Where Most Needed

Down Payment Charity Chiefs Benefitted from Millions in Fees

Execs struck gold with interests in for-profit marketing firms hired to promote the charities.

More has come to light about the home-down-payment-granting charities that the IRS recent ruled were not charities when the seller funded the grant. The Wall Street Journal reports (subscription) (also Pittsburgh Post-Gazette with no subscription) that in their days of rapid growth, these charities paid millions to for-profit marketing firms often controlled by the executives of the charities

Our earlier posts about down payment charities:

Washington Post Discovers IRS Crackdown on Down Payment Charities (June 2)

IRS: Down Payment Grants Not Charity If Funded by Seller (May 5)

GAO: Nonprofit Down Payment Loophole Opens Back Door to Federal Funds (March 18)

The main story is that of Don Harris, the minister who founded Nehemiah Corporation of America (EIN 52-2145694 Form 990), who appears to have fallen into the marketing deal somewhat by chance. As the story is written, the founders of AmeriDream (EIN 52-2145694 Form 990) and The Buyers Fund (EIN 87-0635224 Form 990) were more intentional in also founding a for-profit marketing arm.

And it doesn't appear that any of this would have come to light had not Mr. Harris hired Scott Syphax to succeed him as chief executive in January of 2001. Mr. Syphax, a public affairs executive who had originally volunteered for Nehemiah, recognized the problem with the marketing arrangements throughout the industry and contacted both the IRS and HUD about cleaning them up. Mr. Harris left the staff and the board. Nehemiah sued him for return of the funds in 2003 and he has made an undisclosed settlement with the organization.

What could have been done differently? The IRS could have paid closer attention. Yes, they are overworked in the exempt organization area, but when a new class of charities in a financial field goes from zero to hundreds of millions in a short period of time, closer scrutiny surely is called for. The combination of inexperienced start up operations and huge amounts of money flowing through create a high risk of excess benefit transactions.

IRS Panel Proposes Form 990 Rearragement, But Not Reform

And we make our suggestions for really radical reporting reform.

Some tepid recommentations for improvements of IRS Form 990 are included in the recent Report of the Advisory Committee on Tax Exempt and Government Entities.

It's the kind of report that only a tax attorney might find comforting. Here's what the panel described as a good question in the current form:

Schedule A, Part III, Question 2 asks: “During the year has the organization either directly or indirectly engaged in any of the following acts with any substantial contributors, trustees, directors, officers, creators, key employees, or members of their families or with any taxable organization with which any such person is affiliated as an officer, director, trustee, majority owner or principal beneficiary?”

The report's recommendations are just statements of general principles, with no indication how they could be achieved in an actual redesign, not even an outline. Even the recommendation about electronic filing fails to address the huge human engineering problem of entering volumes of Form 990 data in an online session.

But there are a few tidbits of information deep in the report that are worth passing on:

In 1994 the IRS found that 24% of nonprofit bookkeepers were unaware of the requirement to file a Form 990 once an organization's gross receipts exceed $25,000.
More than half the organizations applying for 501(c)(3) status do not have the services of a professional (lawyer or accountant).
In the last two years, 576,794 organizations filed Form 990, and of these, 483,989 had revenues less than $1 million.

But if you are looking for some really radical suggestions about how to improve nonprofit reporting and accountability through financial and tax reporting, we can suggest a few:

Require large scale organizations (say, with consolidated gross income over $100 million) to file in the same manner as public companies, under SEC-like rules—including Sarbanes-Oxley Section 404 internal controls. Only about 2,000 organizations would fall in this category, but they account for about 85% of charity income.
Require all organizations to report consolidated results.
Have a fundamentally different approach for audited organizations. Instead of a separate form, develop a list of supplementary schedules to be attached to an organization's audited financial statement, similar to the method used for organizations with federal grants. The schedules would include compensation of key employees, a governance checklist, a lobbying schedule, and so forth.
For all audited organizations, adapt technologies and infrastucture developed for SEC reporting to charity financial reporting.
For unaudited organizations, have a policy of 100% examination for organizations over a certain threshold (starting with $5 million and lowering over time).
If the IRS is going to make charity accounting rules in the form of instructions on completing the forms, allow charities the benefit of a rulemaking procedure with notice and comment.
In enforcement of excess benefit, put the emphasis on the recipient rather than the employer: the IRS should identify and audit individuals who receive more than some level of compensation from exempt organizations (say, $500,000) and individuals who receive substantial compensation from more than one such organization. This would be an easy internal cross check for the IRS, much easier and more effective than publishing salaries.

Universities and Wikipedia: Like Napster in Reverse

College students downloaded volumes of free music against the wishes of corporate copyright holders. Now Wikipedia thrives by getting University Ph.D.s to upload content for free.

