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Faith, hope, and chicanery; want to do some good? Ask your favorite charity where it spends its money.


The souvenir program for the BahiaShrine Temple circus held in Orlando, Florida, in 1983 tugged forcefully at local heartstrings. It was packed with testimonials and photographs of patients treated in the Shrine's 19 orthopedic and three burn centers for children. There was a photo of a bandaged, smiling two-year-old recovering from severe burns and another showing a clown cheering up a wheelchair-bound child. Local businessmen who were told the circus would benefit such children filled the program's pages with paid ads and purchased blocks of tickets.

The circus was a tremendous success. It madean $81,000 profit, more than any circus in the Orlando chapter's 22-year history. Unfortunately, not a penny went to provide medical care to disabled and burned children. Instead, the Orlando Shriners placed the money in the bank and drew on it for temple-related travel and entertainment, the upkeep of the fraternity's private bar and restaurant, and the payment of utilities and other expenses.

The Shrine fraternity, which operates the nation'slargest charity, had been misleading the public for years. And not just in Orlando. Fewer than ten of the 175 Shrine circuses held each year donate any money to the hospitals. In 1984, the circuses reaped an estimated profit of $17.5 million. The charity's own records show the hospitals received only 1 percent of that, a total of $182,000. When you add the revenue from the fraternity's other fund-raising activities--football games and the sale of Shrine newspapers, for example--less than one-third of all receipts actually went to pay for the treatment of Shrine hospital patients.

The Shriners are not unique. Behind many aworthy cause--whether furthering cancer research or locating missing children--may be a charity scam. "Whenever the current news is focusing the public's attention on a crisis or a need it becomes a focus of fund-raising, both by existing charities and newly created opportunists,' says Larry Campbell, California's registrar of charitable trusts. "For us it's hard to remember there are legitimate charities out there operating.' It is also difficult to determine which are legitimate. Though the nation's 483,000 charities and public service organizations reported income of $225 billion in 1984, accurate financial information on individual organizations is hard to come by. As a result of the regulatory freedom charities enjoy you can learn more about the Shrine by visiting one of their three-ring circuses than you can from their glossy annual report or IRS file. Because charities have successfully fought disclosure initiatives, what can be learned about their finances boils down to what they decide to tell you.

Super Bowl shuffle

In September, about 30 state regulators andassistant attorneys general met in San Antonio to review the year's crop of dishonest charities and professional fund raisers.

John Vasquez, an assistant attorney generalfrom Texas, briefed his colleagues on the Rainbow Foundation, an organization that had been raising funds in Texas and California to buy dying children their last wish. The state forced the organization into receivership last year following complaints that contributions were not being spent as advertised.

When Vasquez obtained a warrant and visitedthe foundation's offices, he found records so incomplete "we'll never know how much money they had.' The records, however, did show that money was spent to rent a home in Houston for Rainbow's administrator, Jamie Norris. They also indicated that Norris used donations to pay for personal trips to Switzerland and the Cayman Islands where investigators suspect he squirreled away a significant portion of the charity's funds.

Vasquez also told of a charity dedicated tomultiple sclerosis research that was supported through rock concerts organized by friends of Ronnie Lane, a former bass player for the rock group Small Faces. Called Action for Research for Multiple Sclerosis (ARMS), the organization was shut down in March when investigators found $1 million had been spent on administration and only $67,000 on medical research. A state-appointed receiver has filed a lawsuit charging that most of the money spent on ARMS went to exorbitant salaries and administrative expenses paid to the charity's administrator, her lover, and friends. Some $4,000 alone was spent on eating and drinking at a posh Houston dining club.

Terry Knowles, New Hampshire's registrar ofcharitable trusts, then told of an organization that sold commemorative coins nationwide for the Christa McAuliffe scholarship set up at the New Hampshire high school where the space shuttle crew member had taught. The company's salesmen told people buying the coins for $19.95 each that all proceeds went to provide college scholarships. But the legitimate fund never received any of the money.

Illinois Assistant Attorney General Tina Rossosaid her office is still trying to untangle a mess caused by last year's sale of the Chicago Bears's "Super Bowl Shuffle' record and video. The producers of the shuffle told the Bears that "a substantial portion of the proceeds . . . will be donated to help feed Chicago's neediest families.' That message also appeared prominently on the record cover. But so far none of the reported $365,000 in profits has gone to help needy families in Chicago or anywhere else. The producers have admitted to investigators they had no specific charity in mind when they started.

