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Old Tools. New Vision.

Five ways to support local nonprofits today that will protect our tomorrow!

Old Tools. New Vision.

Five ways to support local nonprofits today that will protect our tomorrow!

Americans donated 427.7 billion dollars to charity last year[i], and yes, that is billion with a "B." Sure, some of that is because it's hard to say "no" to your neighbor's kid, or your boss' kid, or those fabulous mint chocolate cookies (you know the ones), but that amount of money is driven by more than just guilt and chocolate.  As Americans, we love to be the cowboy in the white hat, helping the little guy. 

Many of us also like the idea of charities helping rather than more government agencies.  In fact, not only do Americans like to donate to charity, they want to work for and with companies that share those ideals.  Corporate community involvement has become a "buzz word" for big corporations.  Why?  Because 66% of consumers will choose to do business with a "for purpose" company. 

At the same time, donors are wary of giving money that will not be used wisely, or at all.  In recent years there have been scandals involving several charities, some very well-known charities, where money or services did not get to the ones who needed it.

Interestingly, 90% of that almost four hundred billion dollars goes to less than ten percent of the charities.  The "eighty-twenty" rule lives, or in this case, the "ninety-ten." It's probably worse than that, but even the IRS doesn't readily publish this disparity.[ii]

There are approximately 1.71[iii] million charities registered by the IRS in this country, so you do the math.  Most operate with budgets of $100,000 a year or less, most with yearly budgets of $25,000 or less.  Local charities grow out of local need. They provide the services our communities need, whether that is school mentoring programs, meals for seniors, or preventing childhood drowning.  

When we consider that there are 3,142 counties in the United States, that's an average of 542 charities per county: clearly, there's a lot of need. Unfortunately, many people don't know about these smaller charities, and worse, believe that they are not reputable.  The measures we use to evaluate charities can make a small nonprofit look like a bad investment, even when that organization is doing great work.

The improvements I am outlining here also benefit larger charities.  As we march into a new decade, our families and our communities depend on the local charities more than ever before to provide vital quality of life services that no one else can or will provide. What's more, helping small charities can help your business, local municipalities, and even larger charities improve their bottom line while improving their communities. Here are five things we can do today to build a better future by helping local nonprofits today.

Some background you should know:

States, for the most part, are responsible for registering charities that solicit within their borders. Yet a Supreme Court decision prohibits states from regulating how a charity spends its money or how much a charity can spend on fundraising. Thus, a charity could be spending 99% of its income on fundraising, and the state can only intervene if there are "unfair or deceptive acts or practices." The average consumer sees state registration as government approval when it is more like a license plate.  The state registers your vehicle. It doesn't vouch for the driver.

States want to protect their citizens from nonprofits that do not deliver, and it is time we provide them better tools. It's time to tap into the potential community impact local charities deliver and improve our businesses and our communities in the process

Did you know that forty states and the District of Columbia currently require a charity to register and file annually in that state to comply with their jurisdiction's solicitation laws? The states say that if you are soliciting donations in their jurisdiction, you must be registered.  Makes sense, right?  The charity is, after all, a business, and just like any business, needs to be registered as a business and also as a charity. The burden of knowing the rules falls on the charity. In Florida, that starts with state statute Ch. 496, and it's confusing but not impossible to manage if you take the time. (See detail below)

If you are a national organization raising money in all fifty states, you must be registered and report annually in all of them, which again makes sense, but each state or jurisdiction has its own specific rules. Multi-state registration and reporting requirements are a problem that states' attorneys general have been wrestling with for over two decades. They developed guidelines in 2001, but there is no unified code of regulations.

It is unlikely that fifty-one jurisdictions will agree on a unified code any time soon.  If you are a small charity, the answer would be not to solicit donations outside your home state, which was fine, until the internet showed up.  The states do agree on one thing, and that is that the solicitation for donation occurs wherever it is seen, which means any web page could be a solicitation if it appears in a different state. 

To continue with the previous analogy, it would be like saying you need an additional license plate and annual inspection for every state if you drove from Florida to California.  So, having a web presence can be a problem for a small charity.  But that's for another discussion.  For now, let's stick to the basics of registration, and the states' attempts to help consumers.

I use the state of Florida to illustrate the challenges and some simple solutions, because of my experience with nonprofits in Florida over the past several years.  Clearly, these and other issues exist in other jurisdictions. This document isn't a criticism of any state or any individual.

