Old Battles and New Challenges

In the spring of 1987 there were few computers sitting on the desktops of the nation’s top charity executives, even fewer CD-ROMs piled in their shelves and briefcases, and no Web sites to nag them about their marketing miscues. Yet, many of the stories of the first edition of The NonProfit Times, which debuted in April that year, resonate today.

For-profit health clubs, for instance, still complain about nonprofit competitors as they did in the lead story of Volume 1, Issue 1. And the other page one stories about insuring nonprofit boards and the use of affinity cards would not be the only ones of their kind either.

Still, over the past 15 years, some stories and trends have emerged that stood out above the rest. Recently, founder John McIlquham and Editor-in-Chief Paul Clolery along with the editorial staff writers (only one of whom had even started college when the first issue hit the presses) culled the myriad of newsworthy items and ideas to winnow them to 10 in particular that convey the most impactful events on the sector in the past 15 years. While there are likely to be some readers who think others could be included, these 10, in no particular order, helped shape the sector.

The Aramony scandal

There are some names within areas of American culture that conjure up conflicting emotions. In politics, there’s Richard Nixon. In baseball, it’s Pete Rose. For the nonprofit sector, it’s William Aramony.

All three had successful, mercurial careers that should have placed them in the pantheons of their chosen professions. Instead, all three saw their names and reputations sullied through their own unethical or criminal behaviors.

While Aramony’s frauds were criminal, the lack of appropriate board oversight created an environment that enabled the crimes. Lack of faith in that board and United Way of America (UWA) fostered a mistrust that exists in its system today, and caused self-evaluations among boards throughout the sector.

“This did serve as a wakeup call,” said Lisa LaMontagne, communications manager of Washington, D.C.-based BoardSource, formerly the National Center for Nonprofit Boards. “It really drew much more attention to accountability. It elevated accountability to a critical issue for boards. … It increased the visibility of board governance and the fiduciary responsibility of board members.” Aramony’s 22 years as president and chief executive officer of the UWA saw the development of that organization and its members into one of the nation’s largest community funders. Under his watch, the system extended its impact domestically and internationally — most visibly through its partnership with the National Football League.

But Aramony will forever be remembered most for a string of crimes causing a scandal that saw him and two other officials convicted, and which still rankles much of the American public. Aramony was convicted on 25 counts, including conspiracy to defraud, mail fraud, wire fraud, transportation of fraudulently acquired property, engaging in monetary transactions in unlawful activity, filing false tax returns, and aiding in the filing of false tax returns.

Several United Ways disaffiliated themselves with the national office and filed name changes. And, local UWs still respond to questions about the scandal at the Alexandria, Va., office. The immediate decline of donations to United Ways in 1992 and 1993 followed two years of slowing campaigns amid the economic doldrums of the early 1990s. UW agencies saw smaller allocations. As the decade wore on, the combination of the Aramony scandal fallout and the growing sophistication of American donors led to wholesale changes in how people scrutinized and contributed to charities. Though some argue that organizations and boards are stronger as a result of the painful experience, new scandals do little to support that argument.

Accouting standards

Before the issue of nonprofit accountability could be further addressed, the sector had a preliminary issue to address. The problem was that donors — and many accountants — could make neither heads nor tails of the financial statements of charities. The Financial Accounting Standards Board (FASB) decided it was going to do something.

In an attempt to level the playing field for all nonprofits, FASB in 1993 unveiled statements 116 and 117, which were intended to establish standards related to contributions made and received, as well as to provide a blueprint for general-purpose financial statements. The changes resulted in the adding of categories and reallocating and reassessing how an organization reported its numbers. FASB 116 required all nonprofits to delineate the difference between contributions that increase permanently restricted net assets, temporarily restricted net assets and unrestricted net assets. It also requested “disclosure for items not capitalized and for receipts of contributed services and promises to give.”

FASB 117 established a requirement for a statement of financial position, activities and cash flows. It included noting amounts for total assets, liabilities and net assets and necessitated the reporting of three classes of net assets: permanently restricted, temporarily restricted and unrestricted.