Waverly Crenshaw, Rosso's counterpart in Tennessee,offered details about a bogus charity called Missing Children USA, Inc. Investigators forced it to close this year after they discovered it misled contributors into believing it was a non-profit organization that published a monthly magazine with pictures of missing children. The company turned out to be a for-profit business that had published only one issue.

Of course there are scores of other charityfrauds that the regulators didn't discuss at their San Antonio meeting. The Rev. Guido John Carich, fund-raising director of the Pallotine Fathers in Baltimore, was charged by the state of Maryland in 1978 with soliciting money in the name of the Fathers but spending it on food, travel, and real estate. Carich, who allegedly concealed $2.2 million in secret bank accounts, pleaded guilty and was given a one-year probation.

The American Cancer Society's chief NewYork fund raiser, Miriam Grubard, was convicted in 1985 of conspiracy to defraud the IRS because she helped contributors file fraudulent tax returns.

Raiders of the lost tax forms

Historically, mismanaged charities have beenas much of a problem as the scam charities. There may not be outright fraud, but the effect is the same: a small portion of contributions go to the cause. In 1938, Basil O'Conner, a friend of Franklin Roosevelt, was appointed to head the National Foundation, a charity Roosevelt established to raise money for polio research. Over the next 20 years the foundation raised nearly $550 million to "fight polio.' Yet only 6 percent was spent on research, according to Harvey Katz, a charity expert.

Father Flanagan's Boys Town, subject of thepopular 1938 motion picture, was found in 1972 to be furiously soliciting public donations but spending less than a fourth of the $25 million it raised each year on its boys.

In both cases the problem was grossmismanagement rather than fraud, although the line between the two is often blurry.

In the case of the Shrine the jury is still outon whether they have committed fraud or just mismanaged funds. IRS records show they spent more money in 1984 and earlier years on conventions and parties than on the hospital charity. The records show the fraternity spent roughly $86.3 million in 1984. About $42 million went to the general operating expenses of the Shrine's members-only clubhouses, bars, restaurants, and golf courses. The Shriners spent another $21 million that year on travel to state, regional, and national conventions, hospitality suites, picnics, parties, dinners, dances, fraternal ceremonies, and the purchase of gem-studded jewelry for Shrine leaders.

The fraternity's board of directors--who canspend as much as $180,000 of their own money to get elected to the board--receive free trips to exotic places and an expense account that sometimes reaches near the six-figure range. The Shrine also spends more than $1 million on the travel expenses of Shriners who attend the organization's annual convention.

Even money the public contributed directly tothe hospital endowment was not used to treat disabled or burned children. For example, the Shriners raided the fund to provide almost $1 million in low-interest and no-interest loans to 13 top officials. The loans were used to build or buy new homes in Tampa, Florida.

Charity investigators in six states continue tolook into temple finances and fund-raising activities. They have reportedly found everything from the sale of unregistered annuities to evidence of fund-raising misrepresentations. The Shrine board of directors recently adopted a number of fund-raising reforms, including a requirement forcing temples to tell the public whether a fund-raising event benefits the hospitals or the fraternity. But the Shrine continues to refuse to open its books and disclose how it spends its money.

Excessive fund-raising expenses are still themost common problem in the industry. The National Charities Information Bureau, a charity watchdog group, recommends that charities spend at least 60 percent of their total income on program services. Prominent charities such as the Disabled American Veterans and the American Lung Association cannot even meet this modest goal, spending 57 percent and 59 percent, respectively. The Shrine, of course, is considerably worse, spending an estimated 30 percent on providing medical aid to burned and disabled children in their hospitals in 1985. By contrast, the National Easter Seals, the American Cancer Society, and the Muscular Dystrophy Association each spend about 70 percent of their total income on services, while the American Red Cross spends 84 percent, and Catholic Relief Services and CARE spend more than 90 percent.

Some of the differences arise from the methodsof fund raising. For example, Disabled American Veterans relies almost exclusively on direct mail solicitations, one of the most expensive techniques. Catholic Relief Services, on the other hand, raises much of its money through the network of Catholic churches already in place around the country. Others, like the American Red Cross, and the American Cancer Society, rely heavily on hundreds of thousands of volunteers, the most effective way of reducing fund-raising costs.

