On the Money Trail
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The Charity Biz: Take Care With Your Giving
by Al Jacobs, author of Nobody's Fool
March 2008

Though the headline recently appearing in my local newspaper caught my attention, “State-run charity takes in millions,” I’d not have guessed who was doing what to whom.  It appears that since 2004 an Ohio attorney, Jeffrey M. Lewis, acting as a court-appointed receiver, has operated the American Deputy Sheriff’s Association, a seized charity.  During this time it has raised millions of dollars from unsuspecting donors under the guise of providing bulletproof vests for sheriffs and death benefits for their families.  In reality, 99½ percent of the money collected has gone to telemarketing fees and receivership charges.  Lewis admits that he feels sorry “for anyone who’s been hoodwinked,” but added that “charities like this would not exist if folks would do some checking.”

We Americans are a pretty generous bunch of people.  If we can’t even rely on government agencies not to run scam charities, what can we do to see that our contributions really go to the deserving?  I’ve got a few thoughts on this.  To begin with, be certain that any organization to which you give is legitimate.  There are a lot of people out there in the soliciting business who perform no charitable function at all.  They’re simply collecting money for themselves.  Some are easy to spot, using what I’d describe as the “smell test”—simply ask for credentials and a telephone number.  If that causes their hasty retreat, you’ve saved yourself the trouble of checking them further.

Beyond mere legitimacy, you want to know that whatever you give will be used for the purposes intended.  Luckily this can be checked out without much trouble.  Of the thousands of non-profits in the nation, details on many of them can be found on two websites: www.give.org and www.guidestar.org.  Both are easy to search, with a wealth of information available.  On each organization you can learn, among other things, its stated purpose and programs, the size of its staff, the source and amount of income it receives, and a detailed schedule of its expenses.  Let me give you some information I discovered during fifteen minutes of browsing.  One well-known organization I’ve always held in high regard, last year devoted 76% of collections to its programs, 19% to administration, 4% held over for the next year, and only 1% to fund raising expenses.  Sounds pretty good.  Compare this with another charity that employed only 12% toward programs while assigning 63% to fund raising and 25% unallocated.  That one’s not impressive at all.  Finally I spotted a third that admitted to a mere 1% for programs, 52% for fund raising, and not a word about the other 47%.  Why do you suppose they’re in the money-raising business?

I hope you get the message.  There’s a wide variation in the way non-profit foundations operate.  Some take their obligations seriously by devoting the contributions they receive to the purposes they profess to support.  Others are less concerned with the way services are provided and money spent.  And, unfortunately, some of the charities are nothing more than thinly disguised confidence operations that prey upon the gullible.

With this said, let me spell it out.  Don’t make contributions based simply on the promises or affability of the solicitor.  Be skeptical—and informed.  Before you make any decision, collect the information.  Then go home, or wherever you must, to search the Internet for details on the organization.  If it checks out to your satisfaction, you can then arrange for the donation.  If it doesn’t, consider the effort well spent.

You’re now entitled to a bit of reality.  Despite your inquiry and the available information, there’s no way to really know what happens to the massive sums of money that disappear each year into America’s charities.  You’ll have to take some of it on pure faith.  My wife and I regularly donate to two organizations: the Salvation Army and Goodwill Industries.  That’s our preference.  Similarly, each of you must make your own choices, but first conduct your investigation.

As a final word on giving, I want to pass on a suggestion to those of you who’ve attained a degree of prosperity—or intend to.  There’s a way to ensure that contributions you make are used effectively, and exactly as you desire.  This is accomplished with the private non-operating foundation that you can establish under Section 501(c)(3) of the Internal Revenue Code, allowing for the pursuit of a broad range or religious, charitable, scientific, or educational purposes.  Into this vehicle you’ll transfer sums of money to be used for designated purposes.   Not only are the funds applied exactly as you direct, but are fully tax deductible as well.

As a guide, I’ll explain how one organization, Science Scholarship Foundation, created in 1981, operates.  With the cooperation of the chemistry department faculties of four local community colleges, deserving students completing their sophomore years at those schools are awarded scholarships to pursue bachelor’s degrees in the physical sciences.  During their subsequent two-year attendance at universities of their choice, each student receives $10,000, scheduled in four $2,500 distributions at the start of junior and senior semesters—admittedly, not enough to live very high on the hog, but sufficient so they can spend their time studying instead of flipping hamburgers at a fast food joint.  As a condition for continued receipt of the payments, the foundation director monitors their grades.  Those that don’t perform are dropped from the program after a semester’s probation.  It’s controlled tightly with no administrative expenses—all the money goes for the intended purpose.  And best of all, over the past couple of decades it has helped over one hundred talented and dedicated students earn their degrees.  How can money be better spent?

Let me sum it up for you.  Charitable giving is a fine gesture, but generosity without accountability is not.  When you donate to a cause, make certain the cause is truly furthered.

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Al Jacobs has been an entrepreneur for forty years. His business experience ranges from property management and securities investment to appraisal, civil engineering, and the operation of a private trust company. In his book, Nobody's Fool - A Skeptic's Guide to Prosperity, Al presents his Ten Ground Rules for Success for achieving wealth and a prosperous life by outlining a philosophy for spending, borrowing, making sound investments, and how to avoid being victimized by America's many intimidating institutions.