The year in review: more shiners than shining moments during 2002. (Special Report).

Following the tumult of 2001, the country and the nonprofits within it got acclimated to life in time of war and weak economy. In some ways 2002 felt like an extension of 2001 - indeed September 11 became a point of demarcation unlike any in a generation.

Still, in looking back at 2002, trends emerged that help to distinguish it in the sector's history. The evolution of the sector's relationship with government, the public and to the foibles of the market economy emerged for all to see. Looking ahead to 2003, nonprofits will continue to navigate around the quicksand surrounding those relationships.

The sector used the time to retrench itself and evaluate where it was going in the new economic environment. Chalk 2002 up to a rebuilding year.

One of the developments of the past 12 months with long-lasting significance came early. The Internal Revenue Service (IRS) issued its finalized regulations on Intermediate Sanctions. While there were only minor tweaks from the temporary rules announced a year earlier, the message was clear to nonprofits: excess benefits to officials and influential leaders could lead to stiff penalties. "Organizations that have CEOs or CFOs ... making a significant amount of compensation need to be aware that these provisions are out there and that (the organization) isn't subjecting the directors or key employees to potential penalties," said Harvey Berger, a partner and national director of not-for-profit tax services for Grant Thornton, in Alexandria, Va.

One notable non-change, however, was the IRS's view of when an insider profits from so-called "no-risk contracts," as well as from control of the decision making process. The regulations cited the opinion of the 7th Circuit Court of Appeals in a case where a fundraiser entered into an agreement with a nonprofit. The court concluded that prohibited inurement cannot result from a contractual relationship negotiated at arm's length with a party having no prior relationship with the organization, regardless of the relative bargaining strength of the parties or the resultant control over the organization created by the contract's terms. It's known as the initial contract exception, or "first bite rule."

Steven Miller, who heads the exempt organizations office of the IRS, said he didn't think the intermediate sanctions bill has yet changed the nature of the IRS's investigations. "Next year (2003), we'll do some checks on whether those are having .an impact on how people are setting compensation," he said. "The first step is to see if it's had an impact at all."

The Form 990 faces changes ahead. With encouragement from the IRS, nonprofit leaders put together a coalition to gauge the sector's readiness for electronic filing of Form 990s. The group was researching where the sector stood, though the IRS is not yet able to accept 990s electronically. Miller noted that the Form 990 has not been revised in a long time, and it may need changes to better inform the public about the revenues and expenses of the burgeoning tax-exempt sector.

The IRS has other concerns, too. Miller said his exempt organizations office has had a 5 percent annual increase in workload without a comparable boost in staff. During the early 1990s, the IRS audited 2 percent of nonprofit filings. Now, it only audits 1.3 percent.

President Bush's Office of Faith-Based Initiatives and Community Initiatives continued to exist in some ethereal haze during 2002, as legislative roadblocks brought about some reexamination of the office. Short of the authorizing legislation, the White House directed funds through five cabinet-level departments. Nearly $50 million was awarded through the U.S. Department of Labor and the U.S. Department of Health and Human Services. Other initiatives through the housing and urban development, education, and justice departments awaited final award announcements.

State governments wallowed in deficit budgets. In Minnesota, state budget cuts caused the dissolution of the Office of Citizenship and Volunteer Services. John Woodele, spokesperson for Gov. Jesse Ventura, predicted community organizations would pick up the recruiting aspect the office had supported, and umbrella organizations and statewide associations would assist in managing and training volunteers. "This is not a matter of the administration supporting or not supporting volunteerism," Woodele said. "This is a fiscal, budgetary decision separating what is necessary from what is nice."

On American shores

The war on terror landed on U.S.-based nonprofits early in the year, with allegations and actions surrounding officials of certain Islamic charities. Accused of having connections and dealings with terrorists, the Holy Land Foundation for Relief and Development, in Richardson, Texas, The Benevolence International Foundation in Worth, Ill., and Paterson, N.J., and the Global Relief Foundation in Bridgeview, Ill., had their assets frozen by the federal government. Those actions accompanied scathing accusations from the highest offices of political power in the country.

Last year's terrorist events also made life difficult for immigrants, who've inundated such groups as the Legal Aid Society with requests for assistance. "There's a vastly greater demand for services than nonprofits could possibly pick up," said Janet Sabel at the Legal Aid Society's immigration department in New York City.

Also taking hits were universities' international student programs, which had to scramble to establish electronic tracking systems for their programs before next month's deadline. Some 70,000 schools certified to accept foreign students must re-certify and switch to the electronic system by January 30, 2003. Some 545,000 foreign students attended U.S. colleges and universities during the 2000-2001 school year, according to the New York City-based Institute of International Education.