There is another way to "reduce' fund-raisingcosts: creative bookkeeping. Charities can greatly overestimate the actual amount spent on program services by including in that category various administrative costs. For example, a charity may send an administrator out to the field hospital or homeless shelter once every two months and include that person's entire salary in the program services budget. Or a charity can obscure its dismal record of giving with clever wording or key factual omissions. The Shrine, for instance, claims that 96 percent of each contribution to the charity is spent on "program services.' How can the Shrine make their claim? By talking in terms of contributions instead of total income. Contributions directly to the charity--and remember, most of the money raised indirectly for the charity through fraternity fund-raising activities never even makes it to the charity--amounted to $114 million in 1985. That year the charity spent about that much to operate its hospitals. So far so good. Sounds like the Shrine is a pretty selfless and effective charity. What the Shrine doesn't tell the public is that they have a $2 billion endowment, built over the years in large part from individual contributions, that generated $230 million in income in 1985. If the public hadn't contributed a dime to the Shrine in 1985, the income on the endowment alone would still have been enough to pay for the costs of all the hospitals two times over. In essence, then, direct contributions to the Shrine hospital charity simply allow the investment portfolio to grow bigger and bigger, with little benefit for the hospitals. How many contributors would have given if they knew their favorite charities were swimming in excess cash, while other needy organizations were counting nickels? In total, the Shrine charity spent only one-third of its income on providing medical care.

Americans gave $80 billion to charities in 1985.Yet most of us are naive about where the money goes. We tend to trust that a group soliciting for a good cause is itself good. After all, who can resist appeals that use emotionally charged images of starving children, or children on crutches, or dying children who as a last wish might want to meet Mickey Mouse?

In the face of such solicitations, who bothersto ask: how much of my donation will be spent on the charitable program? What percentage will be used to pay administrative salaries? What percentage will be spent to cover the cost of raising money? Current laws do not require charities to disclose this information. And judging from experience, it could be a tough battle to get the laws changed.

Jerry Lewis goes bananas

Charities and regulators have fought over theissue of accountability for decades. They have skirmished in Congress, butted heads in state legislatures, and debated the issue twice before the Supreme Court. Certified public accountants, direct mail firms, charity rating agencies, state attorneys general, religious groups, and the General Accounting Office (GAO) have all tried and failed to effect reform. "Charities are powerful because the people running them are the movers and shakers in their communities,' says Edward Van Ness, executive vice president of the National Health Council, which represents 62 of the nation's largest health organizations. "They make their views known to politicians when they feel strongly about something. That happens in every state.'

Charities blocked the adoption of a charitablesolicitation law for six years in New York because it required charities to provide detailed financial information at the time they request money. When this "point of solicitation disclosure' provision was removed this year, the bill sailed through. "The legislature was very tuned in to what the [charities] wanted,' recalls Valerie Voorhees, a New York assistant attorney general who helped draft the law. "We either had to listen to what they said or we wouldn't have gotten a bill passed.'

But consider what New York gave up.Disclosure at the point of solicitation would make charities more competitive and efficient. It would force them to strive to reduce their fund-raising and administrative costs in order to attract contributors. At the same time, contributors would get information essential to making an informed decision about which charities to support. Positive as these reforms seem, charities bitterly oppose them. "The major charities like the status quo,' says Larry Campbell. "They don't want the public to know what is going on. They want the laws to be the least restrictive and the least burdensome.'

And so they are. Congress has largely abdicatedany responsibility for the regulation of charities. In the 1960s, then-Senator Walter Mondale investigated charities and contemplated introducing laws that would force financial disclosure. But he never proposed any legislation because, "I didn't find much public interest in it. I think the public is not aware of this problem.'

George Gould, former aide to the late Rep.Charles Wilson of California, recalls helping Wilson draft legislation in the 1970s to force charities soliciting by mail to include with their appeals a pie-chart showing the percentage spent on fund-raising and charitable services. "We weren't telling anyone how to spend and where to spend,' says Gould. "All we were saying was, "Hey listen, you have to tell the public how you spend your money.' We had the Epilepsy Foundation, the American Heart Association, and the American Cancer Society behind us. But Jerry Lewis and the Catholic Church went bananas. They tried to kill the bill, and they succeeded.'

Congress has passed the problem over to theIRS. By law the IRS is responsible for processing annual financial reports filed by charities and providing copies--known as 990 forms--to the public upon request. Unfortunately, the IRS often comes up empty-handed or offers incomplete records when asked for the 990s of a specific charity. In 1983, the GAO studied 10,930 1981 returns of tax-exempt private foundations and found that 94 percent "did not completely respond to certain public information reporting requirements.' The organizations omitted information on their 990s about gifts, grants, donations, expenses, assets, liabilities, and net worth, as well as names of administrators. Johnny Finch, associate director of the GAO, told a House oversight committee that the IRS's failure to monitor the forms was "shocking.'

"Our [1983] hearing just confirmed that theyweren't looking at the 990s,' says Theodore Jacobs, chief counsel for the House subcommittee on commerce, consumer, and monetary affairs, which asked the GAO to investigate whether the IRS was ignoring incomplete returns.

