No doubt about it — Americans are generous. Seventy percent to 80 percent of us contribute to at least one charity each year, says the American Association of Fundraising Counsel.
However, if you’ve ever found it difficult to figure out exactly how the organizations that solicit support are using your funds, you’re not alone. Seventy percent of the people surveyed by the Council of Better Business Bureau’s Wise Giving Alliance said it was hard to know if a charity is legitimate and operates ethically.
With a bit of legwork, you can determine which charities are most likely to use your contributions prudently. As a starting point, you’ll want to verify that an organization actually is a charitable group. Not all nonprofit groups are charities. Many trade and lobbying organizations, for instance, are nonprofit groups, but not charities. While you can support these groups, your donations are not tax-deductible.
To find out if a group is a charity, you’ll want to see its Form 990. The charity files a Form 990 with the federal government. This financial report provides information on the organization’s tax status and programs, and shows how it is using its funds.
Charities are required to provide Form 990 when requested, although they can charge a reasonable fee for it, says Daniel Borochoff, president of the Chicago-based American Institute of Philanthropy.
One exception: Churches, synagogues and other places of worship generally do not need to file Form 990.
Don’t be misled by organizations providing what’s known as a “tax ID number.” These numbers do not show that an organization is a charity; they’re simply IRS-required employer identification numbers. Michael Nilsen, public affairs manager with the Association of Fundraising Professionals in Alexandria, Va., says he would be suspicious of any group whose members tried to use its tax ID number to gain your support.
Also take a discriminating look at the organizations’ marketing materials.
“Watch out for appeals that make you cry vs. think, or if they go on about the problem, but don’t tell you what the charity is doing,” says Bennett Weiner, chief operating officer with the Wise Giving Alliance. Solicitations for contributions should accurately convey the work the charity is doing.
Checking the numbers
How can you tell how effectively a group uses its resources? Again, Form 990 can help, as it shows how much the group spent on programs, administration and fundraising activities.
However, the forms can be overwhelming. Those submitted by national charities often run dozens of pages, and the charities typically have more than one.
Borochoff recommends asking for the organization’s combined audited financial statement, which includes financial information on all of an organization’s entities. Many states require audits from charities that receive more than $100,000 in donations.
However, charities are not required to release audits. If that’s the case, you can get one from your state; typically you would contact the secretary of state or attorney general. However, this is likely to be an involved process. In addition, you may want to re-think your support of an organization that won’t provide a financial statement. Reputable charities should encourage your interest in them.
At least 60 percent of an organization’s funds should go to its programs or services. This is a guideline, however, rather than a strict calculation. Different groups will have varying administrative costs. Art museums, for example, typically have overhead costs in the range of 30 percent to 40 percent. That’s because they need to install sophisticated climate control systems, hire security guards and the like. In contrast, food shelves often can put 90 percent of their funds to their programs.
Even among similar groups, several factors can drive up a particular organization’s administrative and fundraising costs. New organizations need to spend more money getting out their message. Often groups that support issues such as abortion or gay rights also spend more on fundraising, as they are less likely to receive significant corporate backing.
Many donors want their contributions to support specific programs. If that’s the case, include instructions with your check. A well-run organization will honor them.
However, keep in mind that charities, like for-profit organizations, have administrative costs. “It’s fine to give restrictive gifts that are just for use in specific programs. But, if everyone did it, the money would be wasted because the charity couldn’t operate,” says Nilsen.
Beyond the numbers
Once you’ve reviewed the financial statements, it’s helpful to look at several other elements of an organization. Good governance — that is, the way in which the charity is run — is one.
For starters, look at the organization’s board of directors; a list of its members can be found in the Form 990. Logical constituents should be represented on the board. For instance, a group dedicated to helping people with a specific disease should have on its board individuals with the illness, or their family members.
You’ll also want to check whether the organization is doing substantial business with firms that are owned or operated by board members or their relatives. For instance, is a food shelf purchasing milk from a dairy firm owned by a board member?
Such transactions may be legal as long as they’re reported and not excessive, says Borochoff. However, the arrangements can drive the work of the organization. That is, the charity may take on programs that benefit the board member’s business more than the mission of the charity.
You may want to ask whether the organization uses a professional fundraising firm; that is, a company whose employees contact potential donors. From the charity’s point of view, these can be worthwhile. A small nonprofit without the staff to engage in large-scale fundraising may view any funds that come its way from such an arrangement as “found” money. Say the fundraising firm raises $100,000 and keeps 80 percent, or $80,000. That’s still $20,000 that the charity wouldn’t otherwise get.
However, the arrangements prompt people to question the legitimacy of all charities, says Nilsen. In fact, his organization prohibits charities from compensating firms based on a percent of the funds collected.
Take your time
Clearly, investigating a charitable organization requires time and effort. Reputable charities will accommodate reasonable requests for information and give you time to make an informed decision.
Your work will be rewarded. “We always encourage people to be informed donors, and look at it as investing in philanthropy. The payoff is social good,” says Suzanne Coffman, director of communications with Philanthropic Research Inc., in Williamsburg, Va., which runs the GuideStar project. Guidestar provides information on more than 1.5 million U.S. nonprofit organizations.