The Chronicle of Philanthropy provides us with a view of the Wikimedia Foundation (EIN 20-0049703 Form 990, but the 2004 Form 990EZ is not very revealing) and its initial efforts at fundraising. (A non-subscription version of the article may be available here.)

Although the article starts out with the sensational claim that Wikipedia has a million volunteers, later in the article Wikimedia head Jim Wales identifies a core volunteer group of 3,000. Curiously, an article in Fortune a month ago set the figure of "active volunteers" at 30,000. According to this site, Wikipedia had slightly over a million registered users (not necessarily contributors) in March of 2006, of which 300,000 had at least one edit that had not been deleted. However, since a change in Wikipedia's hosting, these statistics are no longer readily available.

There's a lot of talk about the significance of Wikipedia as a new type of organization; however, the rhetoric of the Wikipedians and the nature of the content point to University campuses as the likely source of a lot of the Wikipedia content. Wikipedia is pulling information from universities into the public domain of the Internet, sort of a reverse of Napster, where college students pulled copyrighted music into the public domain of the Internet.

In this respect, the ultimate success or failure of Wikipedia will lie in whether Universities embrace it as it is, press for changes in the vetting process, or develop their own alternative. To me, a mashup between Wikipedia and Facebook has a lot of potential.

Make-a-Wish Bait-and-Switch

Medical science is saving many more children's lives, but wish-granting charities go on raising as much as ever.

A largely overlooked report by Bob Shaw in the St. Paul Pioneer Press revealed the bad news for people who like bad news: the death rate for children from one to fourteen has dropped by half in the quarter-century since the founding of Make-a-Wish (national foundation, EIN 86-0481941 Form 990, with seventy-six separately incorporated local chapters).

As a result, Make-a-Wish and other wish-granting charities have to scramble to find worthy kids to grant wishes to—and overcome their "grim reaper" image when they try to help those who are not actually dying.

In the article, a spokesperson for the Make-a-Wish group claimed that since 2000 the group has stopped saying that it only helps the dying. But here's what the Form 990 says:

The Foundation's purpose is to grant the wish of each child between the age of two and a half and eighteen who has a life-threatening medical condition, i.e. a progressive, degenerative, or malignant medical condition that has placed the child's life in jeopardy.

Is this enough to save Make-a-Wish from the accusation that they are misleading donors? A Google search on the phrase "progressive, degenerative, or malignant" turns up thiry-eight hits related to Make-a-Wish, but that compares to over five million for "Make-a-Wish" itself. So the new formula is not getting much play in the public forum.

The wish-granting business is huge. The Make-a-Wish organization's consolidated annual report reports that the Make-a-Wish network as a whole (chapters as well as national) raised $176 million last year. It granted 12,550 wishes—trips to Disney World account for a third of them. The average direct cost is $6,450, so that the actual cost of wishes is $80 million, almost exactly half the total amount raised.

New CEO David A. Williams earned $272,420 for not quite a full year in 2005 (he started January 10 according to the BBB Wise Giving Alliance report). General Counsel David B. Mulvihill took home $227,371 and CFO Paul Velaski $218,485. There were six other staff in six figures. Total staff attached to the Phoenix headquarters operation is 66.

Especially with charities with a strong emotional appeal like Make-a-Wish, more attention needs to be paid as to whether the organization is raising money in excess of actual need. Currently, none of the charity watchdog agencies and no state regulatory body has much to say about this. It is left to the media to raise the issue. And as this article shows, even media coverage does not alway guarantee wide coverage or interest. So kids continue to get lavished with wishes and charity executives get salaries most of us can only wish for.

Tiny Audit Unravels Yale Accounting

Audit of a small subgrant notes reporting flaws that lead to federal subpoenas from Defense, Health & Human Services, and the National Science Foundation.

A few news outlets (like USA Today and the subscribers-only Wall Street Journal) reported on a federal investigation of accounting for federal grants at Yale University (EIN 06-0646973 Form 990).

What triggered the investigation wasn't a large grant or even a direct one. Yale, a $2.6 billion institution, had a $1.7 million subgrant for stem cell research from the University of Massachusetts Medical School (state institution, no Form 990). But subgrants using federal funds are audited, so the Department of Health & Human Services looked at Yale's books for a period of about eighteen months, covering total spending of about a half million dollars.

What they found (PDF 1.2Mb) was that about $151,000 of the spending was transferred from other grants or from general funds.

In some cases, it was because the grant award was approved late (a common occurrence), but the documentation was missing that was required by the University's own procedure manual to verify that the transferred charges were appropriate to the grant.
But in other cases, funds were transferred to spend down the subgrant award, which is not allowed. A footnote tells us that initially an email provided to the auditors had been altered to omit the explanation of why the transfer had occurred. Ouch.

