Nonprofits seem in no big hurry to fix their problems

Jay Hancock

March 2, 2005

WASHINGTON

The nonprofit-industrial complex knows it has a problem.

Impropriety and opacity at multiple charities involving millions of dollars have tarnished the reputation of all nonprofits and probably prompted more than a few would-be donors to stay their hands.

But as Congress considers reforms, nonprofits don't seem to want to do much about it. Recommendations delivered yesterday by the cream of nonprofit leadership would accomplish little to deter abuse, illuminate murk or inspire confidence.

Nonprofits need "to make sure charitable dollars are not used to line the pockets" of insiders, Paul Brest, president of the William and Flora Hewlett Foundation, told journalists and nonprofit staffers gathered at the Dirksen Senate Office Building.

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Great idea. But how does Brest's panel of two dozen charity executives, formed to give ideas to the Senate Finance Committee, propose to accomplish that?

One way is to "fully enforce existing financial penalties" against nonprofits that try to hide self-dealing, inordinate executive pay and other stinkers by filing false returns with the Internal Revenue Service.

Only three problems. 1) Existing penalties are puny; $50,000 is the maximum. 2) The Internal Revenue Service doesn't have the resources to enforce existing penalties. 3) Existing penalties haven't deterred numerous charities from filing bad returns.

The panel implicitly acknowledges this by proposing extra sanctions for charities that repeatedly violate filing laws.

But check out the punishment: First, the IRS must notify the charity of a violation. If the problem isn't fixed a year later, no problem. If the law is still being broken two years later, then the government moves in - not to revoke the group's charitable status and maybe shut it down, but to "suspend" its tax-exempt credentials until it can "correct" its returns.

Double-secret probation might be worse.

The proper response to nonprofit scandals of recent years, which prompted Finance Committee Chairman Charles E. Grassley, an Iowa Republican, to vow corrective legislation, is anger.

The charity sector should be outraged that the American Red Cross initially tried to keep millions that people had donated to the victims of the 2001 terrorist attacks.

It should be furious that the Nature Conservancy engaged in land deals and financial transactions with insiders and that Baltimore-based Chimes failed to properly disclose millions in executive pay to the IRS. It should be fuming that New England blueblood Paul C. Cabot Jr. drained $4 million from his family's foundation to pay for real estate and a daughter's wedding.

It should be apoplectic that dubious actors cast doubt on hundreds of good nonprofits doing work that otherwise wouldn't get done, serving people who otherwise wouldn't be served. But there was no anger on display yesterday. Complacency and sanctimony, but no passionate, righteous resolve suggesting that nonprofits are serious about restoring their good name.

With several chances to propose clear boundaries for charity behavior and tougher consequences for misbehavior, the committee, known as the Panel on the Nonprofit Sector, abstained.

It urged nonprofits to adopt conflict-of-interest policies for trustees and executives but wouldn't make them mandatory and hasn't proposed specific rules, although it plans to.

If insiders looted a nonprofit by paying themselves inappropriate salaries or selling goods or services at inflated prices, the panel would merely boost an excise tax on the ill-gotten gain, a tax that is rarely levied.

If the IRS bestirred itself to investigate a nonprofit and found improprieties, the panel couldn't agree on whether the agency should have to get the charity's permission to publicly disclose the misdeeds!

The group, which plans to issue a final report this year, had some good ideas: restore IRS resources to monitor nonprofits; require financial audits and public availability of the results for all but tiny charities; have charity CEOs certify IRS filings; and expand access of state regulators to nonprofit documents.

But it stopped short of meeting its self-described mission "to help the nonprofit sector meet the highest ethical standards."

"When a husband and wife stretch their budget to write a check to help someone who is in even greater need, they have a right to have confidence that the money is going to be spent wisely," Grassley said yesterday.

The senator and his committee are working to restore that confidence. To do so, it looks like he'll have to give nonprofits a lot more reform than they want.