Today, the same problems plague the agency.For instance, the IRS could provide only 343 of the 685 forms The Orlando Sentinel sought for a four-part series it did on the Shriners last summer. In addition to its failure to supply forms, two-thirds of the forms it did provide were missing important information.

Connecticut Assistant Attorney General DavidOrmstedt has also encountered problems with the way the IRS handles the 990s. "You can put whatever you want on the 990, and as long as you fill in the top part [where the organization enters its name] the odds of getting called to task are relatively slim,' he says.

One reason the IRS does not do an effectivejob with the 990s is that the division responsible for handling the forms--the Employee Plans and Exempt Organizations Division--has not been given adequate resources. The division's 1986 budget of $30 million is $4 million less than last year. The division's work force was reduced this year to its lowest level in seven years, dropping from a high of 925 in 1984 to 780 in 1986. At the same time their workload has increased; the division is expected to monitor and manage records of an incredible 887,000 tax-exempt groups. In 1983, those organizations reported income of $234 billion, an amount equal to about 7 percent of the nation's gross national product. One reason the IRS does not give sufficient resources to this division is that from their point of view it isn't "cost effective'; auditing complex tax exempt organizations is often more difficult--and brings in less revenue--than targeting the returns of individual taxpayers.

Agency officials chafe at the suggestion theIRS is ineffective. Still, administrators were at a loss to explain why many of the forms were incomplete or why the IRS could provide only half the forms the Sentinel requested. They said there could be a variety of reasons, mislocating the forms being one. "Did you ever see the movie "Raiders of the Lost Ark?'' asked Howard Schoenfeld, a top IRS administrator. "Remember the end of the movie? It reminded me of one of the federal records centers.' At the conclusion of the film, the deadly and supernatural ark is placed in an innocuous crate, then deposited amid acres of identical crates in a cavernous government warehouse. Said Schoenfeld: "Who knows where the 990s are stored?'

Shyster control

State efforts to regulate charities have beenequally ineffective. In the past, state authorities have had to rely almost exclusively on consumer fraud laws. These laws work well when prosecuting cases of blatant malfeasance, but because they require authorities to prove intentional wrongdoing, the laws have little effect in controlling charities that simply have exorbitant administrative or fund-raising costs.

Thirty-five states have adopted charitablesolicitation laws. But they generally lack strong enforcement provisions. Most require only that charities register and file annual financial reports. Only California requires charities to disclose fund-raising costs to contributors at the time they solicit money. At the same time oversight of these laws is woefully inadequate. For example, California has about 20 employees to monitor 45,000 registered charities and professional solicitors.

State regulators have long recognized the needto get charities to declare their finances to contributors up front, but only recently have they pulled together to do something about it. The result has been a "model law' drafted by the National Association of Attorneys General. The model law, which could be introduced into state legislatures as early as this month, was originally designed to require up front disclosure by charities. But that provision was opposed by an advisory group of charity representatives who made it clear they would lobby in every state house in the country to defeat any attempt to force such disclosure. As a result, the bill now would impose an up-front disclosure requirement only on professional fund raisers that charities sometimes hire. Charities themselves will be required to provide financial information only upon request.

Attorneys for charities and professionalsolicitors have successfully assaulted laws similar to the model law on First Amendment grounds. In 1980 and 1984 the Supreme Court struck down laws in effect in 19 states prohibiting charities from soliciting the public if the amount spent on fund raising exceeded certain limits. The court ruled that such limits restricted the free speech of charities by preventing them from soliciting.

Regulators then turned to simple disclosure ofpercentages, but this has also proven difficult to defend in court. Last year, a Maine Superior Court declared unconstitutional a law forcing fund raisers to tell prospective donors the projected percentage spent on charitable services, management, and fund raising. The disclosure requirement applied only to organizations spending less than 70 percent of their funds on charity. The court ruled the law violated free speech because it forced disclosure of so much information that it impeded a charity's ability to raise money. The court also ruled the law was not applied equally because it singled out charities that spent less than 70 percent of their income on their programs.

Attorneys general around the country seem certainthe model law won't suffer the same rebuff from the courts. The model law will be found constitutional, they say, because it requires disclosure of general financial information only if someone requests it. Although the legislation requires professional fund-raising firms to provide information when soliciting, they don't have to provide as much data as under the Maine law. Moreover, the model law disclosure provisions are applied equally to all charities.

