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America Needs More Truth in Fundraising

   Aug 01, 2008

The doubling of oil and food costs, higher unemployment rate, housing and mortgage market collapse, and government cutbacks have caused millions of Americans to struggle to stay financially afloat. Charities that provide assistance to the economically suffering are being asked to do a lot more with, in many cases, less resources. Yet well-intentioned but confused Americans continue to squander billions of dollars of charitable resources by giving to inefficient or even fraudulent groups that are doing very little to help.

The solution is to provide better information to the donating public to help them make smarter giving decisions. The simplest solution would be for the government to require that charities spend a reasonable portion of their budgets on program services and state in all solicitations what percentage of a donor’s gift will be eaten up in fundraising costs. The only problem with this solution is that the courts have ruled on a number of occasions that fundraising solicitations are protected speech under the First Amendment and cannot be restrained by these requirements.

As a result of the outrage over poorly-performing veterans charities, some members of Congress are considering legislation that would require charities soliciting through the mail with reduced nonprofit postage rates to post specific organizational information for donors on the U.S. Postal Service’s internet site. A Congressional staffer from the U.S. House Committee on Oversight and Government Reform involved in crafting the proposed legislation said she remembered me saying how difficult it can be to obtain a charity’s audited financial statements when the charity does not want to provide them. She and AIP would like to see new requirements that would include disclosure of both the audits and tax forms of charities on the postal service’s web site.

I also communicated to the House Committee that charities should be required to disclose on the post office’s web site their contracts with professional fundraisers which spell out what portion of contributions will go to the charity or what fixed amount will be paid to the fundraiser. If a charity has multiple contracts with the same fundraiser, it is very difficult for a donor to know under what contract they are being solicited, even if they are able to obtain copies of contracts that are filed with a state. Ideally, there should be a number on every charity mailing that a donor can punch into the post office’s web site database to find the underlying fundraising contract.

Just as the Sarbanes-Oxley Act requires the CEO of a business to approve of and take responsibility for a business’s financial statements, the chief staff officer of a charity should approve of and take responsibility for the content of all mass direct mail solicitations. I told the House Committee that it is important that the proposed post office database include a record of the top charity official agreeing to the content of each mailing. Too often when AIP has complained to charity officials about a misleading or questionable solicitation the charity responds that the marketing or fundraising staff or consultants mailed it without the top executive officers having seen it.

It is also wrong that for-profit fundraising companies can receive huge, 40% postage discounts off of the standard mail rates, when such companies receive, by far, the largest share of contributions from charity solicitation mailings. This unwarranted subsidy causes everyone else to pay more for postage. It also causes there to be more aggressive and untruthful solicitations from companies driven more by profit motives than charitable ones. The Postal Service is considering eliminating an exception made in 2003 to the cooperative mail rule that allowed commercial fundraising companies to send fundraising mailings at reduced, nonprofit rates if they partnered with a charity and met some meager requirements. Hopefully, the post office will make stronger rules that will sharply limit the number of undeserving fundraising companies that receive reduced rate nonprofit mailing privileges.

In another promising development, Congress is considering expanding the authority of the Federal Trade Commission (FTC) over charities in an effort to deter charity wrongdoers and protect donors. A release from the U.S. Senate Committee on Commerce, Science and Transportation says that “Currently, some non-profits have used their tax-exempt status as a shield to block FTC enforcement action.” A bill introduced last April by the Senate Committee calls for strengthening the FTC and expanding its “authority to regulate non-profits for unfair or deceptive acts or practices.” The FTC, which is well-known for protecting consumers, may be granted the power to penalize charities that, for example, make a habit of asking for donations for one purpose, but then use them for another, such as enriching a fundraising company.