Apparently Yale has been aware of inadequacies in its grant accounting. From their own press release on the government investigation: "Late last year, the University brought in the Huron Consulting Group, experts in the field, to accelerate its efforts to upgrade accounting procedures and ensure compliance with federal regulations."

Huron Consulting has a product for effort certification and reporting for large institutions. As a side note, Huron Consulting was started by a group that had formerly been employed by Arthur Andersen.

Stories about government grant accounting don't get a lot of attention from the mainstream media. I could find no coverage by either the Washington Post or the New York Times, not even a wire story. But there's a good chance that a lot of people at Yale will be making the acquaintance of a number of auditors in the upcoming months and years. All because of a few charges transferred between grants back in 2001.

People in Need Don't Need Mac & Cheese

Food drives still sending the message that charity means giving the bare minimum.

In researching another posting, I ran across this ad on the web site of the Arizona Republic newspaper for a summer food drive. Here's what's for dinner:

Items needed: canned beans, tuna, canned vegetables, macaroni and cheese, peanut butter, jelly, dry pasta, rice, boxed cereal, ramen noodles

And in an article covering the food drive we are told:

A $1 cash donation will show support with a Bashas’ icon on the store wall. A $25 cash donation will fill an average food box with enough food to feed a family of four for about a week. So whether it’s cash or a canned donation, every donation will be put to good use.

What do the sponsors of these drives think people eat? Most food drives have a "most needed" list (like this flyer) that includes a lot more suggestions with protein, canned fruit, powdered milk, a mention of personal items like toothpaste & soap, and even coffee (which Americans enjoy regardless of their economic status).

And what gives with the continued suggestion of a $1 gift at grocery check out? Grocery stores now have a choice of $25 gift cards at check out for everything from food to DVDs, but the "suggested gift" for the poor at the checkout stand is still $1, $2, or $5.

The $25 cash donation is a better idea, but the suggestion that it will feed a family of four for a week in the USA in 2006 is a bit of a stretch.

The agencies benefitting from the food drive include the local Diocesan Council of St. Vincent de Paul (EIN 86-0096789 Form 990), which is a surprisingly large organization with income of about $30 million (about $14 million in-kind) and a staff of 200. Their mission includes advocacy for the poor, so perhaps they could start to educate the food drive people about what it really costs to feed a family and what people (even poor people) really want and need to eat.

El Paso Charity Contractor Restructures and Sues Former Chief

After a newspaper exposé and an FBI raid, a nonprofit strives to regain qualification for federal JWOD contracts to companies that employ severely disabled people.

The El Paso Times reports that the National Center for Employment of the Disabled (EIN 74-2544266 Form 990) has renamed itself Ready One Industries and is suing its former head Bob Jones for $30 million in what it says is excessive compensation and unauthorized personal spending. A management company controlled by Mr. Jones received $4 million a year during his tenure.

Ready One is, or was, the largest contractor in the Javits-Wagner-O'Day program, which specifies that federal contracts should go to companies that employ severely disabled workers. Ready One is a huge operation, with the 2004 Form 990 showing $192 million in federal grant income. The organization makes boxes and chemical warfare suits. Clicking "hybrid" on the Google map shows the size of the facility.

The operation was featured in an exposé by the Oregonian newspaper earlier this year (we talked about in the post "Lax Oversight in Disabilities Program Yields Major Abuses." And we talked about the FBI raid "FBI Raids Contractor in Disabilities Program." Although it is the major JWOD contractor, severely disabled people constitute only about nine percent of the work force, rather than the required seventy-five percent.

Subsequently, the company brought in former El Paso mayor Joe Wardy as CEO. The old NCED was reorganized by splitting it into two nonprofit corporations, with Ready One to handle the JWOD contract work. Hiring the mayor makes sense, as Ready One is a major employer in El Paso, and the recovery from this scandal will require a politician's skill as much as a manager's. Wardy is receiving $25,000 a month for his service.

As we have seen in other charities, Mr. Jones was brought in to turn around the nearly bankrupt company in 1995. He accomplished that and much more, but also compensated himself too generously for it.

NISH (EIN 52-1007153 Form 990), one of the organizations that certifies nonprofits for the JWOD program, has been working with the Ready One on a formula that would allow it to continue with its federal contracts. The renaming and reorganization are part of that plan. NISH itself is no small organization, with $62 million in federal grant income and a staff of 290. CEO E. Robert Chamberlin has a salary of $286,376.

Preserving a Little Frank Lloyd Wright House Takes a Big Commitment

A 900 square foot workers home in Milwaukee becomes a university architecture project.

