Free Speech Concerns Limit Charity Regulation
Many donors wrongly assume that the government regulates how much a charity can legally spend on overhead versus programmatic activities. This is not the case. In fact, the government is not allowed to regulate it due to First Amendment concerns.
In the 1980s the Supreme Court of the United States (SCOTUS) shot down several attempts by state and local governments to legally require charities to spend a minimum percentage of their donations on programmatic activities and limit their overhead spending. For example, the North Carolina Charitable Solicitations Act of 1985 attempted to limit the percentage of donations a charity fundraiser could retain as payment for services, deeming "up to 20%" as "reasonable," and amounts exceeding this as generally "unreasonable," subject to certain conditions. This effort was deemed unconstitutional by the SCOTUS in 1988 on First Amendment grounds (Riley v. National Federation of the Blind of North Carolina) due to concerns that limiting a charity's ability to disseminate information, even when such information is intertwined with fundraising efforts, could have the effect of limiting free speech.
In Schaumburg v. Citizens for a Better Environment, the village of Schaumburg, Illinois was prohibited on First Amendment grounds from enforcing an ordinance that would bar charities from soliciting donations within city limits unless they used 75% or more of their receipts for charitable purposes. Such fundraising appeals are considered a form of communication involving the dissemination of ideas and advocacy of causes. While they are subject to reasonable regulation, according to the SCOTUS's 1980 ruling, such regulation may not impinge upon free speech. On these grounds, the "75%" rule was deemed unconstitutional.
In Secretary of State of Maryland v. Joseph H. Munson Co., a Maryland statute that limited the amount a charity could pay to fundraisers to no more than 25% of the amount raised was ultimately deemed unconstitutional in 1984 by the SCOTUS on free speech grounds. In short, limiting a charity's ability to contract with fundraisers due to putting a cap on the amount of money that can be paid for their services could have the unintended consequence of preventing the charity from distributing information that is considered protected speech.
The takeaway is that just because a charity is registered and in good standing with the IRS and state regulatory agencies does not guarantee that it will use your donations efficiently or effectively. It is possible for a charity to spend as little as 1% of its expenses on programmatic activities and 99% on overhead without breaking any laws. For this reason, donors must do some additional research to identify efficient and effective charities to support before making their donations.
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