But wait, there was more. Two years later FASB 124 addressed certain investments held by nonprofits. With its institution, organizations began to focus on the actual financial statements, requiring those investments in equity and debt securities to be reported at fair value with gains and losses included. Standards were developed for reporting losses on investments held due to a donor’s request to “invest the gift in perpetuity or for a specified term.”

“Generally, the implementation of the FASB standards 116, 117, 124 was a tremendous step forward and have been mostly well received by the nonprofit sector and had a positive impact,” said Gregg Capin, partner at Capin Crouse, LLP in Indianapolis.

That doesn’t mean nonprofits liked reporting income that had not yet been received. Capin explained that FASB created a consistent financial reporting model, but he believes that some tweaking needs to be done.

For the most part, the planning opportunity in “promises to give” is to structure the type of solicitation that an organization wants, Capin said. Shortcomings also exist in an inability to record contributed services that FASB believes are important, while others must record contributed skilled services that it may not consider meaningful, Capin acknowledged.

Honing skills, effectiveness

North Carolina State University in Raleigh expects this fall to offer a graduate certificate in nonprofit management. The school joins a growing group of programs and services that have sprouted during the past 15 years to help nonprofits better run their operations.

“We see a need in the nonprofit sector for professionals skilled in modern management techniques and fiscal and program accountability,” said Liz O’Sullivan, director of the public administration program at N.C. State.

Triggered in part by cuts in federal funding for social services, nonprofits during the 1980s looked for ways to strengthen operations, said Naomi Wish, director of the Center for Public Service at Seton Hall University in South Orange, N.J. That demand, plus a desire by foundations and donors to improve technical support for nonprofits, fueled an explosion in nonprofit-management courses, said Wish.

More than 240 schools now offer nonprofit studies, including nearly 100 offering three or more graduate courses — up from just 17 in 1990, according to a Seton Hall study. The increase in nonprofit studies also has generated new research on topics ranging from volunteer behavior to nonprofits’ economic impact.

Growing demand also led to an increased supply of services, ranging from professional certification and technical support to consulting and tools to address needs such as strategic planning, budget and program development, fundraising, evaluation, benchmarking and technology.

Being more professional has helped nonprofits take on “more complex challenges in a more complex landscape,” said Jan Masaoka, executive director of CompassPoint, a nonprofit consulting organization based in San Francisco and San Jose.

But nonprofits have embraced good management “out of context,” she said, cutting themselves off from their volunteer roots and social mission, and producing “blander and blander” leaders.

“We don’t want to be only a better managed sector,” she said. “We want to be a sector that has a bigger impact on democracy and economic and social justice. One way to get there is good management.”

POTUS

Though not involved in nonprofit management, U.S. presidents have taken a much more visible role in the sector, as government seeks to cut funding while getting private citizens to pick up the slack. During the past 15 years, the face of the volunteer has also morphed, with the traditional stay-at-home mom/volunteer entering the workforce and government-funded service groups like AmeriCorp paying participants for a two-year obligation.

No matter the political agenda of the sitting president, government has played a major role in the sector.

Corporations have also increased philanthropic efforts, and workplace-volunteering programs have evolved.

The two most visible signs of Washington’s intervention were the creation of the Points of Light Foundation and the Presidents’ Summit.

President George H.W. Bush started the Points of Light Foundation in May, 1990 to advocate volunteerism and work in communities across the country. The foundation works through a network of hundreds of volunteer centers nationwide.

Robert Goodwin, president and CEO at the Washington, D.C.-based Points of Light Foundation, said the presidential focus on charity has been positive.

“There has been a continually important conversation between and about the three sector coordination to improve the quality of life in our communities. And, it is significant that this president, joining those who have preceded him in recent years, understands and is using his bully pulpit and his influence to create a proper balance between the role of government, business, and the nonprofit sectors,” said Goodwin.

In 1997, all of the living presidents except Ronald Reagan, who was represented by his wife Nancy, convened the Presidents’ Summit in Philadelphia. From that was spun America’s Promise — The Alliance for Youth. Recently, President George W. Bush created the USA Freedom Corp to mobilize volunteers around responding in case of crisis at home, rebuilding communities and extending American compassion throughout the world.