The problem is that technology moves at lightning speed, and governments and bureaucracies, by their very nature, move more slowly and deliberately. I believe these few specific action items will vastly improve a problem that impacts all of us.

States take responsibility for protecting their citizens from unscrupulous individuals posing as charities. By phone, mail, internet, or door to door, bad guys con Florida citizens out of millions of dollars each year.  Another issue in the nonprofit world is properly registered charities that do not use donations as promised.  The state of Florida's Department of Agriculture and Consumer Services dedicates countless hours and dollars to register charities to prevent this crime. Unfortunately, despite these efforts, donors lose millions of dollars a year because we can't quickly find a worthy charity or identify a bad or fraudulent one.

Individual and corporate donors need an easy way to evaluate nonprofits; unfortunately, the current tools we use are not right for the job.  The good news is that there are some (relatively) quick and easy fixes with proven long-term financial benefits for all involved. Here are a few specific examples of things we can improve and ways we can do better.

Problem 1: Add a Check-A-Charity site disclaimer  

Florida, and most states, provide a Check-A-Charity type website to help donors make an educated decision before donating. It's a valuable service. The language on the Florida Check-A-Charity (CAC) is not clear. We can make it better.

It is illegal for the state to endorse one charity over another.  The average citizen has no idea that a Supreme Court ruling forbids this.  For most users, the fact that the charity is on the state's site implies tacit state approval of that charity.  In reality, any nonprofit that files the correct paperwork can register and legally solicit in the state of Florida.

Registered charities appear on the Check -A-Charity site based on their registration, regardless of their financial practices, until the state receives a complaint. Unfortunately, the site doesn't have a clear disclaimer of this fact.

Proposed solution:

Post a disclaimer like this one:

"Appearance on the Check-A-Charity site is NOT an endorsement of that organization.

Please seek additional information before financial investment."

"THE US SUPREME COURT PROHIBITS STATES FROM LIMITING THE PERCENTAGE OF DONATIONS THAT GOES TO FUNDRAISING"

*This image was verified 1/12/2020

Estimated cost: less than 1 hour of IT programming.


Problem 2: Florida Check-A-Charity; Charity "Statement of Purpose"

No clear definition of "Statement of Purpose" is provided to the donor or investor who will be using the site.

The IRS asks charities to "Briefly describe the organization's mission or most significant activities," and this answer appears on a charity's 990 form, which is a public document. This language is clearer to both charity and donor.

The state's Check a Charity Display is not reflecting the purpose of the charity accurately.  The registration form uses

the answers provided for question #9 on FDACS 10110 and question #14 on FDACS 10100 as the charity's Statement of Purpose. Yet the intake question is: "Briefly explain [the] purpose for which contributions shall be used." [emphasis added] Question 8 on FDACS 10110 and question 13 on FDACS 10100 asks the "Purpose of the Organization."

Frequently, how donations are used is not the same as the mission statement for the organization, as illustrated in the example below.  An individual investigating a charity may be confused and concerned when they see "Statement of Purpose," expecting the charity's mission statement.

See the examples right and below:

 

Both forms have a similar format, which yields identical results for a charity regardless of their size.

The problem is in the use of information by the Department of Agriculture. Repairing the problem by retraining staff or reprogramming a computer is straight forward.

 

 

Which would you choose to support with your money?

                                                                                            Or

 

 

 

Form 10110 – Small Charitable Organization / Sponsors Application 

question 8 & 9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Form 10100 – Solicitation of Contributions Registration Application; question 13 & 14:

Compare the Florida CAC wording to the wording on IRS 990: "Describe the organization's mission or most significant activities."

Proposed Solution A: (Most beneficial) Follow the IRS format and change the intake field for both forms to reflect the "purpose of the organization" answer that the donor expects.

Proposed Solution B: Display both answers with clear, descriptive titles formatted clearly for the donor and investor.

Proposed Solution C: (Least beneficial) Change the display title: 'Statement of Purpose" to read "Purpose for which contributions will be used."

Estimated cost: 

  • Time to fix: Less than one hour of IT. Minimal cost.
  •  Time and cost to decide to incorporate the change form
  •  Time and cost to incorporate (educate data team or rewrite computer program)

Problem 3. Clarify and educate charities on Small Charity Exemption.

Years after the State of Florida's first effort to regulate nonprofit organizations and protect Florida's donors from unscrupulous businesses operating as charities, there is still a wide gap between the number of charities who fully understand their obligations under FS 496 and those who believe they are "exempt from registration."