A tiny home in Milwaukee illustrates the dilemma of nonprofit preservationists. In late 2004, the Milwaukee Journal Sentinel reported on the purchase of Frank Lloyd Wright gem: an American System home built designed by Wright for working-class families. Milwaukee has the only remaining neighborhood in the US that retains a cluster of such homes (in varying degrees of preservation & alteration). The 900 square foot home sold for around 5,000 in 1916, but the preservation group now known as Frank Lloyd Wright Wisconsin Heritage Tourism Program Inc. (EIN 39-1765073 Form 990) paid $130,000 for it.

A year and a half later, here's another article about the progress on the site. There's a caretaker living there, a graduate of the University of Wisconsin-Milwaukee (state run, no Form 990), whose Historic Preservation Institute has taken an interest in the home. There's even a video walk through of the property.

The preservation group is applying for a $379,000 grant from Save America's Treasures (Federal program, no Form 990). The article mentions that the group is looking for a certain amount of additional funding, which is consistent with the matching requirement mentioned in the program web site.

So the cost of preservation is already well past $509,000, not counting the free services provided by the University. Historically accurate restoration is costly: here it's running over $400 per square foot.

Even more problematic is what to do with the property once the restoration work is done. While the article mentions using the house as a museum, it is difficult to see a 900 square foot home as a museum in a residential area.

This just shows what preservationists are up against. Small nonprofit organizations don't have the resources to pay what it takes. Only the assistance of a major university makes it possible to conceive of such a restoration.

Congress Considers Requiring the Smallest Nonprofits to File Annually

A number of other provisions potentially affecting charities are in a grab-bag tax reform bill.

After several failed attempts at nonprofit regulation reforms, passage may be doubtful, but at least a proposal is now on the table (PDF 455Kb) for reform of nonprofit reporting. Currently, organizations with income under $25,000 are not required to file. As a result, there are hundreds of thousands of nonprofits registered with the IRS that may not be active anymore. Far more organizations never file than file.

The provision before Congress (page 27 of the PDF file) would required an annual electronic filing of the name of the organization, any alternative names used, Internet address, name and address of a principal officer, taxpayer ID, and some proof of continued activity. Failure to file for three years would result in revocation of nonprofit status.

This administrative reform would be a very helpful in establishing the number of genuinely active charities in the US.

Before and After Death, The Rich are Getting Stingier

Bill Gates & Warren Buffett are countering a trend toward diminished charitable giving by America's wealthiest families.

In a sidebar to a story about Warren Buffett's gift, New York Times reporter David Cay Johnston offers some very disturbing statistics about the decline of charitable giving among the very rich, even while some of the wealthiest families are spending heavily on a campaign to repeal the estate tax.

As a proportion of income, charity giving of people with incomes over $1 million has declined from 4.1% in 1995 to 3.6% in 2003. it is now nearly the same as the rate for people with incomes under $1 million.
For gifts at death, the percent going to charity for all estates over $1 million has declined from 8.8% to 7.9% between 1995 and 2004. For estates over $20 million, the decline was from 25.3% to 20.8%.
The number of estates that leave nothing to charity is rising. For estates over $1 million it rose from 73.8% in 1995 to 78.1% in 2004. For the estates over $20 million, the non-givers rose from 42.4% to 47.7%.

The Times gives us a graphic summarizing the trends.

Reporter Johnston provides some details on the relative stinginess of the Mars Family Foundation (the candy people)(EIN 54-6037592 Form 990) and the Walton Family Foundation (Wal-Mart) (EIN 13-3441466 Form 990). The Mars group gives almost nothing, and while the Walton group is more active, especially in supporting charter schools, it is nowhere near the level of Mr. Gates or Mr. Buffett.

Without directly referencing it, the Times story alludes to data from a report by United for a Fair Economy (EIN 04-3286118 Form 990), "Spending Millions to Save Billions: The Campaign of the Super Wealthy to Kill the Estate Tax." The report claims that directly and through the companies they control and the trade associations they belong to, a handful of wealthy families have spent $490 million since 1998 on lobbying estate tax repeal. Here are the families listed in the report:

Allyn-Soderberg Family (Welch Allyn Inc., medical devices)

Blethen Family (Seattle Times Co.)

Cox Family (Cox Enterprises, Inc., media)

DeVos and Van Andel Families (Alticor/Amway)

Dorrance Family (Campbell Soup Company)

Gallo (E&J Gallo Winery)

Harbert Family (the richest family in Alabama)

Johnson Family (BET, RLJ Development Co.)

Koch Family (Koch Industries, Georgia-Pacific)

Mars Family (Mars Inc.)

Mayer Family (Captiva Resources, oil & gas exploration)

Nordstrom Family (Nordstrom Inc.)

Sobrato Family (Sobrato Development, Silicon Valley real estate)

Stephens Family (Stephens Inc., investment banking)

Timken Family (The Timken Company)

Walton Family (Wal-Mart)

Wegman Family (Wegmans Food Markets, Inc.)