The war on terrorism - and the potential for new combat in Iraq - revitalized such groups as the United Service Organizations (USO), known for years for Bob Hope's involvement in entertaining the troops overseas. The year also saw a tactical change in how military academies sought private donations from alumni. With Uncle Sam's dollar not stretching quite as far as it used to, service academies have erected structures to keep the institutions ready for full-scale fundraising. The approach has been likened to state higher educational institutions, only on a national scale.

In an effort to assist the national healing after last year's attacks, The Points of Light Foundation launched the Unity in the Spirit of America Initiative to memorialize the lives of those lost in the attacks through community service projects.

The attacks on the nation also spawned the creation of hundreds of new nonprofits. Despite two separate mailings during the spring and several hundred telephone calls during late July, a team of NPT reporters was able to get information from only 77 of the 293 charities - just more than one-fourth - that had received preliminary tax-exempt status under the fast track process through April.

The good news, however, was that a national telephone survey conducted for THE NONPROFIT TIMES and Ruotolo Associates during late June showed that more than 68 percent of those who donated as a result of September 11 believed the gifts were used properly. The survey also showed that the response attracted younger donors and reached demographic segments in equal ways.

Reports on giving throughout the year included caveats about pre- and post-September 11. The report of Independent Sector's (IS) Giving and Volunteering survey showed mixed results, but had been conducted in the spring and early summer of 2001.

The Council on Aid to Education's annual Voluntary Support of Education (VSE) survey showed surprising growth of $1 billion during fiscal 2001. Though the growth rate fell below 10 percent for the first time in six years, the 4.3 percent growth was better than expected.

Foundation grants fueled the $24.2 billion in giving to higher education, showing 18.1 percent growth. "Without the foundation piece in there, giving would have been flat or negative," said Ann Kaplan director of the VSE survey.

Giving USA reported that giving grew to $212 billion for 2001, a 0.5 percent increase before inflation. The 2.3 percent decline after inflation represented the first such decline since 1994, when giving fell 0.3 percent. Leo Arnoult, chair of the AAFRC Trust for Philanthropy, which publishes Giving USA, said organizations entered 2001 cautious about the economy. Looking at giving in a time of terrorist attacks caused organizations to try not to appear in competition for donations, Arnoult said, "It's really good news that we've maintained giving levels."

Corporate giving was at its worst since 1998, when it was $8.46 billion in current dollars. Pre-tax profits plummeted nearly 20 percent after adjusting for inflation. Eugene Tempel, executive director of the Indiana University Center on Philanthropy, said corporate philanthropy might have been worse had the terrorist attacks not occurred. Corporate profits had slowed considerably during 2001, he said. "In fact, that's the major cause of tax coffers and estates being down."

Hospital and health care foundations fought to change the outcome of the administration's medical privacy decision, which affected fundraising rules. The U.S. Department of Health and Human Services (HHS) released its final regulations, which didn't meet the hopes of some health care-related groups regarding fundraising.

Hospital foundation groups, for example, cannot use point of service information, which would pinpoint what department treated a patient. Previously, hospital fundraisers had access to patient service department information and other demographic details with little or no authorization needed to target grateful patients .The Association for Healthcare Professionals pulled out all the stops - even running an ad in the daily paper covering Crawford, Texas, while President Bush was vacationing there on his ranch.

The NPTs study of the nation's money supply showed that the rising tide of money after the Federal Reserve flooded the market with cash and credit last year helped buoy some organizations. But the most commonly used financial measure of liquidity, M2, showed a record decline. The. Ml (the supply of readily available forms of money, basically checking accounts and currency) grew 8.3 percent in 2001, though it fell sharply after September 11.

A month after the attacks, 44 percent of fundraisers saw a decrease in donations, with more than 20 percent reporting drops of 20 percent or more, according to a survey by the Association of Fundraising Professionals. AFP also showed that despite the challenges of September 11 and the slowed economy, more than half of the charities it surveyed raised more money in 2001 than the previous year.

One of those organizations, the American Red Cross (ARC), found it self still answering questions about its fundraising and disaster relief services. It emerged battle scarred after the public relations hits it took following its fundraising and distribution of money after the September 11 attacks. Early in the spring it announced about 100 job cuts at its Washington, D.C., headquarters. One new face there, however, was Marsha Evans, who left the Girl Scouts of the U.S.A. to become president and CEO of the Red Cross.

The organization announced it would use more generic headlines in its advertising and fundraising pleas. The ARC's response to public confusion regarding what donors were funding with their gifts would include declarations when funding needs for specific disasters had been met. Wildfires during the summer' brought about the first tests of the new protocol, including the declaration that some efforts were fully funded.

The changes at ARC also followed a decision by the Better Business Bureau's Wise Giving Alliance to re-evaluate the ARC in the wake of public outcry against its practices. It found ARC did not meet two of its standards, which had been recently revised, giving the national watchdog's teeth a good cleaning and sharpening.

