How to tell good charities from bad

By Liz Pulliam Weston

Tough economic times mean more people need help. But tough economic times also mean more charities are on the brink as endowments shrivel, major donors cut back and fundraising efforts bear less fruit.

Two-thirds of the organizations polled by charity watchdog GuideStar in October reported increased demand for their services. Yet nearly half of those that rely on year-end giving said they expected donations to drop this year.

Does that mean you should be more sympathetic to the pleas you get this holiday season? Not exactly. If anything, you should be more careful and skeptical than usual, said Daniel Borochoff, the president of the American Institute of Philanthropy.

"Some of the groups are going to have to close their doors" because of the harsh financial environment, Borochoff said. "There will be some desperate behavior (by charities that) will be tempted to exaggerate and mislead."

Unfortunately, there are often are no easy ways to tell the good guys from the bad guys.

• Talk back: Are you giving less to charity this year?

Even nonprofits that aren't outright frauds may go to great lengths to conceal how they spend their money. And the watchdogs that are supposed to help us decide typically have vastly different ideas of what's an acceptable practice and what's not.

We'll get to some practical solutions to the problems, but here are just some of thorniest issues you face:

Most charities pretend they don't fundraise. You want the bulk of your donation to go to a charity's programs, not its administrators or fundraisers. To that end, the better-giving guides typically suggest you ask for the charity's Form 990, the Internal Revenue Service form that is supposed to detail how contributions are spent. Yet 64% of the 990s in a 2002 General Accounting Office study (.pdf file) listed no fundraising expenses at all.

Borochoff has reviewed thousands of these forms, and he says many charities misreport their fundraising as "program development," "public education" and other misnomers. As the public becomes more sophisticated about the need for low fundraising costs, the charities get craftier about hiding them.

"It continues to be a problem with groups not counting as fundraising things that really are," Borochoff said.

Regulation is perilously thin. The IRS has redesigned Form 990 to ask more questions about fundraising, executive compensation and other hot-button issues. Charities will start using the new form next year, but the IRS pretty much depends on the organizations to be honest. The tax agency doesn't audit many nonprofits, and the agency staff responsible for handling the Form 990 filings has shrunk even as the number of reports has grown, according to the GAO's report. State regulation is a patchwork quilt, and there are few restrictions on how charities spend their money.

In fact, the Supreme Court recently decided that for-profit fundraisers can legally keep almost all the donations they get in a charity's name, provided they don't actively lie about how much is actually going to the nonprofit.

Even the good guys screw up. Charities that have reasonable fundraising and administrative expenses still manage to blow it now and then. Critics excoriated the American Red Cross when the charity revealed plans to divert money from its Sept. 11 fund to other causes; the charity ended up changing its policy so the money would benefit only victims and their families. The United Way also has had its high-profile embarrassments, including a CEO convicted of defrauding the charity in the early 1990s and a finance officer who pleaded guilty to embezzling $1.9 million to pay for quarter horses.

Sometimes the watchdogs don't agree. The Better Business Bureau's Wise Giving Alliance says the Shriners Hospitals for Children met its standards, but Borochoff's philanthropy institute gave the charity a failing grade for continuing to raise funds while sitting on enough cash to pay for years' worth of programs. The BBB alliance thinks it's OK for a charity to maintain such an endowment to smooth out unpredictable swings in giving; Borochoff doesn't think a nonprofit should hit you up for money before spending what it's got.

Charity monitors also disagree about how much fundraising should cost. The philanthropy institute won't give a high grade to charities that spend more than 25% on raising money, but the BBB alliance thinks 35%, and sometimes more, is reasonable.

Do these difficulties mean that you get to sit on your wallet this holiday season? Hardly. Legitimate charities need your money, and most of us feel some obligation to give back a little of our good fortune each year.

Keep your cash in good hands

If you have the time and inclination, there are plenty of ways to check out a charity, and I'll give you some suggestions below. If you're in a hurry, though, here's a down-and-dirty giving guide that will all but ensure you don't give money to the wrong folks:

Hang up on telemarketers. It may seem convenient to give over the phone, but it's a bad idea in so many ways. Not only can you be easily scammed giving your credit card number to a stranger, but any charity that pays telemarketers is probably spending too much on fundraising.

Ignore pleas to help cops and firefighters. Scams abound in this corner of the fundraising world. As Borochoff points out, it's not the old days when the widows and children of these public servants were routinely left penniless. These days, their benefit packages are typically some of the best around.

If you really have your heart set on helping your local firefighters or cops, be proactive: Take the time to call the department, find out if it has an official foundation or benevolent fund, and send your money there. If you want to deduct your donation, make sure you're not sending money to a union lobbying group or a fund that benefits specific people.

Continued: Bogus charities for veterans

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