There are over one million individual charities registered in the United States and their activities make up 10 percent of our economy. Hundreds of billions of government funds flow through their operations each year. Yet, as former NPR CEO Ken Stern points out in his new book “With Charity for All,” the charitable sector largely escapes the kind of scrutiny that should come with such pervasive influence and reach.
TSD was pleased to connect recently with Stern to learn what several years of research has taught him about an area that touches every American life – from schools, to churches to hospitals to soup kitchens to his former employer, National Public Radio.
Town Square Delaware: First, the scandal regarding the apparent IRS targeting of conservative groups would seem to help make your case that when it comes to not-for-profit organizations, the tax code has gone well beyond its original intentions of incentivizing support for real charities. Beyond the point of inappropriate or even criminal activity by the government, it is clear we now have legions of government employees charged with ensuring the tens of thousands of registered non-profits are complying with US law. Is this a good or effective use of resources?
Ken Stern: There are more than 1.5 million nonprofits (of which, 1.1 million are classified by the IRS as 501(c)(3) charities), in the United States and, relatively speaking, there are only a handful of people whose job is to regulate them. Over the last two decades there has been an explosion of nonprofits in this country, and staffing at the Exempt Organizations Division of the IRS has simply not kept pace. Due to lack of resources, the IRS can do little more than rubber stamp applications for charitable status (approving over 99.8% of all applications). And there are fewer than 100 full-time state regulators of charities; as Professor Harvey Dale of NYU has written, “In most states, the Charity Bureau of the Attorney General’s office is inactive, ineffective, understaffed, overwhelmed, or some combination of these.” For me, the most surprising thing about the IRS investigation of 501(c)(4) organizations was that the IRS was able to muster the resources to undertake an investigation in the first place.
TSD: How have our tax laws gotten so far away from the original intentions? In the US thousands of new non-profits are started every year but very few are doing what would be considered real charitable work, correct?
KS: It is fair to say that the tax laws have been unable to keep up with the changing conditions of the nonprofit field. People are shocked when I tell them bowl games, roller derby leagues, and beer festivals are sometimes organized as tax-exempt charities, but the bigger issue is that entire segments of the charitable field may no longer properly categorized as charities. Take charitable hospitals for instance. Many of them were legitimately formed, often by nursing orders, as charities but the health care field has changed enormously over the years. Studies now show that charitable hospitals are more profitable than for-profit hospitals, their executives are frequently paid millions of dollars a year, and most importantly, they provide no more “charitable” services than for profit hospitals. It’s virtually impossible to tell the difference between a for-profit hospital and a charitable hospital – even though at $650 billion in revenues a year, charitable hospitals account for almost 40% of all charitable revenue in this country.
KS: I started writing this book based on some of my own experiences running NPR. I was curious to see whether some of the same challenges I saw there were more widely felt within the charitable world, and I must say that these last three years of research and writing have been a remarkable education. If I had to do it over, I would change the subtitle of my book to “Everything We Think We Know About Charities Is Wrong.” There are so many myths that have grown up around the charitable world, and my purpose in writing this book was to challenge these unquestioned assumptions about how we give, who we give to and how we should think about the charitable world. There are many extraordinary charities out there, as well as many bad ones, but our system and our donors don’t properly sort out the good from the bad in any useful way. My hope for the book is that it will spark some conversation about how to change that.
TSD: You point out in your book that the largest single charitable gifts each year go to schools and art museums. For example, a wealthy donor could give an upscale prep school $100 million and enjoy the same tax benefit as if they had made the contribution to the Little Sisters of the Poor. How should policymakers approach the determining whether an organization is worthy of the favorable tax treatment?
KS: It’s a great question, especially after a donor recently gave $250 million to Centre College In Kentucky. We tend to reflexively applaud such acts of generosity without recognizing the huge public ingredient created by the charitable and estate tax laws. It’s not necessarily a popular view but I do think we need to rethink the charitable deduction laws. They cost the federal government roughly $50 billion in forgone revenues (and state and local governments more on top of that) and it is probably what the experts call “treasury inefficient”; that is, the charitable deduction likely encourages less than $50 billion in marginal charitable giving.
