Not since Congress passed the 1969 Tax Reform Act have Senators and Representatives exercised their authority so vigorously to oversee how America’s charities serve their missions.  Beginning in 2004, the Senate Finance and House Ways and Means Committees opened hearings; these hearings subsequently led to investigations that continue today and will likely continue until new legislation reconfigures how America’s charities operate.  Leading the charge are Senators Charles Grassley (R-IA), who chairs the Senate Finance Committee, and Max Baucus (D-MT), who serves as the Ranking Democratic Member.

Unfortunately, the scrutiny is not entirely unwarranted.  High profile scandals – or, in some cases, terrible judgment – have rocked the nonprofit world:  the United Way, American University, the American Red Cross, the Nature Conservancy, the James Beard Foundation, and the Cabot Charitable Foundation.  Although the names for these nonprofit organizations have not, for the most part, degenerated to the level of household buzz words meaning “scandal” – akin to Enron, WorldCom, or Martha Stewart – they certainly amount to bad news for the charitable sector.  While truly small in number compared to the numbers of charitable organizations operating responsibly, these aforementioned nonprofits and their misanthropic mistakes have captured headlines, which, in turn, have fueled scrutiny by legislators and attorneys general.  Yet, for all the salaciousness of scandals, perhaps it is the unearthing of the size and scope of the nonprofit sector, instead, that has sustained the attention of the media and government officials.

Undoubtedly, many elected leaders have been caught off guard by the rising influence of charitable organizations, which, to the surprise of some, often steer public policy.  How so?  Because, unlike government agencies, nonprofits roadtest new ideas for delivering public services; because nonprofits, through government contracts, actually deliver critical public services (that were once delivered directly and largely by government agencies); and because nonprofits, as permitted by law, advocate and lobby for public policy changes.  To be sure, spending by charitable organizations – even in aggregate – pales in comparison to the dollars available in public coffers; still, the might of nonprofits is indisputably growing.  Consider the following figures, which illustrate the rising power of our rapidly expanding nonprofit sector, at the local community level as well as the national policy level:[1]

• According to the latest data, there are approximately 1.9 million tax-exempt organizations in the U.S., and the majority of these – more than 1.4 million – make up the “nonprofit sector” (sometimes also referred to as the independent sector, social sector, or charitable sector).  Of the 1.4 million nonprofit sector organizations, around 1.3 million are 501(c)(3) organizations which, by definition, must benefit the broad public interest. These include public charities, private foundations and religious congregations. Additionally, there are more than 100,000 501(c)(4) organizations, comprising predominantly advocacy groups.  The remaining half million fall into more than 25 categories of organizations defined by the Internal Revenue Service as exempt from federal income taxes, including private country clubs, labor unions, business associations, fraternal organizations, and many others.
   
• There are more than 66,000 private and community foundations in the United States, with assets totaling $476 billion. Of these, 47,000 foundations – or approximately 70 percent – have assets of less than $1 million. The largest, the Bill and Melinda Gates Foundation, has assets of $32 billion.
   
• Most nonprofits, however, are small, with 73 percent of charitable organizations operating with annual budgets of less than $500,000. Only 4 percent have annual budgets of more than $10 million.  Still, total combined assets of public charities and private foundations are estimated at $2.95 trillion.
   
• The nonprofit sector employs 11.7 million workers, or 9 percent of working Americans. This is larger than the number of workers combined in the real estate, insurance, and finance industries.
   
• From the mid-1980s until the mid-1990s the number of nonprofit organizations in the United States grew at more than twice the rate of the business sector.  The growth of nonprofits in the United States is averaging more than 70,000 per year, and may be as high as 85,000 for the most recent year.  Impressively, the total number of nonprofit sector organizations has more than doubled during the past 25 years. 

The size and rate of growth alone justifies increased attention from government policymakers and the press. For the time being, the major focus of this attention is on the nonprofit sector’s performance, its ethics and its practices – following revelations of abuse and unethical behavior by a small minority of nonprofits.

Fortunately, the nonprofit sector itself is endeavoring to clean-up its own house and influence the way forward.  Working with Congress and the Internal Revenue Service is a group called the National Panel on the Nonprofit Sector (“National Panel”).  The group, consisting of nearly 24 distinguished members representing a wide range of charitable organizations, is supported by work groups, advisory groups, and task forces, comprising another 150 nonprofit professionals and citizen leaders; the entire effort is staffed by Independent Sector, a nonprofit, nonpartisan coalition of approximately 600 organizations, foundations, and corporate philanthropy programs representing tens of thousands of charitable groups across the United States.  Independent Sector’s mission is to advance the common good by leading, strengthening, and mobilizing the independent sector and to provide the impetus for change. 

