Special Report: The Year In Review

December 1, 2004       Jeff Jones      

“Have you heard of the terrible family They And the dreadful venomous things They say? Why, half the gossip under the sun, If you trace it back, you will find begun In that wretched House of They” Ella Wheeler Wilcox, “They Say” as quoted in The Pocket Book of Quotations.

What the “House of They” said about the nonprofit sector this year wasn’t pretty. Nonprofits experienced public scrutiny on several fronts and from multiple sources, even as the sector struggled to meet increased service demands amid a weak economy that held giving essentially flat. State and federal government deficits also spelled funding trouble.

Financially this year, some nonprofits turned to greater collaboration or mergers for fortification. Others reviewed their situation and folded.

Legislatively, Sen. Charles Grassley, chairman of the U.S. Senate Finance Committee, was a recurring figure to nonprofit leaders. The Iowa senator wasn’t afraid to throw a few pitches high and tight. The Grassley Watch began in February when the NPT reported on a Government Accountability Office study showing that some charities with vehicle donation programs lose out on significant amounts of money. Further, the report estimated that vehicle donations reduced people’s tax liability by some $654 million.

Finance Committee staff seized on the idea that some charities and donors were abusing the system. The appearance was that donors received a tax write off worth significantly more than a car’s fair market value while charities received pennies from the actual sale of the car.

President George W. Bush signed into law provisions to overhaul car and intellectual property donations weeks before the election. The charitable reforms were revenue raisers in a bill that included several corporate tax breaks.

The Senate Finance Committee staff spent a lot of time investigating charities and publicly pummeling groups allegedly involved in misconduct. The committee’s activities culminated in a well-attended Senate hearing that put the sector and its public image under bright lights and probing questioning of several senators in late June.

Grassley has promised to push for more reform during 2005, and a committee discussion paper laid out potential changes.

Grassley appeared to offer an olive branch, of sorts, to nonprofit leaders when he asked Washington, D.C.-based Independent Sector (IS) to form a panel and give recommendations by early next year.

“It’s my understanding at this time that Senator Grassley intends to hear those recommendations,” as part of a decision-making process regarding legislation, said Diana Aviv, president and CEO of IS.

Looking back, Aviv listed numerous challenges faced this past year. They included federal and state budget deficits, a failure to pass the charitable tax incentives in the CARE Act, extensive media coverage of ethical misconduct and other alleged abuses, and of course, the Senate Finance Committee moves.

“All in all it was a very grim year,” Aviv said.

Aviv took a proactive stance earlier in the year when she announced the release of IS’s code of ethics and called on sector leaders to step up and police their own. “We should not underestimate the power of the bully pulpit and our responsibility to become our brother’s keeper,” she wrote.

The question remains whether nonprofit trustees and executives get it.

“Despite extensive coverage in philanthropy media and the volumes written about governance, financial management, transparency and accountability, many nonprofit leaders aren’t getting the message,” Eugene R. Tempel, executive director of the Center on Philanthropy at Indiana University in Indianapolis, Ind., wrote in April. “A good rule of thumb is to ask ‘what would my donors think about this practice, policy or transaction?”

Nonprofit leaders would do well to ask that question if the Internal Revenue Service’s (IRS) latest enforcement moves in the exempt arena prove to be more than just posturing.

IRS officials launched a probe of nonprofit executive compensation with plans to contact some 2,000 charities and foundations. The federal tax agency is also focusing on private foundations and improper charitable contribution deductions of conservation easements, officials said.

With more people paying attention and more ears willing to listen, some courageous nonprofit workers have spoken out after witnessing wrongdoing. It underscores the importance of creating whistleblower protections. Yet, a Grant Thornton survey suggested nonprofits have been slow to act. The survey of 300 nonprofit CEOs found only 16 percent of nonprofits have whistleblower policies in place.

On another regulation front, the American Civil Liberties Union protested a requirement put forth by the Combined Federal Campaign. The CFC, which oversees charitable contributions from federal workers nationwide, now requires nonprofits accepting its funds to check employee names against three watch lists of suspected terrorists. The ACLU announced it would no longer accept donations from the CFC, amounting to roughly $500,000 last year.

Nonprofit leaders also continued informal talks with the U.S. Treasury Department regarding terrorism issues. The Treasury Department issued voluntary guidelines in fall 2002 to provide a self-help tool for charities. Sector officials have expressed concerns with the voluntary guidelines.

One concern was maintaining independence from the federal government while ensuring charitable funds weren’t unknowingly funneled for violent means.

In response, a group of sector leaders have formulated a draft of recommendations that is being circulated among the sector, according to Aviv.