Part of the problem is that FS 496 is challenging to interpret. If you have ever read a legal statute, then you understand. Clarifying the language in the law would take too long. The solution is a two-step "workaround" to provide charity education.

Create and disseminate educational videos and resource links to relevant materials directly to current offenders in the most cost-effective manner. We created an instructional video series on related subjects with the direct help of FDACS staff at our own expense, which addresses and clarifies the problem.

Proposed Solution: Video-based education and awareness program via email directly to noncompliant charities and onsite Donor education

Step 1: (See example in the link) Produce a library of educational videos which discuss charitable solicitation laws, the nuance of FS 496 in a non-threatening manner, Why Charities should Register, where they can get more information and provide free access to further information designed to enlighten and engage Florida Charity workers. (see the examples:  Ch 496 in under six minutes)

Step 2: Deliver these resources directly to the noncompliant charities ("naughty list") by email with hyperlinks to the educational materials and provide an incentive to invite and engage all charities regardless of exempt status or classification (religious, fraternal, membership, etc.)

Creating a "naughty list" of charities that are unregistered with the FDACS requires some excel spreadsheet manipulations and cooperation between two State agencies to assemble the data. (I've tried under the freedom of information act - but that's a different story).

SunBiz has data and contact email for every business designated as a nonprofit operating in the State of Florida. The FDACS has data and addresses of all properly registered charities. Combining the two databases in a similar format, then sorting alphabetically and by EIN and removing all duplicates with email addresses. These steps would yield a reasonably accurate naughty list, and instructions/video links could follow for free via email.

Example: It's relatively simple math to get started. Then a typical sales cycle of outreach, follow up, tracking, engagement, repeat.

Sunbiz registered not for profit businesses – FDACS registered not for profits = “Naughty list"

The naughty list receives regular video outreach, access to mentoring, education, and online resource engagement.

“No-fee annual registration on form 10100 < $25,000.00> Sliding fee registration on form 10110”

Educational materials must clarify annual registration requirements and procedures with a heavy focus on the benefits of registration. Outreach provides in-person and virtual engagement opportunities between state and small charity personnel, which provide proof and testimonials for the program.  

Estimated cost:

  • Time and cost to get the data from two state agencies collected and sorted. (1 week with the correct phone calls from the correct people.)
  • Time and cost to assemble tracking analytics to assess the reach and plan the impact: (1 day)
  •  The ongoing expense to improve and adjust educational materials and promote FDACS

Problem 4. Check a charity - ratio repurpose and clarification

Ratios displayed on the CAC reflect a charity's yearly performance. Since the FDACS give no historical data or instruction for using the data, the CAC site is encouraging misuse of the information by visitors to their website. Charity to charity comparison based on ratios that do not directly relate to each other is dangerous.

This system always reflects poorly on small charities due to their lower income. It also perpetuates the myth that investment in small charities is a high risk, and it diminishes the direct impact potential small charities have for improving communities.

  • A High fixed (mandated) cost vs. modest annual income, results in a high ratio in "Management & General" expenses.
  • High ratio numbers overshadow the true potential of a small charity.
    • This system stacks the deck against "small" charities.
  • This system undermines the usefulness of Florida's CAC. Small charity will always seem to perform poorly.

Proposed Solution A: Display Year to year trend with a compare function for multiple charities simultaneously.

The C-A-C provides a set of ratios each year, based on the expense and income figures reported by each charity. Because of the overwhelming number of variables, it is inherently unreliable to compare the expense ratios from two different organizations.

There is no user education on how to interpret the ratio information. Donors compare charities to each other based on these ratios (regardless of size). A clear explanation of the rationale for the ratios would benefit the user, and historical graphics and numerical performance display would make the data more valuable.

It is impossible to track year to year performance for one charity "at a glance" because the state does not provide historical data on their CAC website. FDACS should already have historical data in its archives. Therefore the State could reformat the CAC site to calculate and display year to year efficiency numbers in graph and number format and thereby produce a reliable trend for each charity.

Providing a trend comparison tool across three or more charities would make the CAC more relevant for charities and donors. Being able to compare and sort by trend results would be invaluable to the community investors. It would also allow a donor to make a fair comparison between organizations of vastly different sizes.

Proposed Solution B: Provide clear, concise directions on the state financial form and in the instructions.

