Congressional Testimony on the Charities’ Response to the September 11 Terrorist Attack For Subcommittee on Oversight of the Committee on Ways and Means
November 8, 2001

By Daniel Borochoff, President
CharityWatch

The American Institute of Philanthropy and Charitywatch.org is a nonprofit charity watchdog and information resource dedicated to helping its members and the general public make wise giving decisions. Since 1993 we have been America’s most outspoken watchdog of the accountability, financial, governance and promotional practices of charities. We are most famous for our letter grade (A+ to F) ratings of the financial performance of charities as published in the Charity Rating Guide & Watchdog Report. During this recent crisis nearly every major US media outlet has covered AIP’s advice, analyses and concerns. Some of the problems brought to light in the aftermath of the recent crisis are unfortunately all too common in the nonprofit sector and were of serious concern before September 11.

Americans have been far too hazy when it comes to making charitable giving decisions and following-up on how charities are using their contributions. Charities are making it difficult for donors in their fundraising appeals when they are not specific about their intended use of contributions. What often happens is that the charity heavily raises money for the one or two aspects of its work that people are most inclined to support and neglects to fully inform donors about the other planned uses of funds. This happened in this disaster but it also regularly happens with other groups. For example, a disease group may primarily ask for money to find a cure and to help your poor neighbor with its medical bills yet the most advertised need may only represent 20% or less of the charities total spending.

Ordinarily nonprofit organizations find a need, develop a plan or budget and then raise funds for it. In this crisis everything happened in reverse. The money poured in so quickly the charities are scrambling to figure out what to do with it. Shortly after the attack it is understandable that the charities must rapidly help take care of suffering people and seek emergency funding before knowing how much money is required for immediate or short-term needs. When judging the charity’s response to this crisis, we should separate out its performance meeting short-term, intermediate-term and long-term needs. For longer-term needs it is better to be patient with the charities and give them time to assess unmet needs and allow them to prudently distribute the funds.

This disaster recovery effort is more complicated than others in recent history because it involved so many players including layers of federal, state and municipal government, insurance companies and about 200 charities. Not only was this a horrible disaster it was also an act of crime and therefore victims have access to federal and state crime victim compensation funds. It is important to be aware that though the $1 billion plus raised by the charities seems like a lot it is small compared to the $100 billion that the government and insurance companies may be putting into this crisis. The role of the charities is to fill in the cracks and meet those needs that are not being met by the government and insurance coverage. The federal victims’ compensation fund that is still being designed may lead to victim’s families receiving anywhere from $600,000 to $25 million (the specific amount depends upon the income of the victim, the size of the overall fund and other factors, many not yet determined) by this spring. The rules have not yet been written for this fund but there is a risk that charitable money given to victims will be subtracted from their federal pay out. The charities’ role is to help victims’ families until this big federal pay out becomes available. I am concerned that the public is not aware of this fund and is thinking that the charities are supposed to use their money for the same purpose.

In this crisis many people wanted to give money to the families of the 400 brave firefighters and police who were struck down in the line of duty. Many charity fundraisers were conducted across the country for these victims. Yet these victims already receive substantial benefits because of their job. They receive a tax-free pension of the officer’s full salary for the life of the widow, $151,000 from the Department of Justice, $25,000 from the New York City Mayor’s Office and money from their union. Any charity raising money for these uniformed people have an obligation to inform donors of what they are receiving from other sources so donors can decide if they want to provide additional support. The Twin Towers Fund, which has raised over $85 million and distributed nothing yet for the families of uniformed city personnel, should tell the public how much it wishes to distribute to each family and when it plans to do so. (This fund announced shortly after this testimony was written that it planned to distribute $40 million to victims’ families before Thanksgiving.)

If the donors and charities have been confused by this crisis, you can imagine the difficulty of the victims. Unless the charities and governmental agencies can set-up a one-stop shop for victim aid, I would suggest that a counselor or social worker be assigned to each direct victim’s family to help them navigate the maze. I’m concerned that bolder people that know how to work the system will receive a lot more than timid less bureaucratically experienced types. Also, I am concerned about individual victims that show up on multiple television programs and are included in news articles receiving baskets of money from the public while less publicized victims are neglected. This is also something that happened after the Oklahoma City bombing.

I want to clear up some confusion about the American Red Cross. It is a financially efficient organization and receives an “A” grade from AIP for spending 90 percent of its total expenses on program services and having a cost of only $15 to raise $100. The concern in this disaster is that it is spending money on areas other than what was most heavily advertised and perceived to be the need by the public that being the direct victims, their family and the relief workers. Even if the Red Cross keeps to it $320 million budget, it is likely that less than half of the $550 million raised will be used for this purpose.

I believe that the Red Cross in its zeal to fundraise while the iron was hot raised more money than it needed for what it would ordinarily do in a disaster and behaved opportunistically by using this crisis to raise money for programs that were not a major part of its advertising such as upgrading its phones and computers, promoting humanitarian principles and encouraging tolerance. Many of these programs such as building a strategic blood reserve are useful and important but the Red Cross needed to be more specific about raising money for them. I’m concerned about the Red Cross raising money for programs that might be better run by other nonprofits. For example, why is the Red Cross raising money in its Liberty Fund for physiological trauma counseling nationwide when we already have local mental health associations across the country that can offer this service? A great strength of the nonprofit sector is its diversity of organizations that allows for many creative solutions to complex problems.

