Charitable Giving, the Right Thing to Do, or the Biggest Scam in America?

As I mentioned in my profile, at the end of my career at 50, I decided to look into philanthropy. I had political aspirations as well. A quick review of what is involved in politics, negative comments from my friends about being to candid and honest, as well as my birth father (remember cigar smoking gambler?) family and associates being deeply involved led me to drop that politics idea. So I endeavored into a new space of charitable giving. One of the most misused phrases is non-profit, which somehow implies that all the money goes to a good cause. I quickly learned otherwise. While there are many great organizations, the best are also the hardest to find!

Charitable giving encompasses a wide range of activities. My new circle of wealthy friends had interest as well. But as I was soon to learn properly giving money is NOT an easy task. Understand I had never donated money outside of the normal holiday stuff like Toys for Tots, food banks, church baskets, and the Salvation Army.

There are many types of charitable organizations. These include: but are not limited to:

  1. Educational Institutions like Universities e.g. U.C., Harvard, etc.
  2. Environmental Organizations e.g. WWF,
  3. Social Welfare Organizations e.g. United Way
  4. Masked Political Organizations e.g. Doctors w/o Borders
  5. Disaster Relief Organizations e.g. Red Cross

These organizations all pay into a LOBBYING organization called the Independent Sector. Their job is to insure that the government stays out of any form of regulations to this industry. Overall, this industry is HUGE, and the Independent Sector estimates as much as 1/7 of our economy is impacted by this industry. Obviously not just in money, but volunteering etc. As I learned this industry cries out for more regulations. The government has already intervened and forced basic standardized reporting via a document called a 990. This is intended to give a donor insight into how the money is spent. Unfortunately this document is abused and frequently fraught with errors. For example, many charity CEO’s consider it only suitable for a low level secretary to sign. Imagine if a corporation were to try this! If you are considering donating any amount of significant money, you should either invest time or hire someone on your behalf to do so.

There is another industry associated with non-profits and it is the for profit fund raising industry. Frequently, they take anywhere from 70-90% of the money donated as expenses. These organizations are easily recognized by those telephone solicitors who may call representing your local police or fire department. These costs may not show up on the 990 as the non-profit may only report the net received. Never donate over the phone or to an unrecognized solicitation. Cancer is a word frequently abused by sound alike organizations as an example. I cannot stress enough; you must act responsibly to donate money.

One of my first experiences had to do with charitable giving to Education. At the university level it is quite easy. Many universities already have huge endowment funds. If you want your donations to have an impact in your lifetime, I suggest you look to smaller organizations. Perhaps consider setting up a scholarship program instead of just dumping it into an endowment fund.

Of greater interest to many of my peers is to make an impact at the k-12 levels. This is much more difficult. You cannot just make a tax deductible donation to a public school. Other entities have to be created. Even worse trying to make an impact at the individual teacher level is nearly impossible. Many people want to provide financial rewards to the best teachers. In fact, with the internet, we should be seeking out the best teachers and scaling them up to reach hundreds or even thousands of students. Like movie stars their compensation would be tied to their success. Similarly, as industry pays more for science and math degrees, education should mirror this market practice. But the unions will have none of it. No measurements, no pay for performance, only time in grade and tenure. Whenever you worry about the future of America, start with the teachers unions!

The next shocking practice was compensation of executives in this industry. Most major charities have a board of directors. These typically determine compensation of the CEO. As they cannot use profit as a metric they must find other metrics. The argument goes they have to compete with the private sector for talent. So they frequently rationalize that the top line of donations equates to “sales”, and or the number of workers equates to employees. For example the head of the Red Cross salary before expenses is over $500,000. The sum of the top three execs in a single city United Way is well over $1,000,000! The problem is most of the work is done by volunteers. Even worse, most of the money is redistributed to other non-profits who count the net again in executive compensation. Bottom line, most organizations consume roughly 25-30 % of money donated to administrative costs. Some are over 50%! Contrast this with the Salvation Army at 11%, the work that is done by many churches. With the coming retirements of baby boomers executives, I challenge the boards of these non profits to seek out these resources at a better price!

In my travels I encountered many scandals. I learned of famous high tech executives who donated to environmental organizations, which then gave them and their families a trip to the rain forest. Talk about tax deductible vacations! I learned how charities take in $100 remove $25 in expenses and donate to another charity friend. That charity then reports $75 and takes $20 in expenses before a single dollar reaches a program. As I said above, donating money takes time. If you are donating amounts above $20,000 per year to an organization and don’t have time, get help.

Lastly, giving trusts are a great tool. Fidelity has a great one. If you really want to make a donation but are struggling with time, put the donation here. From there you can then direct the money subsequently to the organization of your choice but get the tax credit immediately.

This introduction leaves the door open for many more topics in the future, but I hope it makes you think!

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1 Response to Charitable Giving, the Right Thing to Do, or the Biggest Scam in America?

  1. Carl Woods says:

    And people used to scoff when I said I knew someone with a brilliant, low-overhead FOR PROFIT charity. Like such a thing wasn’t possible.

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