Sector infrastructure organizations supported by Atlantic Philanthropies learned they had new challenges beyond 2002. Atlantic Philanthropies, once the shadowy, anonymous philanthropic arm of Charles Feeney until its presence became public knowledge five years ago, announced it was changing its funding of nonprofit infrastructure groups.

The Bermuda-based group granted out close to $400 million in 2001 globally and intends to continue granting out more than the 5 percent common among U.S. foundations. But organizations have expressed concerns with the group's exit strategy for the charities it will no longer support.

"I think one of the challenges for the sector as a whole is to engage additional foundations in support of the field of philanthropy and the nonprofit sector," said Peter Shiras, vice president of program for IS. "There are some real challenges and opportunities for the nonprofit sector."

There are some real changes going on at IS, as well. In a year that saw the passing of its beloved founding chairman, John Gardner, IS also bid farewell to Sara Melendez, who's led the coalition for the past eight years. After the holidays, Melendez will return to the education field, where she will teach about nonprofit management and conduct research on Latino nonprofits at George Washington University in Washington, D.C.A new president and CEO had not been selected at press time.

The War on Terrorism took a back seat to the accounting and management scandals that erupted throughout the nation and spewed magma into the vulnerable sector. Nonprofits in the Houston area that counted on Enron, for example, had to scramble when the energy giant short-circuited.

But there was fallout from the fallout, too. Organizations all around the country; including several large NPT 100 groups, had hired Arthur Andersen LLP to handle accounting needs. Many organizations chose to evaluate who would conduct their accounting and auditing in the wake of Andersen's fall from grace.

Nonprofits that didn't hire Andersen weren't immune to accounting and management scandals. When its financial records were finally put under serious scrutiny after officials attempted to stunt the efforts, the United Way of the National Capital Area (UWNCA) saw nearly its entire management team, both volunteer and professional, tossed out. After months of press coverage and ongoing federal investigations, a task force headed by former U.S. Transportation Secretary Rodney Slater presented recommendations for change. Norman Taylor, who'd appointed the task force, stepped down following a tumultuous tenure. The entire board, including newly elected members, was being reassembled and new bylaws were approved. In addition to interim executive vice president Robert Egger, who went to UWNCA from D.C. Central Kitchen, a new management team from United Way of America went in to help with UWNCA's stalled fall fundraising campaign.

The United Way system was going through its own transition. As Brian Gallagher began his first year as president and CEO of UWA, he articulated the group's plan to emphasize community impact and de-emphasize its role as a fundraising pass-through organization. Though the UW system has taken strides toward rebuilding the trust within its ranks, it will take time.

"Change is tough, especially when we're not all at the same place," said Christine James-Brown, president and CEO of the United Way of Southeastern Pennsylvania, in Philadelphia, who supported Gallagher's position. "People are starting to get it," she added, "that we need to change. And it's not just a cosmetic change."

The transition could also create job insecurity within the UW system, as many people who work in it consider themselves fundraisers whose talents might not fit snugly anymore. "There should be tension," Gallagher said at the UWA conference in April. "(Transformation) is not a comfortable thing. If there's that kind of tension about how do I make this change and how do I fit in, that's healthy."

One of the quieter outcomes of the year caught nonprofits unexpectedly. The hard insurance market struck nonprofits of all stripes, with some organizations having to accept premiums 100 percent more than the previous year.

What was different about this hard market was it immediately followed a soft market -- the longest soft market in recent history, in fact. The duration of the soft market could have been a contributing factor to the hard market, though the attacks and the accounting scandals in corporate America also played a role.

The Catholic church found itself facing mistrust among its members, as revelations of cover-ups of sexual misconduct shook it to its foundations. Many supporters halted their giving to Catholic groups, particularly in Boston, and organizations lost grants and cancelled fundraising events. The church also fought against efforts from outside nonprofits responding to the scandal and the needs of the victims of past molestation.

Despite the Catholic church's problems and the rough economy, the year saw new cathedrals rise to the heavens around the country. Construction of new cathedrals hit a 40-year high in terms of square footage.

Such building and growth during a difficult era served as a fitting symbol of the place of nonprofits in the American culture. As the nation prepared to enter 2003 with much still unresolved, nonprofits at least have learned they can weather the difficult storms the 21st century has tossed its way so far.

RELATED ARTICLE: Perry Mason Would Have Been Proud Of Nonprofits

Matthew Sinclair

The nation's nonprofits found some solace in the courtroom during 2002. From the protection of fundraising abilities and the freedom of speech to brand protection, nonprofits enjoyed some significant victories this year, though some organizations took it on the chin.

