Who Guards the Guardians? The New Age of Nonprofit Accountability. - book reviews

Washington Monthly, Oct, 1994 by Adam Yarmolinsky

Outrage may be the most readily available emotion to those who contemplate the public scene today, and the world of philanthropy provides at least its share of occasions, as this report on nonprofit accountability demonstrates.

The occasions range from outright scandal (United Way, Marine Corps Toys for Tots, Covenant House) to exploitation of well-meaning charities by professional fundraisers (the United Cancer Council case, now in federal courts) to consistent failure to make regular public disclosure (how many foundations publish annual reports?). That the majority of the nation's half-million charities operate honestly, openly, and too often with painfully inadequate resources does not appease public indignation, perhaps because more is expected of them than of other institutions. And charities as a group have more fundamental problems, to which this report makes at least passing reference.

The system of federal and state laws governing charitable organizations has been singularly ineffective in anticipating outrage. State attorneys general, who are responsible for the oversight of charities, have not yet begun to exercise that responsibility in many states, or are just beginning to do so. The federal tax authorities can and do penalize foundation officers for abuses of trust, but the only weapon available to the feds against public charities is the blunderbuss of revocation of tax exemption, which hits the recipients of charitable bounty.

The situation may be about to change as a result of a legislative proposal worked out between the Oversight Subcommittee of Ways and Means, the Treasury, and representatives of organized charity. The Internal Revenue Service should be able to rescind unfair transactions (such as sweetheart payments for office rent and salaries above the market for executives) and levy fines against individuals who receive or pay excessive or unfair compensation for goods or services. Charities would be required to send copies of the tax returns that justify their tax exemptions (the famous Form 990) to anyone who asks, instead of making the return available only to someone curious enough to visit their offices. The reporting form itself would be redesigned to make it more user-friendly to the inquiring layman, and the IRS, instead of being required to conceal information about disciplinary actions, as it is now, would be required to publish these actions to all the world, while the reporting form itself would carry information about penalty taxes paid.

These changes, which are working their way through the legislative process, would make charities more law-abiding and more responsive to the general public. But in spite of exhortations by the Oversight Committee, enforcement will still depend on over-stretched staffs both in the Service and in the states--a situation unlikely to change while federal and state tax-collectors focus their attention where the dollars are: delinquent taxpayers, rather than on the exempt folk.

One remedy proposed in the report would be to make it easier for private watchdogs to pursue charities in the courts, but this idea makes me a bit nervous. For every public-spirited challenge to a fat-cat foundation overpaying its trustees, I can see a Capital Legal Foundation given more latitude to harass Planned Parenthood or the NAACP Inc. Fund. Charities have traditionally provided a haven for the eccentric who proposes the abolition of slavery or suffrage for women, and too vigorous a house-cleaning may sweep out the eccentric along with the private advantage seeker.

What these reforms don't address is the set of problems raised by fundraising practices of some charities--encouraged by professional fundraisers--where a large proportion of funds raised go for administrative and fundraising expenses.

Then, too, the government has been shifting responsibility for the operation of social welfare programs to the charities, so that social welfare expenditures by charities (excluding K-12 education, pensions and veterans' benefits) are 20 percent greater than direct federal spending, and almost as much as total government operations, federal, state, and local, in this area. Five-sixths of this activity is financed by government grants and contracts, and by fees for services, accounting for the large increase in charitable spending, while charitable giving has been increasing slowly (but steadily) over the years.

Yet this trend creates worrisome problems for the future: Increasing dependence on government funding threatens the independence of what is often referred to as the independent sector. A traditional bulwark against government interference has been removed by the recent Supreme Court decision in the Rust decision (the "gag rule" decision) in which the Court allowed the Bush Administration to forbid physicians working for Planned Parenthood in a federally supported pre-natal counseling program to advise patients of the existence of abortion counseling services. A Justice Department official testified in a Senate hearing after the decision that "In a sense, when the government funds a certain view, the government itself is speaking. It therefore may constitutionally determine what is to be said." The Clinton Administration reversed the gag rule policy, but the Court has removed the First Amendment protection against future administrations, at least until the court changes its mind, or confines the ruling to the facts of the Rust case.