According to Harris Wofford, the newly appointed chairman of America’s Promise, the first significant step toward large-scale national service came with the National Service Act in 1990. He added that current President Bush is expanding on the AmeriCorp program by asking for an additional 25,000 members to assist nonprofits nationwide.

With regard to corporate philanthropy as it’s tied into volunteer programs, Wofford said more corporations are giving a certain number of hours or number of days each year as paid support for their service in the community. He added that he foresees substantial growth in the next 10 years of corporations encouraging, matching, and supporting employees’ volunteer service as part of their working day.

Gavel to gavel

Court battles of all kinds have shaped the futures of nonprofits. Win or lose, organizations often found themselves, and the environment in which they operate, changed by the results. The United Cancer Council’s (UCC) battle with the Internal Revenue Service (IRS) was specifically referenced in the recently issued intermediate sanctions guidelines. The cash-strapped organization employed a fundraiser that raised $29 million, but charged $27 million in fees. Though the initial Tax Court decision called the fundraisers “insiders,” the 7th Circuit Court of Appeals reversed the decision, leaving the IRS spinning.

Ozee and Richie v. American Council on Gift Annuities, et al. threatened to limit tax-deductible annuities and change planned giving. After numerous court battles, Charitable Accord, the nonprofit coalition led by Terry Simmons that lobbied Congress on this issue, was able to win Supreme Court approval of the Charitable Donations Antitrust Immunity Act of 1997.

In 1988, Riley v. National Federation of the Blind of North Carolina enhanced what was allowable in fundraising in terms of free speech, moving beyond two previous, notable cases. In Riley, the Supreme Court stopped states from requiring pre-solicitation disclosures about percentage of gifts going to professional solicitors and called charitable solicitations protected speech.

In its battles with Pinellas County, Fla., American Charities for Reasonable Fund Raising Regulation stopped the county from enforcing registration requirements on fundraising counsel and copywriters. In Boy Scouts of America v. James Dale the U.S. Supreme Court affirmed the association’s right to define requirements for members and leaders. BSA’s discrimination of Dale, who is homosexual, led to funding challenges, particularly from church groups, United Ways, and government.

The Redlands Surgical Services case featured a nonprofit hospital in a joint venture with a for-profit agency, and the IRS lopped off its exempt status, which the courts affirmed. To attorney and author Bruce Hopkins, Redlands is one of the most important recent decisions.

While private benefit doctrine has long existed, the case law was often considered incorrect, he said. “One of the things that Redlands did was to take those old cases and breathe new life into them because of the way they were relied on so heavily.”

It’s likely all these cases will be revisited in future battles.

An intermediate step

The sector will face a new type of legal matter now with the creation of intermediate sanctions legislation. Intermediate sanctions fundamentally changed how the IRS punishes nonprofit insiders who receive excess benefits.

But their iceberg-like scope has yet to impact nonprofits’ Titanics.

“It has the potential,” said Marcus Owens, former director of the IRS Exempt Organizations Division. “I don’t think you can say that it has done it yet. Certainly, the seeds are there, and in some sectors there are definite signs that it’s changing the way institutions go about doing their business.” Those buds are sprouting where the IRS has been busy auditing — healthcare organizations and universities, for example. The sanctions are moving state attorneys general and the IRS closer because of reinforced common concerns, said Owens, now a member of the law firm Caplin and Drysdale in Washington, D.C.

“It has drawn more attention to the business practices of the charitable sector and caused organizations to begin to look inward at themselves, and how they go about doing their business,” said Owens.

Before the IRS had two choices when dealing with influential nonprofit directors who received excessive compensation: revoke the organization’s tax-exempt status, or go after the insider with criminal charges.

Both were hard to accomplish.

But intermediate sanctions regulations, enacted in 1996 and finalized January 2002, have given the IRS the authority to sink nonprofit insiders’ wallets.