As one example of the unfairness of the law, the most generous donors in this country, as a percentage of income, are the working poor, who give more proportionally to charities yet get no tax benefit from the charitable tax deduction (since they by and large don’t itemize). It would take more time than we have here but there are plenty of sensible ways to make incremental changes (caps or floors on the deduction) in the charitable tax deduction to produce a more fair and efficient tax system.
TSD: Mission creep is a common occurence in the non-profit world — you argue that whether the original mission they were created to address becomes moot or a funder comes along with money that isn’t in the group’s sweet spot, many organizations instinctively tend to do what it takes to keep themselves going.
KS: That’s right, there is a self-preservation instinct in charities that sometimes keep them alive past their date of useful public purpose. But the real problem is less with the charities themselves but with the absence of “creative destruction” in the marketplace. There is just virtually no movement in the charitable marketplace. If you look at the Fortune 50 companies from 40 years ago, the whole world has changed. Bethlehem Steel, American Can, LTV. They are all gone, replaced by the likes of Microsoft and Google and Wal-Mart. There is no such dynamism in the not-for-profit marketplace. The top 50 charities of 40 years ago are still the top charities of today. People with new, innovative and breakthrough ideas for charities can’t raise the money and can’t get to scale, and that’s a real problem when we need the best and most creative ideas to tackle major education, healthcare and social issues.
TSD: And when it comes to governance, how effective would you say most non-profit boards are in setting measurable goals and ensuring accountability, and, ultimately, asking the hard questions about whether they should stay in business or perhaps merge with another group?
KS: It’s probably not entirely fair to generalize here. There are strong boards and weak boards, good board members and bad board members, but I would say that the current structure of who gets on charity boards does not inspire much confidence. Board seats are often transactional, given in return for donations, and not for qualifications or for willingness to do the careful and important work of organizational stewardship. Very few charities have a results-driven culture and that problem starts at the top.
TSD: Many non-profits act as extensions of federal, state and local government, yet there probably isn’t widespread awareness of the extent of their role providing vital government-discharged services. Should our government policymakers be looking at the provision of social and educational services in a different way that takes into account the far-reaching involvement of these non-profits? Is there enough accountability in that chain of command, so to speak, from Congress to government agency to non-profit?
KS: I occasionally refer to the charitable sector as “government by other means.” The federal government, in particular, has outsourced major health and human services to charities, which explains why the federal government is the source for more than 1/3rd of all charitable revenues each year. The federal government provides more funds to charities than individual, foundation and corporate donors combined, so they have immense leverage over American charities. But the government, as you might imagine, is not particularly good at rewarding the best and most innovative charities.
I’m reminded of a story about Youth Villages, an amazingly rigorous and successful charity that serves at risk youth in about 13 states now. Youth Villages developed a new methodology for treating at risk youth, focusing on treating them in their homes rather than in residential facilities. Their approach has been shown to be far more effective and cost efficient than traditional treatment approaches, but Youth Villages has lost out on numerous government contracts because the federal funding program is only for “custodial” care. Government rules often create the wrong incentives, and sometimes even the wrong result.
TSD: Can you give an example of where the current non-profit paradigm is really working well?
KS: There are certainly great charities doing great work and also investing in the tools to determine what works and what doesn’t. Youth Villages, Give Directly and the Nurse Family Partnership are among them, and there are organizations like Give Well which are creating new tools and informational services to help donors make wise giving decisions. I admire all these organizations greatly, but I would be lying if I didn’t say that it is still an uphill fight to help create a culture of accountability and rigor among charities and donors alike.
TSD: On a different note, ever enjoyed first-hand the marvel that is the First State?
KS: I’m a native Washingtonian, and have spent many happy summers down at Bethany and Rehoboth, eating Grotto pizza and Casapulla’s subs. And my father-in-law and mother-in-law are both Blue Hens!