At a state level, California Gov. Arnold Schwarzenegger signed the Nonprofit Integrity Act into law effective the first of the new year. It will force nonprofits with revenue of more than $2 million to conduct independent audits and appoint an audit committee.

California Association of Nonprofits (CAN) officials said that they were disappointed but slightly heartened that the governor urged the state legislature to make sure the law is not financially burdensome to nonprofits.

Also in the transparency arena, sector leaders pushed for e-filing Form 990s this year and the IRS offered nonprofits electronic filing capabilities in time for this past spring filing season.

Responding to scandal;


At least one charity moved one step closer to putting a well-documented scandal behind it.

The United Way of the National Capital Area in Washington, D.C., brought to a close the criminal part of former top executive Oral Suer’s scandal. Suer pleaded guilty to criminal charges in an U.S. District Court in Alexandria, Va. Suer was charged with transporting stolen money across state lines, making false statements, and concealing facts in relation to an employee retirement plan.

Suer was ordered to pay the organization $497,000, roughly a third of the $1.6 million the organization believes he owed. Suer was sentenced for up to 27 months in prison.

The fury of the “House of They” knew no favorites. At one point, the well-respected Brian O’Connell (co-founder of IS), faced conflict of interest allegations. Missouri Attorney General Jay Nixon cleared O’Connell and the Ewing Marion Kauffman Foundation, where O’Connell was a trustee. Nixon did make suggestions for improved governance at the foundation.

The Nature Conservancy (TNC) announced new governance and accountability reforms after media scrutiny and a U.S. Senate investigation headed by Grassley. The senator said he would study TNC’s reforms for applicability to all nonprofits.

A Governance Advisory Panel, chartered by TNC, highlighted several of TNC’s governance improvements and made additional suggestions.

The report laid out comprehensive oversight duties for board members, including guidelines for an executive committee, and suggested TNC use its Form 990 to disclose information similar to that required of public companies under the Sarbanes-Oxley regulations.

The new reality: Consolidating, collaborating or closing

Several nonprofits entered into collaboration agreements, merged, or at least talked about it.

The American Society of Association Executives and Greater Washington Society of Association Executives announced plans to consolidate under a preliminary agreement reached earlier this year. The consolidation went through July 1.

Elsewhere, two children’s wish giving nonprofits merged and snagged a competitor’s top executive. Paula Van Ness, most recently head of Make-A-Wish Foundation of America, was picked to lead the newly-formed Starlight Starbright Children’s Foundation.

Representatives from the Alliance for Nonprofit Management and the National Council of Nonprofit Associations explored a closer relationship this September and left open the possibility of a merger. While no decisions have been made, a facilitated discussion in September went well and a partnership committee comprised of representatives from both organizations planned to meet again this month (December). “We had a great conversation,” said Audrey Alvarado, executive director of the NCNA. “I’m still committed to being at the table.” The groups will also hold a joint conference next year.

The American Cancer Society, American Heart Association, and American Diabetes Association, joined forces to spread the message to eat healthy, exercise, not to smoke, and to visit your doctor.

The groups launched a three-year education campaign, Everyday Choices for a Healthier Life to deliver the four-point message. Perhaps just as importantly, these usually competitive organizations chose collaboration to achieve their goals. Each organization pitched in a third of the $3 million total cost over three years.

In Pittsburgh, three small nonprofits joined forces and shared a human resources employee.

The year was also one of transition. Independent Sector overhauled its research department in what officials called a streamlining of functions and redirection of staff. The umbrella organization revamped its approach to focus on opinion research, membership surveys, and interpreting existing sector research. It was unclear what would happen to the well-known and respected, “Giving and Volunteering,” and “Nonprofit Almanac” reports IS had published in years past.

Several organizations created in the immediate aftermath of the September 11th terrorist attacks, were in the midst of winding down operations. Some were already closed. The September 11 Fund, created by United Way of New York and the New York Community Trust, planned to conclude most operations by the end of 2004. The 9-11 United Services Group, which coordinated the efforts of 39 relief groups after September 11, was aiming to close by Dec. 31.

“We were set up to be a temporary organization,” said Stephen Solender, president and CEO. “As far as we’re concerned, that’s the right way for us to proceed.”

The Management Center faced a similar fate under different circumstances. Reportedly mired in debt, TMC officials decided to essentially sell its main assets to other nonprofit organizations and close its doors.

St. Louis-based National Benevolent Association (NBA) filed for bankruptcy Feb. 16 and was scheduled to auction off 11 senior living facilities in November, said spokesman Bob McCarty in October.