Penalties for accepting an excess benefit are steep.

The IRS can impose excise taxes on an insider for 200 percent of the excess benefit if that person doesn’t fix the excess benefit within a specific time. That is added to an original 25 percent tax. Organization managers, who knowingly approve the excess transaction, face a 10 percent tax of the excess benefit limited to $10,000 per violation.

“In the past, you had sort of a capital punishment system of sanctions,” said Gail Harmon, a partner with Harmon, Curran, Spielberg and Eisenberg, LLP in Washington, D.C., and editor of Nonprofit Navigator, an e-newsletter that covers tax-exempt issues. “Now with intermediate or graduated sanctions, the IRS has another arrow in its quiver to do something with, and I think they will.”

Put my donation there, please.

A different type of intermediary arose out of obscurity roughly a decade ago. The popularity of donor-advised funds sparked a bonfire that burns bright in the nonprofit sector.

Fidelity Investments Charitable Gift Fund, established during the early 1990s, helped ignite the smoldering flames. The Fidelity fund’s searing success — it now holds more than $2.6 billion in total assets — influenced other financial service institutions to create similar funds. The Vanguard Charitable Endowment Program, for example, holds more than $171 million in total assets in less than five years.

The inferno of financial services’ donor-advised funds sent smoke signals warning community foundations that the profitable firewood pile wasn’t solely theirs. Community foundations stoked their embers and sparked significant growth, due in part to donor-advised funds.

About 650 community foundations in the United States held more than $30 billion in assets during 2000, the latest statistics available. That figure is startling when compared with past gains. It took 60 years after the first community foundation opened for assets to reach $1 billion, and another 20 years for assets to hit $10 billion in 1994, according to The Columbus Foundation.

“Donor-advised funds have represented the real drive behind the incredible growth community foundations have noticed over the past 15 years,” said Carla Dearing, president of Community Foundations of America in Louisville, Ky. “The product itself has grown philanthropy so far, as it’s something that really appeals to donors.”

Competition keeps community foundation officials’ feet on red coals.

“For us, donor-advised funds have always been an effective way to work with and support local donors,” said Mariam Noland, president of the Community Foundation for Southeastern Michigan in Detroit. “The commercial competition has probably strengthened us serving donors.”

A downside is they can reduce charities’ flexibility to disburse funds, said Dennis Young, professor of nonprofit management and economics at Case Western Reserve University in Cleveland. Overall they make giving more attractive to donors and will continue to illuminate the focused eyes of directors.

“I would say that the trend in the last 15 years is to pay more attention to donor-advised funds and more attention to living donors, whatever their interests might be,” said Jim Luck, president emeritus of the Columbus Foundation in Columbus, Ohio. “This is something we’ve been doing for quite some time.”

Engaging younger donors

A new twist on funding emerged with “venture philanthropists.” They contribute more than money by putting their entrepreneurial expertise and connections to work for groups they support.

“There’s been a sea change in the field over the last decade,” said Mario Morino, chairman of Venture Philanthropy Partners, a $35 million-asset venture-philanthropy group in Reston, Va. As the delivery of social services has shifted to nonprofits from government, the aim of younger people who have accumulated wealth is to help nonprofits be more effective, he said.

And while money is important, he said, venture philanthropy’s critical contribution is providing hands-on, long-term assistance to nonprofits to build their internal operations, and connecting them to other donors and entrepreneurs.

The goal is to equip nonprofits with the strategic and management tools they need to be more accountable to supporters and constituents, and to become entrepreneurial “social enterprises” that can sustain themselves financially over the long-term.

Of 42 venture philanthropies with more than $400 million in capitalization, only four began their grantmaking before 1998, and two-thirds have been formed since Jan. 1, 1999, according to a new report by Venture Philanthropy Partners.

The biggest network of venture philanthropy groups is modeled on Social Venture Partners, a group formed in Seattle that has raised $5 million over four years from 290 investors, and invested in about 25 nonprofits.

That model, adopted by a federation of groups in about 20 cities, aims to apply business skills and thinking to philanthropy — and to stimulate and inspire individual philanthropy, said Paul Shoemaker, the Seattle group’s executive director.

