Wise Giving Guide After the ground swell of donations, some lessons in how to judge a charity
(MONEY Magazine) – It was one of the few heartening events of the past several weeks--even before the smoke cleared from the Sept. 11 attacks, charitable donations began pouring in. And the money keeps coming. As of mid-October, some 60% of all Americans have contributed money to victims of the attacks, raising more than $1 billion. About 70% of that vast sum was directed to just two major charities, the United Way's September 11th Fund and the American Red Cross, but all told more than 200 individual nonprofit groups have geared up to help. "The scale of the tragedy and the charitable response are unprecedented," says Rick Cohen, president of the National Committee for Responsive Philanthropy, a Washington, D.C. nonprofit. "It far surpasses any disaster that has come before, including hurricanes, floods and the Oklahoma City bombing."
But the unprecedented giving has been followed by an unprecedented challenge: how to spend those vast sums effectively. "With the Sept. 11 tragedy, everything happened backwards," says Daniel Borochoff, president of of the American Institute of Philanthropy (AIP), a Bethesda, Md. charity watchdog. "What usually happens is the charity comes up with a mission and a budget, then it goes after money--this time the money came in and the charities are figuring out how to spend it." As the nonprofits seek to coordinate and define their missions, only a fraction of the donations have reached victims so far. (The United Way and the Red Cross have stopped asking for relief funds.) For donors, this logjam, though likely to be resolved soon, offers important lessons on the best way to give. In the days following Sept. 11, all that was called for was generosity. Now, as we try to return to our more normal patterns and contemplate year-end giving, what's needed is a more deliberate approach to charitable giving.
Keep in mind, the need is more urgent than ever. As America's attention has been riveted on the attacks, many charities--from medical research foundations to poverty programs to animal shelters--have watched donations dwindle. Citymeals-on-Wheels, which delivers food to senior citizens in New York City, saw a 50% drop in contributions in the weeks after the attack. Habitat for Humanity recently laid off 35 employees. The crisis comes just as the recession and market decline had slashed endowments and put a dent in giving. And with the nation facing increased defense spending and lower tax revenues, nonprofits expect federal and state support to be cut back sharply. "A number of charities may not make it, and many more will drastically reduce their programs, just as they're needed most," says Cohen. "This could be the most challenging time ever for the nonprofit sector."
With that in mind, we've created this eight-step approach to wise giving. Our package includes a review of tax considerations for donors (at left), plus our favorite websites for shoppers who want a portion of their holiday gift buying to support a good cause (see the box on page 182). For ideas on where to give, see the box on page 179, which lists seven lesser-known national charities that receive top financial ratings from the watchdog AIP.
Establish your goals and budget. Your first step, suggests Buzz Schmidt, president of Guidestar.org, a charity information site, is to decide what kind of donor you want to be. Do you prefer to donate small amounts to many charities, or focus your giving on fewer groups by making larger gifts? Do you want to keep your dollars close to home, or give to an international organization that will send the money where it's most needed? Is your main concern preserving old-growth forests or funding Alzheimer's research? Once you've defined your goals, set an annual budget--many Americans devote a set percentage of their income, whether 2% or 10%. Then identify charities that fit your plan.
Be sure that a group is a charity. Not all tax-exempt groups are charities--some may be political lobbying outfits or fraternal organizations. For your gift to be tax deductible, the nonprofit must be registered as a 501(c)(3) with the IRS. If you have any doubts, ask for a copy of the charity's so-called letter of determination from the IRS, or look up the group at irs.gov/search/eosearch.html.
Know what work your dollars will support. One of the first principles of wise giving is to look beyond general appeals and names and figure out what a charity's mission is. Some Sept. 11 groups carved out narrow niches--the HERE New York Assistance Fund (www.hereunion.org) was created to support the families of hotel and restaurant workers, for example; other funds made broad and unspecified appeals for victims. But few groups had track records for donors to rely on. Under more normal circumstances, you can--and should--look at what the charity has done in the past. Go to the charity's website, request an annual report or even look over a tax return.
