Donors open their wallets - and their eyes

Sweet charity / The best way to do good

For a barometer of attitudes toward charitable giving these days, look no further than the outpouring after the attack on the World Trade Center on Sept. 11, 2001. One New York editor walked directly to her local fire department, which lost 50 percent of its firefighters, and handed them a $1,000 check. Fidelity Investments, which handles $2.4 billion in donor-directed funds, reported $10 million in client donations to Sept. 11 causes.

But if the tragedy opened hearts and wallets, it did not shut down critical thinking. When donors learned that the American Red Cross Liberty Fund had raised $543 million on the basis of the attack and did not intend to use it all for the victims but instead to build up reserves against other disasters, the sense of betrayal and outrage was so strong that the organization's president, Bernadine Healy, had to step down. Since the incident, some local Red Cross chapters have reported a 30 percent drop in donations.

If people are giving to charity despite the tumbling stock market, the end of instant IPO fortunes and a general slowdown in the world economy, they are also "giving smarter" and demanding accountability.

This is especially true in the United States. "My impression is that it is tougher to raise money, but American people make it part of their commitment to the community," said Arthur Bellis, former chairman of United Way International.

That impression was backed by figures released Thursday by Giving USA: The annual report of the American Association of Fundraising Counsel Trust for Philanthropy found that in 2001, Americans gave $212 billion to charitable causes, up 0.5 percent from 2000 in constant dollars but down slightly when adjusted for inflation.

The largest decrease in philanthropy came from corporate donors, whose gifts dropped 12.1 percent in constant terms.

Individual donors provided 75 percent of all money raised, and their donations went up 1.1 percent.

In part, bad times may be a catalyst for giving. "When times are tough, people look at other human beings and say, 'I am blessed,"' said Lawrence Wasser, executive director of the Florida Holocaust Museum in Tampa. "'I have it tough, but I still have a job. I will give something.'"

Although philanthropic donations have fallen only fractionally so far, many charities are grumbling. In part, their perceptions are colored by their success in the recent past. Giving rose 6 percent in 2000 after four golden years of extraordinarily high 10 percent growth.

"When the tech boom was very big, we would see someone announce a $150 million gift to a college or university," said Stacy Palmer, editor of the Chronicle of Philanthropy, the newspaper that covers the field. "Those kinds of things ave certainly slowed down."

Palmer said typically there was a lag between an economic slowdown and a slowdown in giving.

But if giving has not slowed drastically, one element undergoing change is the way donors - especially in the baby-boom generation - evaluate the charities they support. Boomers have learned to control their investments by shifting from one mutual fund to another. They have take control of their retirement funds. Now they want to know where their donations are going.

"People want more control," Palmer said. "Boomers have less respect for big institutions. In great part, their parents didn't ask; they just gave, and they trusted the charity."

The shift has prompted charities to create "designated giving" programs so that donors can specify where the gift should go. "This is one of the biggest issues the United Way has had to grapple with," Bellis said.

The demand for accountability also has prompted some soul-searching among charities that have lost credibility. This month the Red Cross announced a program in which they pledged to communicate more clearly that financial contributions may go to help victims of other disasters.

While recent events have intensified donor demand for accountability, judging how effective a charity is and how well it spends its money can be more complicated than it sounds.

Nonprofit public charities and foundations registered in the United States file a tax document called a 990, which can be consulted on the Web (www.guidestar.org). The 990s disclose how much charities spend on administrative expenses and how much on fund-raising, and what percentage of their reserves they spend on charitable purposes. In this, the United States is far more open than other countries. In Germany, for example, charitable foundations need report only to the Ministry of Finance of their home state, and the statements are not made available to the public.

But if financial information is available, due diligence can still be difficult. The Internal Revenue Service "doesn't do a lot of monitoring," Palmer said. Although charities are supposed to report how much they have spent on fund-raising, not all do. Sometimes their accountants advise them to put zero, she added, and until recently, at least, the IRS has rarely questioned it.

What is more, there are ways to manipulate fund-raising expenses. A charity might send a direct-mail solicitation to raise money for a cancer group. The letter might say: "Here are 10 ways to avoid having cancer yourself, and by the way, please send us money." Because the pitch includes the information about cancer, and the charity's mission in part is cancer education, it can claim part of the cost of the pitch as an educational expense.

A new Web site, www.CharityNavigator.org , uses IRS filings to evaluate the soundness and efficiency of more than 1,100 charities and rates them from four stars ("exceptional") to no stars ("exceptionally poor") almost exclusively on their finances. The ratings may prove interesting for donors who want to learn whether a favorite charity is as efficient as the average for its sector. For instance, the median for administrative expenses for all charities is 9.5 percent, but the median for a food bank, with little need for overhead, is 1.3 percent. The median for museums is 19.3 percent, largely because of the expense of maintaining collections and buildings.

Most donors also prefer to make their donations as tax-efficient as possible. Countries that have changed their tax laws to encourage charitable giving are seeing results. Germany raised tax deductions to ?300,000 ($290,000) over 10 years for individuals starting a foundation, with a ?20,000 annual deduction for donating to an existing foundation. Last year, 1,000 foundations were created, up from 681 in 2000.

In Britain, which managed to avoid a recession last year, charitable giving is benefiting from new laws that permit donors to contribute to charities that strengthen local community endeavors. Britain also began to exempt donations of publicly traded stock from capital gains tax.

In Asia, where corporate foundations predominate and individual philanthropy is not highly structured, incentives are minimal. "The tax benefits are not substantial when they exist at all," said Barnett Baron, executive vice president of the Asia Foundation in San Francisco. Some corporate foundations survived the 1997 Asian financial crisis, he said, but there has been no growth, and assets have declined in real terms.

By Sharon Reier (International Herald Tribune)
June 22, 2002