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Daniel Borochoff's Testimony before the Subcommittee on Oversight of the House Committee on Ways and Means Hearing on Response by Charitable Organizations to the Hurricanes Katrina and Rita

   Dec 13, 2005

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 independent watchdog of the accountability, financial, governance and promotional practices of charities. Our letter grade (A+ to F) ratings of nonprofit organizations' financial performance as published in the Charity Rating Guide & Watchdog Report are utilized by thousands of conscientious donors across the nation. During this recent crisis, the December 2004 Asian tsunami and the September 11th terrorist attack nearly every major US media outlet has covered AIP's advice, analyses and concerns.

Americans have responded quickly and generously with over $2.5 billion of charitable aid for victims of Hurricanes Katrina and Rita. The American Institute of Philanthropy is pleased to report that the American Red Cross has improved its fundraising performance in the aftermath of the recent hurricanes. Though it needs to be clearer about its financial position, it has taken to heart many important lessons from 9/11. The Red Cross continues to be a financially efficient organization and receives an "A-" grade from AIP for spending 91 percent of its total expenses on program services and having a cost of $22 to raise $100. In contrast to September 11, the Red Cross honored donor intentions by not trying to raise money for one disaster and use it for another disaster or other programs. Due to the immensity of this disaster, the Red Cross cannot be accused of raising too much money for hurricane victims; even $1 billion, when spread among one million needy families, only amounts to $1 thousand per family.

In AIP's opinion the Red Cross may even have gone overboard when it declared that it would not use towards Rita any money given to help with Katrina. These hurricanes had many overlapping victims and areas that were devastated within weeks of each other. AIP believes it would be fair and reasonable for the Red Cross to spend money for both crises, whether or not it was raised in specific response to Katrina or Rita. It is our view that most donors to the Red Cross wish to help the recent hurricane victims of the U.S. Gulf Coast, regardless of which hurricane struck them. It will be a shame if the Red Cross does not have the funding to treat similar victims of each disaster equally.

The Red Cross also improved its accountability by announcing on September 19th, only a few weeks after Katrina hit, its $2.2 billion goal for providing emergency financial aid and other assistance to one million families. They also have given regular updates of basic statistics on the total number of evacuees to whom they have provided services, how much money they have raised, and how much money they have spent in total in the most expensive relief effort in its 124-year history. It would be even more helpful to donors that want to track the use of their dollars, if the Red Cross also regularly accounted for the amount spent on each type of service provided, e.g. meals, overnight shelter stays, mental and health contacts. The Red Cross could also do a better job in their updates by reporting how many people they are currently sheltering, feeding or offering other services to, in addition to how many people that they have helped in total. This information would give donors a better understanding of how many people currently are in need of Red Cross assistance.

Unlike after September 11, 2001 when the Red Cross resisted participating in a shared database, in this crisis they took the lead in forming a new database system called CAN, or Coordinated Assistance Network. Unfortunately, the part of the database that was to track the aid each victim received from the other charities was still being tested when Katrina and Rita struck, according to Red Cross officials. The database was operational for keeping track of people's shelter days.

AIP is greatly disappointed that the charities were not able to implement a shared database nearly four years after the experience of 9/11 made its importance obvious. Charities need to share information on specific victims to prevent double dipping and allow for a more equitable distribution of aid. AIP strongly encourages charities to expedite the implementation of a shared database in preparation for the next disaster. Based on our inquiries, AIP understands that some unnamed charities are not agreeing to sign on to the planned database. AIP believes that CAN needs to disclose which charities are unwilling or unable to participate so that pressure from watchdogs and donors can help gain their participation.

By September 23, the Red Cross had raised $827 million or about 75% of the total raised by all charities for Katrina and Rita aid according to a tally by the Chronicle of Philanthropy. In recognition of the need for more of America's charitable resources to help with this widespread crisis, AIP encouraged donors to also support the efforts of many other important charities offering innovative approaches to providing aid. We emphasized that while the Red Cross is the major charity for providing emergency, front-line services in a disaster, other charities are better suited to provide intermediate and longer-term assistance to help victims get back on their feet. AIP's message must have gotten out because by October 6, the Red Cross's contributions of $1.1 billion had fallen to 65% of the $1.7 billion raised by all the charities, according to figures provided by The Chronicle of Philanthropy.

By the beginning of December, the Salvation Army had raised $295 million, which was the second most raised by any group, yet only 18% of the $1.67 billion that the Red Cross had raised. Unlike the Red Cross which plans on using over 90% of its $2.2 billion Katrina/Rita disaster budget for short-term emergency needs, the Salvation Army estimates using about two-thirds of the disaster money that it has currently raised for longer term needs, possibly through August 2007.

The Bush-Clinton Katrina Fund, which may have collected the third most at $110 million, has been quick at raising money but slow in deciding what to do with it. Not until December 7, over three months after Katrina hit the Gulf, did it apply for tax-exempt status with the IRS and announce how it will distribute the bulk of its donations. The former Presidents' Fund said that it will give $40 million to charitable funds formed by the governors of Louisiana, Mississippi and Alabama, $30 million for colleges and schools in the three states, and $20 million for a faith-based partnership, which will decide how to distribute it. It is surprising that it took so long to allocate these funds since most went to grantee organizations that are serving as intermediaries in deciding which organizations or people will be the final recipients of these donations. Also, as of December 7, the former Presidents' Fund has not publicly announced on its Internet site or in its press releases who will serve on its full governing board. Donors need to know this to make an informed giving decision.