Of note, Independent Sector mobilized the nonprofit community long before Senators Grassley and Baucus convened hearings in June 2004.  Indeed, in the aftermath of the widely-covered scandal at the United Way during the 1990s, Independent Sector launched an initiative called “Regaining the Public Trust,” which was followed during the early 2000s by the formation of a new standing committee of Independent Sector called the Ethics and Accountability Committee.  Both efforts represented platforms for expressions of concern about the tenuousness of self-regulation within the nonprofit sector and the need to strengthen transparency, governance, and accountability generally.

So it was not without precedent when Independent Sector convened the National Panel in October 2004, after Senators Charles Grassley and Max Baucus invited Independent Sector to appoint a panel to develop proposals to aid them in the writing of new federal legislation.  With remarkable speed, Independent Sector convened the participants and raised the millions of dollars necessary to support its work.  Following just seven months of intensive research, late-night working sessions, and field meetings involving thousands of people, the National Panel, in June 2005, presented its final report, Strengthening Transparency, Governance and Accountability of Charitable Organizations, to the Senate Finance Committee.

The report, available on-line at www.nonprofitpanel.org, runs to 112 pages and proposes more than 120 actions to be taken by Congress and the IRS. If implemented, these recommendations will constitute the most sweeping changes to the governance, operations and regulation of charities and foundations since the passage of the Tax Reform Act in 1969.  (Additionally, the Nonprofit Panel released a supplemental report in April 2006.)

To date, Congress has not acted.  While some charitable reforms and incentives to increase charitable giving were included in various iterations of the tax reconciliation legislation (known as the “Tax Relief Act of 2005,” or H.R. 4297), Senate and House conferees opted not to include such provisions in that bill.  Negotiations, which have continued since Congress returned from its April recess, may ultimately yield consensus, and some measures may be approved as part of some bill.  In all likelihood, however, reforms or incentives will be passed piecemeal, that is, as riders to various pieces of legislation during this Congress.  Unlike 2004, when the Senate and the House never settled differences in separately passed packages – the CARE Act and the Charitable Giving Act of 2003, respectively – this Congress – and Senators Grassley and Baucus, in particular – have resolved to present legislation to the President.

While nonprofit trustees and executives await decisions from Congress, the charitable sector is wasting no time in policing itself.  In late March 2006, the National Panel created a special Advisory Committee on Self-Regulation of the Charitable Sector.  Chaired by Joel Fleishman, of Duke University, and Rebecca Rimel, of the Pew Charitable Trusts, the Advisory Committee will offer guidance to, and advance efforts by, nonprofit organizations committed to strengthening their organizations voluntarily.  Their charge has been well-received.

Self-regulation is, on the whole, standard practice across the nonprofit sector.  The good news not reported alongside the stories of scandals, is that, across America, millions of trustees and executives are already serving charities diligently, responsibly, and ethically.  They have, among other things, invested in organizational assessments, adopted codes of ethics, and benchmarked their organizations against voluntary accreditation standards.  They know that ethical standards are not voluntary but rather necessary – necessary to maintain public trust.  For, without the public’s trust, generous donations of time, treasure, and talent will disappear; nonprofit trustees and staff know this.

For example, in addition to meeting good governance benchmarks (e.g., conducting conflict of interest checks regularly, reviewing the performance of the executive thoroughly, and monitoring fundraising practices clearly), nonprofit trustees and staff might take those “next steps” demonstrating measured accountability:

• Governance:  Just as boards review the performance of their executives, and as executives reviews the performance of their staffs, boards ought to examine their own performance frequently, ensuring that trustees remain strategically focused, monitor trends affecting their organizations, and recruit diverse membership.
   
• Management:  Not unlike subjecting their financial statements to audits by independent Certified Public Accountants, trustees and staff could annually conduct ethics audits, assessing the extent to which they are satisfying the standards set forth in their respective codes of ethics.
   
• Transparency:  In addition to maintaining official documents that are easily and publicly accessible for review, trustees and staff should make available organizational assessments or program evaluations that account for how efficiently and effectively their organizations operate.   

Quickly, amidst questioning of the integrity of their operations, charities must exhibit their wholesomeness, or, at least, tell the wonderful and, to be sure, true story of the 1.399+ million charities operating as wholesomely as mom and apple pie.  The continuing vibrancy of American philanthropy, and all that philanthropy serves, depends upon such truth telling.

Mom, apple pie, and charity.  Even Mom’s apple pies sometimes had some bad apples; yet, she didn’t change the recipe, nor did she even rearrange the kitchen.  She simply did what she always did, continuously better.  Of course, the good ones were never the subject of newspaper headlines or congressional inquiries; they never are.

William E. Trueheart is President & CEO of the Pittsburgh Foundation and Chair of Independent Sector.

Gregg S. Behr is President of the Forbes Funds, in Pittsburgh, PA.

 

	Click here to add your voice to the discussion.
	Click here to learn more about the current topic.
	Click here to email this commentary to a friend.