“There was this kind of hole in the market and we are hopefully, little by little, starting to fill it in on the funding side,” he said. “And we see more nonprofits being entrepreneurial, either literally getting into social-enterprise, revenue-generating opportunities to create new revenue streams, or simply being more creative in how they use resources.”

Private matters

Not all funders want notoriety, however. Donor privacy continues to be a major issue. Buzz phrases like opt-in/opt-out, pushback, and do not call have entered the nonprofit lexicon. Donor privacy is as much, if not more, of a discussion in the sector now than it was a decade and a half ago. How much information does a nonprofit need? Name, address, and telephone number will not suffice. Marketers and nonprofits want everything, down to boxers or briefs.

Numerous events during the past 15 years have helped carve out how privacy is managed today. One such incident occurred in Boston where a public radio station shared its list of names with one political party and not the other, which spawned more self-imposed restrictions on sharing lists with third-party marketers.

The Health Insurance Portability and Accountability Act (HIPAA) issued regulations in December, 2000 that won’t go into effect until next April. For the first time in 35 years HIPPA will deny hospitals and other healthcare related fundraisers access to medical record information without first having prior written authorization. Healthcare groups will continue to have access to some demographic information.

The Direct Marketing Association (DMA) in New York City has been leading the way in setting privacy guidelines for its members, adopting a four-part Privacy Promise in July, 1999.

According to Patricia Faley, vice president, ethics and consumer affairs at The DMA, the Privacy Promise deals with sharing donor information with third parties. “The organization must, at least annually, notify the donor that they plan to share their information with a third party, and give them the opportunity to opt-out of the process,” she said.

The other three Privacy Promise directives include:

• Promptly honoring donors’ requests to opt-out of third-party sharing;
• Keeping a list of consumers who don’t want to be contacted;
• Using The DMA’s preference services for mail, phone, and email in matching prospecting lists up against The DMA’s service and eliminate the names of consumers who have registered with those services.

Lindy Litrides, an Atlanta-based direct response consultant and privacy authority said this doesn’t have to be a big deal. “Privacy is a non-issue if you practice good customer service both in acquiring new donors and cultivating the ones you do have,” she said.

September 11, 2001

Probably no other event in the past 15 years encapsulated the problems and the successes of the nonprofit sector. With the World Trade Center towers reduced to rubble and the Pentagon still smoldering, nonprofits led the fundraising charge to aid the victims of the terrorist attacks. It was uncharted territory, a time of unprecedented giving by Americans, with most of the dollars flowing into three organizations.

The attacks heralded a new era of fundraising — flash philanthropy — and an more wary eye from the public.

In the months following the attacks, the American Red Cross (ARC) would receive more than $850 million in donations to its Liberty Disaster Fund. The United Way of New York City’s September 11th Fund raised in excess of $400 million and the Salvation Army collected more than $60 million. The numbers were staggering and the organizations proved ill- equipped to handle the crush.

The ARC and United Way were both stung by public outcries for initially failing to allocate all of the funds directly to the victims. For the ARC, its problems resulted in the departure of its president, Dr. Bernadine Healy. The Salvation Army saw its payment system lag due to the influx of requests and an inadequate payment system.

The challenges are threefold, according to Michael Farley, vice president of development at the ARC headquarters in Washington, D.C. The ARC saw close to 1 million new donors after the attack, and the task is for organizations to build relationships with these new donors and sustain them over the years, he said.

The second major impact will be on fast fundraising and action, or flash philanthropy. More than 700,000 gifts went to ARC through online giving – an unprecedented number for the organization. Farley explained that organizations must look to technology as a new and evolving expectation, part of increased fundraising complexity.

Accountability has also become a hot-button issue as nonprofits are now held liable on multiple levels. “There has to be sensitivity to donor intent,” Farley said. “Are the dollars being spent in a way for which they were given? The pace of converting that caring into victim benefit must be appropriate. Is it quick enough? Is it focused enough? Are there enough safeguards in place?”