or their relatives.
Line 14 – Benefits paid to or for
members.
Line 15 - Salaries, other
compensation, employee benefits.
Along with Line 14 above, gives an idea of official compensation.
Line 16b - Total fundraising
expenses. This, of course, is
the gamed figure.
Line 18 - Total expenses.
How much it costs to operate the charity.
IRS 990 Part 3
Statement of Program Service
Accomplishments
This section details the
organization’s three largest program services by expenses.
IRS 990 Part 7
Compensation of Officers,
Directors, Trustees, Key Employees, Highest Compensated Employees,
and Independent Contractors.
This is a list of everyone who officially matters at the charity (or
their heavily-used contractors), and what they got paid.
IRS 990 Part 9
Statement of Functional Expenses
Pretty much the whole thing is
important, but Line 26 - Joint Costs. IS VERY IMPORTANT. “Complete
this line only if the organization reported in column (B) joint costs
from a combined educational JSA campaign and fundraising
solicitation” More on that later.
IRS 990 Schedule C - Political
Campaign and Lobbying Activities
Depending on your reason for donating,
you may or many not agree with a charity using your donation for
political or lobbying purposes.
IRS 990 Schedule F - Statement
of Activities Outside the United States
Details of grants or activities of a
charity outside the U.S.
IRS 990 Schedule I - Grants
and Other Assistance to Organizations, Governments, and
Individuals in the United States
Details of grants or activities of a
charity inside the U.S.
IRS 990 Schedule J -
Compensation Information For Certain Officers, Directors, Trustees,
Key Employees, and Highest Compensated Employees
Look at Part Two, Column E. This is
the total dollar amount that key employees have received in salary
compensation.
IRS 990 Schedule O
A detailed explanation of how the
charity spent its donations from Part Three.
Examples Of Flawed 990's
And
while these are all important, what's most important is to read
the form with a critical eye. In
my own reviews of 990's, the most important issues I have encountered
are
Now to find good examples of
bad charities.
Humane Society Of The United States
To
see why you wouldn't want to give money to a particular charity, it's
necessary to review some 990's out there from some of the more
egregious charities. We'll start with the Humane
Society of the United States, axiomatic as a money mill and a
self-serving charity. Patrick Burns back in 2007 gave a fairly
devastating
critique of their 990 that, basically, boils down to one
thing: HSUS moves their large direct mail
costs into “program expenses”, which is obvious nonsense. (In
addition, Burns engages in some informed speculation about the venal
mechanics of their operation.) Worth
magazine in 2002 declared them “questionable”
(PDF) thanks to high mailing costs. But once the direct mail costs
were shuffled into program expenses, suddenly Charity Navigator gave
it its highest rating of four stars. This of course is bogus. Let's
start by taking HSUS's
most recent 990, for tax year 2011.
On line 12, they claim
$133,577,658 in revenue, most of which ($123M) came from grants.
On line 15, $37,788,110 in
salaries paid, and $4,343,746 in professional fundraising.
Skipping ahead to Part IX
(page 9 of the PDF), we learn there was $13,457,363 in “Other”
expenses (line 11g), and $11,915,496 in advertising and promotion
fees (line 13). But the real kickers are line 24: $24,137,976 for
“Education material” (line 24a) and $10,116,669 for “Direct
response costs” (line 24b). Adding all these expenses together
with the professional fundraising – and I do not believe it is
unreasonable to view these as laundered mailing list costs – it
totals to $63,971,250, or about 47% of revenue dedicated to mail
operations before anything else.
If
we add salaries to the totals in the last bullet above, you arrive at
$101,759,360, which means salaries plus overhead – and here I am
not counting a lot of things overhead, such as legal fees (which
really are) – this means 76% of revenues are tied up in salaries
and overhead before a nickel gets spent on actual program. The
reality, of course, is that it is much worse than that, and while the
Worth article from 2001 cited
53% overhead, it's certainly much higher now.
National Disaster Search Dog Foundation
The
National Disaster Search Dog Foundation originally came to light
here,
and while that blog post gives a fine, detailed look at their
operations, their 2011
990 opens a different set of questions. Unlike HSUS, NDSDF does
not appear to be especially
self-dealing, but they are poorly run – an important distinction.