Many small charities, to save money, complete the forms without the proper direction. Frequently, financial data is collected correctly and reported improperly due to a lack of instruction. There are no instructions. As a  minimum, States must provide reasonable guidance on how best to use the information provided and clear direction or best practices for filling out the forms.

Estimated Cost: This one may take a week to wireframe, code and, test - I'd give my team a 20 hour week. Hiring an outside consultant for this would probably cost hundreds of thousands of dollars.  I propose a long term, low-cost approach to solving this problem, so the expense was recovered annually by increased site participation, increased revenue from licensing fees.


Problem 4: Financial Form 10110 (Small Charity) Special Fundraising Event, 4b.

An FDACS-10110 form is a tool for reporting financial performance in small charities. In Florida, that designation applies until a charity makes $25,000.00 or more in a fiscal year. There are currently no instructions associated with the form. The State must educate small charities on the proper use of the state supplied financial forms.

The State should clearly illustrate the value of accurately allocating expenses to "Special Fundraising Events." Finally, the state could quickly improve the document so that the user can provide numbers that accurately reflect their performance.

Example:

Improperly allocating expenses to specific projects inflates "Management and General Expenses."

This system creates a high Management expense, which makes a difference in the CAC's display and always reflects poorly on the small charities. Can you see it? Look closely.

Proposed Solution: Clear education via video and print via a pop-up on the website itself also clearly written instructions for the forms printed on the state's website.

Cost to Implement: A non-threatening educational video (click here for non-threatening educational video). Time and cost to decide on the proper language for the directions. Time and cost to load the video as a pop-up and to update the text on the PDF directions (1 day?)


Problem 5: Isolate mandated expenses for small (or all) charities

All charities are mandated to carry insurance (E&O, Liability, etc.). E&O Insurance makes good business sense for several reasons, but insurance is a Management & General Expense. The average cost can be 20 – 30% of a small charity's annual budget. There is no ethical way to allocate this expense above the expense line of the form.

Isolating the mandated expense for small (or all) charities will account for the cost and reflect Management & General Expense ratios, which more clearly reflect the efforts and accomplishments of the smaller organization.

If the state's goal is to provide a tool that accurately reflects the charity's program vs. management expense efficiencies so they can be used to compare different sized charities, this simple fix will achieve that goal. 

An adjusted Managements & General Expense ratio provides a more accurate ratio for the specific fiscal performance of any small charity. It eliminates the negative impact or burden of carrying a substantially higher expense when comparing different sized charities.

Proposed Solution: Clear education via video and print via a pop-up on the website itself also clearly written instructions for the forms printed on the state's website.

Cost to Implement: Video and cost to decide on the proper language for the directions. Time and cost to load the video as a pop-up and to update the text on the PDF directions (1 day?)

Florida does a fantastic job of managing the confusion and liability that come with solicitation laws and fundraising regulations. Implementing these changes will take less than a month and probably less than a thousand dollars.

The potential financial benefit to the State from implementing these changes is enormous. Improved charity efficiency, licensing enrollment, and reduced compliance costs from these changes would be measurable in the first year. The social benefit from these changes would grow for generations in Florida and could easily set the standard for other states to follow.

Each of these five items will have a positive impact on small Florida charities individually. They will save them money and reduce stress on the founders and board members. They will increase small charity registration in Florida and help those who are already registered.

And yet it's about more than money and efficiency. It's about who we are as individuals, as businesses, as communities, and as a State and whom we aspire to be. There is always a need for improvement in any individual, any business, and any community. The State of Florida is no different. Implementing these changes together will make a clear statement that Florida cares about philanthropy at all levels, not just the top 1%.

When we look out for the little guy, we look out for everyone. I hope you see that by looking out for the small charities, we improve our communities too. Here are five things we can do this week at the FDACS that will help all Floridians. Now it's up to us. 

If you've read this far and agree, please share this with others and leave a comment below. If you think I'm way off base on the subject of the value of small charities, share this with everyone you know, and I'd love to hear your viewpoint. Leave a comment below.

 

[i] https://givingusa.org/giving-usa-2019-americans-gave-427-71-billion-to-charity-in-2018-amid-complex-year-for-charitable-giving/

 

[ii] IRS.gov EO Exempt Organizations. 877 829 5500: Correspondence Unit P.O. Box 2508 Room 6403 Cincinnati OH 45201

 

[iii] https://www.irs.gov/charities-non-profits/exempt-organizations-business-master-file-extract-eo-bmf

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