The hurricanes caused millions of people to flee and resulted in the largest relocation in our nation since the Civil War. It was beneficial that many U.S. based international relief and development charities recognized the need for America to utilize as much of our charitable resources as possible to help the evacuees. For many of these groups with experience aiding poverty-stricken people after large-scale disasters in Africa, Asia and South America, it was the first time that they had ever provided assistance in a domestic disaster. Some of AIP's top-rated international charities that have provided assistance to hurricane victims are Samaritan's Purse, AmeriCares, Mercy Corps, World Vision and Oxfam-America.

Because of the enormous scope of this crisis the Red Cross had difficulty reaching some of the far-flung rural areas hit by the hurricanes. Fortunately, many community groups and churches stepped in to provide aid. AIP believes that it would be a good idea for the Red Cross to reimburse the documented expenses of these financially stretched aid groups, who do not have the ability to raise large sums of money outside of their communities.

"Empty," "running on fumes," "dangerously low" are all terms that the Red Cross used during its 2004 fiscal year to describe the state of its Disaster Relief Fund. These are certainly not the terms that you would expect a nonprofit to be using when, according to its fiscal 2004 audited financial statements, it had total net assets of $2.2 billion. The Red Cross does not make clear in disaster fundraising pleas its true financial position or the amount of discretionary money it has available to spend on disasters.

An analysis of the Red Cross' fiscal 2004 audit, the most recent available, shows that the Red Cross likely has far more money available for disasters than the $709,000 that it reports in its Disaster Relief Fund. The Red Cross reports having $1.36 billion in unrestricted net assets, which includes $1.08 billion designated for various purposes by its Board of Governors. It is important to understand that funds designated by a nonprofit board can be undesignated and made available the very next day. The funds that the Red Cross clearly can not apply to the recent Gulf disaster are $429 million in permanently restricted funds and $274 million in purpose restricted funds, identified in its 2004 audit. Unlike funds designated by an external third party, funds designated by the board as an endowment can be spent by a nonprofit. Based on our analysis of the Red Cross' fiscal 2004 finances, AIP estimates that it has over $700 million that it could direct to a future disaster without using any money earmarked by its board for "biomedical services," "retirement health benefits," "replacement and improvement of buildings or equipment," and "other purposes."

It would be wrong for the Red Cross as our nation's most important front-line emergency aid organization to suggest to the American public that it has very little available to spend for a disaster when it actually has available money outside of its disaster fund. It makes the organization appear unprepared to deal with future disasters that may occur before more money is raised. Charities should also consider whether such claims undermine our international standing as a strong and powerful nation by creating a false appearance of weakness or vulnerability on the home front.

As in 9/11 and the Tsunami disasters, scammers jumped on the fundraising bandwagon. Thousands of questionable web sites purporting to raise money for hurricane victims were quickly thrown up on the Internet. Some scammers capitalized on the public's zeal to help by calling or emailing potential donors for their credit card information under the guise of fundraising for a legitimate charity. One particularly outrageous scam involved a Florida man without a pilot's license who was arrested for allegedly raising $40,000 so that he could purportedly continue airlifting supplies and rescuing hurricane victims, according to The Miami Herald. He even bragged about fake exploits on the Internet, including how he tipped his plane's wings in a salute to President Bush when he saw Air Force One flying over Louisiana, and rescued a 7-month old child who needed a transplant.

There have been many arrests and reports of aid recipients who falsely claimed to be hurricane victims. This is likely to happen because people fleeing a disaster often do not have much in the way of identification or paperwork to demonstrate that they are actual victims. The charities are in a difficult position because they must balance the need to get aid out quickly to legitimate victims with the responsibility of not wasting charitable resources on fakers or double dippers. Donors should realize that in a crisis situation, charities will not be able to stop a lot of people with false claims without making the bona fide victims suffer long delays for assistance. Most scammers will not be caught until after a charity has turned over a suspect's information to a law enforcement agency to research its truthfulness. Unfortunately, by then the money will likely be long gone.

The recent news media reports of Red Cross workers in California and Texas being arrested on charges of stealing money intended for disaster victims is very disturbing. Criminals are more likely to target charities, particularly ones operating in a disaster or other chaotic situation, if they perceive that the many good-hearted and mission-driven people working in these organizations are not focusing enough attention on internal controls and other security measures. AIP encourages all nonprofits to be vigilant about safeguarding the public's donated dollars.

AIP strongly encourages each disaster charity to issue by spring of 2006, a 6-month report of the funds raised and spent and future plans in response to the Gulf hurricanes. These reports will enable donors to better monitor the use of their charitable contributions. The American Red Cross is to be commended for issuing such a report six months after the December 2004 Tsunami. Under current IRS annual disclosure rules, charities are not required to submit a tax form until 5 ½ - months after the end of their fiscal year and are almost automatically granted two 3-month extensions by the IRS. This means that charities with a June 30 fiscal year end, such as the Red Cross, may not be required to disclose how much they received and spent in response to Katrina until June 15, 2007.

AIP also encourages charities to participate in multi-agency evaluations, such as those conducted by the Tsunami Evaluation Coalition for CARE International, World Vision International and other disaster aid groups. This will help charities improve their planning, coordination and communication. It will also make charities and donors more aware of victims that have been neglected or received poor service so that more resources can be directed to them.

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