On October 26, Dr. Bernadine Healy was forced to resign by year-end as president of the American Red Cross. Up to this point, which is 45 days after September 11th, the Red Cross had spent $140 million of the $500 million it had raised. The $140 million that was spent by October 26 is still $100 million less than the $240 million it had raised by October 2nd. On this date, three weeks after the terrorist strike, Dr. Healy said on National Public Radio that the $240 million dollars that the Red Cross had raised at that time was not enough to cover “our needs in the short-term.” As a guest on the same program, I twice pressed Dr. Healy to tell the public specifically how much the Red Cross needed for the short-term and both times she did not answer my question. After the show I said to her: "Is it the case you do not know how much the Red Cross needs in the short-term" and she said emphatically “No.” As a watchdog that does not give up easily I asked her in the elevator, “if we had Bill Gates right here and he was willing to write a check to cover the Red Cross’ short-term needs, what would you ask him to give?” Her answer was, “I’d ask him what he wants to fund.”

The Red Cross could have avoided a lot of donor confusion had it used the Liberty Fund exclusively to raise money for immediate disaster relief and direct victim aid and then cut off fundraising after this need had been met at about $250 million. I believe that it would be dishonoring the intentions of donors for the Red Cross to continue with its plan to keep $200 million or more in a reserve fund for a large-scale terrorist strike that may never occur. I would encourage the Red Cross to keep a more reasonable terrorist disaster reserve of about $50 million, which is what it seeks to maintain in its general disaster fund. The Red Cross should not keep such a large amount of disaster contributions in limbo during a time of great need.

AIP is concerned that the Red Cross’ is giving out cash gifts to victims who could be in line for multi-million dollar insurance policies. The purpose of the Red Cross’ Family Gift Program is to meet the cash flow needs, i.e. pay the bills for a victim’s family. More could be accomplish with our limited charitable dollars if they were given out as loans that would later be repaid upon receipt of large personal or company insurance payments. The money could then be given as a gift to someone who really needed a cash gift. I brought this to Dr. Healy’s attention in early October and she said that it is the Red Cross’ policy to do it this way and she was not interested in changing. $100 million dollars has been earmarked for this fund and only about half of it has been distributed, which may explain why the Red Cross is giving gifts to people who only need loans.

Had the American Red Cross behaved more appropriately in this crisis it could have looked forward to receiving the Nobel Peace Prize. Instead its actions have tarnished its high public standing and brought distrust and skepticism to the entire nonprofit field. Though, some healthy skepticism is needed and long overdue in the nonprofit sector, where people’s good intentions are too often taken advantage of.

The September 11th Fund, which is being administered by the United Way and the New York Community Trust, has been slow to respond and has not been as accountable as it should be. It took over a month after the terrorist strike to put together a board even though most of the board members wound up being from the United Way and the New York Community Trust boards. The Fund has only distributed one-tenth of the $340 million that it has raised. The United Way and NY Community Trust is to be commended for paying for the Funds administrative overhead. Though the Fund’s earlier claim that “100% of all contributions to the September 11th Fund are being used to help the victims, families and communities affected by the terrorist strike” is not totally correct since the Fund gives grants to other nonprofits who may spend some of this money on overhead costs. The Fund has been slow to make and report its grants. Up until October 15, it had only identified three organizations on its web site that it made grants to of $4.5 million and another $1.3 million of unidentified grants.

The Red Cross and September 11th Fund, which both account for 75% of the funds raised, and other charities that are directly involved in this crisis need to be more cognizant of how their aggressive fundraising efforts impact non-disaster charities. Money directed for this crisis will not be available for other important programs at a time of great need. Americans on average have been stuck at giving about 2% of their income over the past three decades. Income is in decline due to the faltering economy. Therefore, many social and human service charities are receiving less donations while being asked to provide more services to people that have lost their jobs or are abusing drugs or alcohol as a way to cope with the fear of terrorist threats.

It is unfortunate that the charities did not do a better job of coordinating their relief efforts. Early on the charities should have divided up the names of the individual victims from the WTC employer lists and reached out to the victims that had been assigned to them. Charities not knowing which victims had already been contacted had to duplicate the efforts of others. AIP has frequently spoken out in support of the New York State Attorney General’s efforts to create an informational database to help charities coordinate their relief efforts. AIP was disappointed by the Red Cross’ refusal up until late October to share its information on pay out amounts to specific individuals with other charities. This made it very difficult for other charities to know what to give to a victim’s family if it did not know what the biggest charity player had already done. Red Cross cited privacy concerns and expressed a concern to me that the other charities may let information out on victims that could subject them to being harassed by marketers with knowledge of the money that they had received. The Red Cross also said that there were other charities that shared their position but would not publicly admit it. I believe that the charities can introduce controls in the database to protect privacy and allow for an equitable distribution of funds that will keep dishonest people from double or even triple dipping.

On November 2nd, the New York Attorney General gave over control of the informational database to the charities. I believe that we need a governmental regulator or independent organization or individual to closely monitor this database. Otherwise, we may not know whether the charities are fully cooperating and equitably helping all of the victims. By taking this database out of the control of the NY A.G., I am seriously concerned that the charities may be trying to skirt some needed accountability. (The NY A.G. continues to closely monitor and have an important influence over the database and strongly encourages charities to participate in it.)

Donors and the media need to be able to receive reports from this database, not on what is being done for a specific named individual, but on what type and amount of aid is being provided by all the charities to classes of individuals. This cross-charity accountability will help donors to determine if they should target additional contributions and encourage charities to spend existing reserves on needs that are not being met.

In the event that charitable contributions are still unspent after all of the short- and intermediate-term needs of the direct victims of the disaster are met, AIP would consider it reasonable to use the remaining funds to provide aid to the indirect victims who have lost their jobs in devastated sectors of our economy.

The important lesson for donors in this crisis is that they must target their contributions to meet specific needs that are clearly articulated by the charities. Giving as a way of grieving, honoring brave firefighters or as a way “to do something” may make one feel good but it does not help us to accomplish the highest and best use of America’s precious charitable dollars.