Guest Post: All That Glitter Cost Your Gold

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.

I should add that this is really the Cliff Notes version. The long form course is at the NonprofitCoordinating Council of New York website.

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).
  
  

What's Inside? What To Look For

The Doggie Stylish Blog gave a useful synopsis of what to look for in 990's:

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

• Fundraising expenses moved into program expenses
• Excessive salaries
• Large unexplained expenses

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.