Even as amended, however, attorneys representingcharities say the model law remains too broad. The law "has very dubious constitutional validity,' says Errol Copilevitz, a Kansas City attorney whose clients include charities and professional fund raisers. "It is, in my mind, simply an extension of the use of percentages which the Supreme Court has now said twice are improper barometers or not proper tools in this area.'

The charities' opposition is, of course, basedless on the Constitution than on their finances. Point-of-solicitation disclosure, they say, would chill contributions. They claim most people don't understand the cost of raising money. In a survey of 1,000 corporate and individual contributors, the Philanthropic Advisory Service of the Better Business Bureau found that more than 30 percent of the respondents expected 80 percent of their donation to go to the charity's service. Most charities donate roughly 60 percent. "To institute a point-of-solicitation disclosure law when the public thinks that 90 percent of their money goes to program services would be detrimental to charities,' says Elizabeth Doherty, the former director of the advisory service.

Charities argue that to summarize finances ina disclosure statement is misleading, that summary statements are inadequate gauges of a charity's effectiveness. They say the cost of raising money varies widely depending upon the type of organization; it costs an organization using paid workers more to riase funds than one using volunteers, and it costs a new organization more to raise funds than an older, established charity.

Charities also claim summarized financialdisclosure is misleading because there is no universally accepted method of accounting for expenses. The American Institute of Certified Public Accountants alone has put out five separate books of standards.

These arguments don't stand up. If currentsummary disclosure methods provide too little information to give an accurate picture, then charities can devise a formula that gives sufficient data. If accounting procedures vary too much, then they can devise one standard formula. At the same time the charities have complained the differences in accounting procedures make summary financial disclosure impossible, they have fought efforts by regulators who sought uniform accounting methods. In fact, charities and their accountants in 1978 helped rewrite the laws to allow more flexible bookkeeping. It's easy to see why. Accounting flexibility allows charities to understate their fund-raising and administrative costs while overstating their programs' charitable spending. Any real reform will have to include uniform accounting standards.

The charities' support for the model law putsthe lie to their contention that summaries don't work. The legislation requires summary disclosures, but for fund-raising firms rather than charities. If it's not overly burdensome on these firms, why would it be a death blow to the charities themselves? Upon-solicitation disclosure would not be an intolerable burden on the charities, and it obviously would make it easier for the potential contributor to make a wise choice.

Without regulation contributors have theburden of seeking information about the charity--a step that most donors simply do not take. Even the most conscientious givers have no guarantee they are getting the relevant information when they ask. Take the Shriners, again, as an illustration. In response to requests for financial information, they hand out glossy annual financial reports filled with data on their hospital charities. But the reports don't divulge anything about the finances of the 189 Shrine temples that act as the charity's fund-raising arm.

Finally, the charities' main argument--thatdisclosure laws would dampen giving--is contradicted by experience. Disclosure has worked in the few places it has been used. In Los Angeles, for example, charities are required to present potential contributors with an "information card' when they solicit. The card gives a charity's address, a description of its purpose, and a breakdown of revenues and expenses, including fund-raising costs. Solicitors are required to present this information before asking for donations, whether over the telephone, by mail, or in person.

The American Heart Association recentlyrated their local charities on fund-raising ability. They concluded that the Los Angeles affiliate performed better than 70 percent of its chapters, including those in Chicago and New York.

"The solicitation rule in Los Angeles does addsome red tape,' says Ron Kensey, director of development for the Los Angeles chapter of the Heart Association. "But it has not hurt our ability to raise funds and it does mean that a lot of shysters are put out of business.' Kensey says organizations in Los Angeles have tried to pass themselves off as the Heart Association "but people have called us because they didn't have the card.'

Suckers don't reach

Charity fraud and mismanagement have gonelargely unchecked, although there are a few early signs that needed reforms may be on the way. In Florida, for example, state legislators are drafting a bill to make point-of-solicitation disclosure mandatory for all fund-raising organizations. A U.S. House of Representatives oversight subcommittee may consider legislation forcing charities to give their IRS financial statements to the public upon demand. Another subcommittee will ask the GAO to study how the IRS handles those public documents. Momentum for change just might be as strong as the efforts by charities to remain free of regulation.

As it is, the current freedom from regulationallows charities to operate like someone on an open-ended expense account: they have little incentive to spend the money wisely. To the IRS and many state lawmakers it does not matter whether a charity spends 35 percent or 95 percent of the money it raises on its own administration.

The absence of strong disclosure laws can onlyhurt the charities themselves, and the unfortunate and disadvantaged they represent. The more people wonder if they are being taken for suckers each time they reach for their checkbooks, the less likely they are to reach at all.
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Author:Wark, John
Publication:Washington Monthly
Date:Jan 1, 1987
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