The Jehovah's Witnesses won a case against the village of Stratton, Ohio, in the U.S. Supreme Court, allowing the Wellsville, Ohio, congregation to spread its message. The High Court agreed that the reasons behind the village's ordinance--protecting against fraud and undue public annoyance--were valid municipal concerns, but they needed to be balanced against the amount of speech being restricted. "Had this provision been construed to apply only to commercial activities and the solicitation of funds, arguably the ordinance would have been tailored to the village's interest in protecting the privacy of its residents and preventing fraud," wrote Justice John Paul Stevens for the majority.

Feed the Children won a federal court injunction blocking Nashville and Davidson County in Tennessee from enforcing a charitable solicitations ordinance against the organization, which could have hurt charities throughout the country. The judge in U.S. District Court for the Middle District of Tennessee ruled that the ordinance "affects substantially more speech than is necessary to achieve its interest in preventing fraud." He left open, however, arguments regarding content-neutral and content-based distinctions on enforcement, which could be an area of future First Amendment challenges on fundraising solicitations.

In a barristers' battle royale, the World Wildlife Fund International won the rights to its abbreviated name (WWF), pinning the group now known as World Wrestling Entertainment. While it appealed a London Court of Appeal ruling that it breached its 1994 contract with the World Wildlife Fund International, the for-profit company launched a typically brash effort to establish its new brand identity.

In Pinellas County, Fla., which has been a hotbed of nonprofit fundraising registration cases since the late 1990s, the county government's Internet fundraising provision of its charitable solicitation ordinance was removed. The government's decision was somewhat surprising, given it remained in a second lawsuit brought by Public Citizen, Green peace, the DMA's Nonprofit Federation and American Charities for Reasonable Fundraising Regulations.

The county had lost an earlier case when the 11th Circuit Court of Appeals directed the U.S. District Court in Tampa, Fla., to determine the extent of contacts made by fundraising consultants and whether they were enough to enforce the county ordinance.

The city of Bridgeport, Conn., moved to enforce state laws enabling it to tax nonprofits. The state law does not include housing subsidized by federal, state, or local government to be included among exempt charitable purposes. The issue was tabled, and has not been brought up in council meetings according to the council's minutes.

Of course, not everything had happy endings. The King Foundation in Dallas helped to launch Sesame Street, but it found itself battling the letters "A" and "G," as in the attorney general of Texas. Top officials, including the organization's founder's grandson Carl Yeckel, 65, have been accused of unlawful private benefit and breach of trust. One of the twists is that the accusations came initially from Yeckel's 62-year old sister, Dorothy.

She denied the dispute is a family squabble concerning the settlement of their mother's estate. "This has nothing to do with a family feud. It's all in black and white," she told the Dallas Morning News.

The Chicago Community Trust found itself battling the family of one of its biggest past donors, John Searle, who had set up a fund that generates roughly $20 million annually for CCT. But family members have threatened to pull the fund from CCT because they allege the organization isn't acknowledging its funding requests. The family views the vehicle as a donor-advised fund. According to CCT, however, the fund is a charitable lead trust, and it has continued to fulfill its responsibilities to the donor's family. Late in 2002, there still had not been resolution on the issue.

Another family squabble involved the family of a former president. The Richard Nixon Library and Birthplace Foundation filed suits to settle disputes that could double its $13 million endowment. The issue centered on a gift from the late Nixon friend Charles "Bebe" Rebozo, $780,000 of which was given to the foundation in 1999. But the remainder awaits a signed legal agreement. Various proposals have been drafted, but the parties have not yet come to an agreement.

When the Milton Hershey School Trust attempted to sell its controlling interest in the Hershey Foods Corp., the town that bears the late chocolate magnate's name decried the move. The state's attorney general Mike Fisher proposed changes to state charitable trust laws that could affect how trustees make investment decisions. The organization, before it voted to stop the sale process, argued that the AG had no right to prevent the sale, which the board viewed as an investment strategy for the organization's long-term welfare.

The leaders of the Baptist Foundation of Arizona were still awaiting a judge's decision on their fates, three years after the organization was closed amid allegations the officials were running it as a Ponzi scheme. BFA's collapse cost 11,000 investors more than $550 million.

The state alleged the organization placed nonperforming assets and bad investments into "bad banks." The organization and its subsidiaries marketed securities throughout the country as retirement vehicles and served as a custodian for tax-deferred individual retirement accounts.

And what should be the final chapter on the sordid tale of Lorraine Hale and her husband Jesse DeVore came to a close. They pleaded guilty to felonies committed while heading Hale House, the organization she founded with her mother in 1969.

Lorraine Hale and DeVore were originally charged with 72 counts of fraud and theft, alleged to have siphoned off more than $1 million to pay for their affluent lifestyle. Sentenced in October to five years probation, the couple may never be able to repay the $769,687, although the court ordered them to do so. Both in their 70s, their sentence also banned them from working for charities in New York.