“There’s still other issues to be determined after (the auction),” McCarty said. “There’s a lot of variables. We’re hopeful to come out on the other side. We know we’ll look different.”

NBA still manages some 75 properties for the U.S. Department of Housing and Urban Development and a handful of programs serving children, McCarty said.

Mother Nature’s wrath and limited resources also created financial problems.

The destructive spate of hurricanes this fall impacted Florida residents and strapped organizations such as the American Red Cross attempting to respond. The hurricanes also affected non-relief fundraising and national groups mailing appeals in Florida. Those appeals were experiencing depressed results and outright cancellations as a result of the devastation.

“Campaigns that are not related to relief, they’re not happening. People are not going to give to school campaigns when the Red Cross, Salvation Army, and Catholic Charities are soliciting for relief money,” said Peggy Calhoun, ACFRE, senior principal at Miller Calhoun & Company in Ft. Lauderdale, Fla.

High crude oil costs also pinched the budgets of charities. “When prices began to go up after Memorial Day weekend, our affiliates across the county began to see problems,” said Peggy Ingraham, director for policy and legislation for Alexandria, Va.-based Meals on Wheels Association of America.

Giving Stable,

Fundraisers Express Optimism

Americans gave some $241 billion in 2003, an increase of 2.8 percent compared with the previous year or 0.5 percent after adjusting for inflation, according to the “Giving USA” report, conducted by the Center on Philanthropy (COP) at Indiana University for the AAFRC Trust for Philanthropy.

It was the second consecutive year of less than 1 percent growth.

Money in circulation and ready for use, or M1, tracked by the Federal Reserve appeared to stabilize. A tracking of the nation’s money supply against direct mail performances of The Cystic Fibrosis Foundation and The Arthritis Foundation showed yet again that giving is connected to the amount of cash in donors’ checking accounts.

An improving economy boosted fundraisers’ positive attitudes about the present charitable giving climate this past summer, according to COP’s Philanthropic Giving Index. The survey’s Present Situation Index showed a 38.7 percent bump from the same time a year ago, and approached pre-September 11, 2001 levels.

“This is great news for nonprofit organizations and their fundraisers who have endured challenging times over the last couple of years,” Tempel said. “Overall, we are seeing a return to fundraising normalcy, which seems to be enhanced by a good economy.”

An Association of Fundraising Professionals survey of 3,000 charitable fundraisers, showed nearly three-quarters (73 percent) of polled charities raised the same or more money in 2003 than the previous year.

One of the largest gifts of the year, Joan Kroc’s $1.5 billion bequest to the Salvation Army (SA), created several new challenges for the organization. Half of the money was restricted to building 25 to 30 community centers around the country with the other half going to an endowment restricted to support the centers.

Bill Hurula, national financial secretary of the Alexandria, Va.-based SA, said in October that the organization anticipated the first distribution of roughly $1 billion would arrive before year’s end.

Indeed, planned giving is an area of potential fundraising growth. Researchers at Boston College’s re-named Center on Wealth and Philanthropy predicted $444 billion of the nearly $43.5 trillion of the expected wealth transfer will go to charitable trusts, including may forms of non-cash gifts.

Online giving is also a place of potential growth. Online fundraising reached nearly $2 billion in 2003, according to a joint Kintera-NonProfit Times survey. That’s roughly 60 percent more than the amount raised online in 2002.

Publicly traded companies showed increase interest in the sector as a potential revenue source.

Omnicom, a marketing and communication services conglomerate, has bolstered its nonprofit marketplace presence since 1998. It has acquired Russ Reid Company, Grizzard Communications, and Changing Our World.

A little more than three years after being acquired by Relizon Company, Epsilon Data Management has been sold to publicly-traded Alliance Data Systems, of Dallas, for $300 million this past fall.

“Companies like Omnicom go where they think the money is,” said Richard D. Friedman, vice dean of management at New York University’s Leonard Stern School of Business. “All I can say is that it’s a statement that there’s money to be made.”

Blackbaud, the Charleston, S.C.-based software company, went public with an initial public stock offering earlier this year. This followed on the heels of Kintera’s public offering in late 2003.

An election year

Tax-exempt organizations played a heightened role in the past election cycle due to election campaign reform.

Aviv, of IS, pointed out that the proper role of 501(c)3s, (c)4s and 527s in the public policy debate is one issue that will resurface next year. This year the Federal Elections Commission (FEC) decided to put off any action until after the election.

After a year of numerous challenges, Aviv finished with a positive: “We should never forget that this is a vibrant sector. Against the backdrop of all these challenges, the work that we do is essential.”