The Sept. 11 fund raising has brought another important issue to the fore: the difficulty of controlling your donation. The American Red Cross, for example, may use a good portion of the $550 million it has raised in its Liberty Fund to finance other operations. If you have a specific goal for your contribution and the charity operates a fund dedicated to that mission, write the program name on your check. But don't try to micromanage your gift; if you trust the group enough to donate, you can let the pros decide where to best spend the money.
Examine the finances. Once you feel comfortable with a charity's mission, your next question should be, does a significant portion of its income go toward that program vs. fund raising and administrative costs. Today, you can quickly research that online. All 501(c)(3)s are required to send copies of their three most recent tax returns (IRS form 990) to anyone who asks, although they can charge a fee to cover copying and mailing costs. (Charities with income of less than $25,000, private foundations and churches are exempt.) A far easier way to get a tax return is to go to Guidestar.org, which provides downloadable 990s (when available) and easy-to-digest financial summaries for 850,000 groups.
Most charity watchdogs recommend that at least 50% of a charity's expenses go toward programs and that no more than 35% be spent on fund raising. these are generous standards: Well-run major charities devote 70% or more to programs. Even so, there can be reasonable exceptions, says Peter Swords, a lawyer and nonprofit expert on 990s. Start-ups may need to spend more than 35% on fund raising because they lack name recognition; groups that get most of their money from the public may have to spend more on fund raising than nonprofits that receive government and foundation money do.
In these dicey economic times, you also want to weigh a charity's financial stability. Consider the amount of the group's asset reserves (Part 1, line 21 of the 990). Maintaining one to three years' worth of revenues (line 12) is healthy, says Borochoff, but more may be a sign that the group is stockpiling money rather than spending it on programs.
Understand what the numbers won't tell you. Financial ratios have limitations. Nonprofit accounting rules give charities considerable latitude in how they allocate expenses among program services, management and fund raising, Swords points out. For example, a medical charity could consider a portion of the fund-raising appeal a program on the grounds that the solicitation contains tips on nutrition. Another problem is that some national groups have more than one chapter and file separate 990s for each one, making it difficult to evaluate the overall organization. And many nonprofits simply do not fill out the forms correctly. "A large number of charities report zero fund-raising costs, which is unlikely," says Borochoff. Try to dig beyond the numbers by talking to people in the community who work with the charity--what does the neurologist next door think of your local MS chapter?--as well as those the group aids.
Check with the watchdogs. One shortcut to analyzing a charity's finances is to find out if one of the many watchdogs has already done so. At Give.org, you can see whether some 250 groups meet the Wise Giving Alliance of the Better Business Bureau's financial and governance standards. Charitywatch.org, run by the AIP, grades about 450 charities according to financial criteria. A new site, ministrywatch.org, rates religious groups. Remember, though, that the watchdogs don't measure the quality of programs or how effective the charities are at fulfilling their mission.
Consider what can cut into your donation. The Tribute to Heroes Sept. 11 Telethon--the televised concert featuring Bruce Springsteen and Paul Simon, among others--raised some $150 million in pledges for the United Way's September 11th Fund. What was most unusual about the event was that 100% of the donations went to the charities serving the victims (most groups then charged their usual expenses, which is necessary to cover costs). Usually when you support a special charity event, such as a walkathon or a benefit dinner, much of your donation is erased by overhead costs. Telemarketing firms used by nonprofits eat up 30% or more of the contributions they collect. Any method of giving helps, but you can't beat a direct donation for pure cost-effectiveness.
Stay involved. The best way to get to know a charity is by volunteering, points out Bennett Weiner, chief operating officer of the BBB Wise Giving Alliance. With a local group, your time and efforts can often have a big impact. Be sure to keep monitoring your charities to make sure they live up to their promises. If they consistently fall short of their goals, it may be best to shift your giving elsewhere--right now, especially, there's no shortage of good causes.