Particularly:
Self-dealing
via no-bid work, so the kennel in which the dogs reside and are
trained are also owned by the principal, Kate Davern.
Trainer's
fees ($203,622 in this, $210,333 from 2009), also presumably paid to
herself or her friends.
New
for 2011 (relative to 2009): three-quarters of a million dollars in
“ADP employee salary” ($775,393, line 24a)
Silly
amounts of rubble pile charges ($600,000 exactly, line 24b; and why
is it such a shiny, zero-filled number?)
Something
called “campaign costs” (line 24d, $127,771)
On
page 11, line 24, a $3,000,000 unsecured loan – which, on page 19
(of the PDF), part X, line 2, we discover $357,469 in accrued
interest. (Paid to whom or what, it does not say.) As I noted at the
time, this is something like you or me taking out a payroll loan for
the entire value of our annual salary.
NDSDF
has a lot of other red flags, and I'll leave you to read Heather's
post to detail those objections, but this is a case where the
headline does not match the output, not by a long shot. For what it's
worth, Charity
Navigator dings them for a high fundraising costs and failing to
list their CEO, but the problems here are ones of circular outside
payments that are not exactly obvious.
Eyes, Ears, Nose, And Paws
This
smallish charity came to light recently in the wake of a news
report that one of its principals had left
a dog trainee in a car to bake to death, and appears, as with
NDSDF, to be more a case of a badly-run charity rather than a
self-serving one. My major concern in reading their
2011 990 is that of the $128,058 in revenue, $77,000 of it –
more than half – goes to the salaries of the two executive
directors, Maria Ikenberry and Deb Cunningham (page 12 of the PDF).
Also, in the form 4562 on page 10, there is a $2,000,000 cost of
property with $500,000 of that expensed for that tax year. This to me
bears more investigation; are they using this charity to launder some
other personal expense, perhaps a house or a commercial property?
Service
dog charities are one of the more egregious frauds in this space
these days, and while I don't intrinsically see anything wrong with
paying yourself, at some point it ceases to be real charity and
becomes a business. This organization looks very much on the cusp of
such a descent.
Worst-Case Scenario: YWCA USA
While
running through some of these examples, it's useful to note one so
bad even Charity Navigator spits them out for wastefulness. One such
(which made their top
ten list of poor-performing charities with highly paid CEOs) is
YWCA
USA, which rates zero stars, Charity Navigator's lowest possible
score. While there are a lot of reasons for this, a review of their
2012
990 is kind of a tour through the pathologies entrenched and old
charities can accumulate over time:
Their
CEO, Gloria Lau, earned $200,920, including a $52,000 housing
allowance while she was working in Washington, D.C. (page 29).
As
a consequence of spending faster than receipts are coming in, YWCA
USA actually spent $2.7 million more than it took in despite
slightly increasing its investment income on $58 million of assets
(page 1).
On
$2.4 million in revenue, $1,147,587 went to salaries of officers and
other employees, of which it is claimed that $434,212 actually went
into program expenses. That means less than half of their employee
costs (and here I'm being generous and not even including things
like pension contributions, benefits, and payroll taxes) are
actually going toward program activities!
In
addition, there are $518,019 in accounting and legal expenses,
$308,559 in investment management fees, and a huge black hole called
“Other” (page 10, line 11g) to the tune of $767,123. Nearly a
third of revenue goes toward unaccounted-for expenses.
Even if you take their word for it that $489,487 of that figure goes
to program expenses, overhead is still no less than 36%.
In
short, this is an organization with substantial resources that is
unbelievably badly managed.
In Conclusion
It's not straightforward to read 990's,
because even when you can make sense of them, they tend to obscure
more than they enlighten. Large charities tend to be the worst at
this, for the simple reason that bureaucracies develop habits, the
same as the people who staff them. Waste, venality, and incompetence
are all enemies, yet ones such organizations tend to succumb to. If
you must give to large charities, read their IRS Form 990
carefully.
