As the tax year ends, it's time to haul out those fund-raising letters you've been tossing in a shoebox all year. In the past, you may have made charitable donations based on a solicitation's heart-tugging appeal or a vague notion of a group's mission. But today, it's easier than ever to apply the same hard-headed analysis to your philanthropic donations that you do to your retirement investments.
Last year, individuals gave $135 billion to charities, nearly 10% more than the year before. Now the government is making it simpler for you to check up on where your charity dollars are going. In June, Congress started requiring that public charities make detailed tax returns easily available, and two Internet sites, including one run by Philanthropic Research Inc. in Williamsburg, Va., have posted thousands of them. The documents offer information that, together with other resources, can help you assess which charities are well-managed, financially healthy, and meeting their goals.
If you don't have specific charities in mind, start by answering a basic question: What kind of good works do you value most? There's nothing wrong with diversifying a philanthropy portfolio, but givers are likely to do the most good if they don't spread donations too thinly. Once you've settled on causes, scour the free Internet database of 620,000 nonprofits run by Philanthropic Research's GuideStar service (table). By typing in the key word, "homeless," GuideStar came up with more than 3,100 programs that provide services to the homeless. A more targeted search for health services found 194 groups.
Armed with your initial list, you can do some serious probing. For national charities, there's a fair chance a philanthropy watchdog group may have investigated already. The Council of Better Business Bureaus' Philanthropic Advisory Service has a list of about 200 nonprofits it has reviewed. The full reports are available for free online or by mail. Many local BBBs also review community charities, so it's worth checking with them. Or call your state attorney general's office to see if there have been complaints. The National Charities Information Bureau (NCIB) also issues detailed reports on 400 nonprofits. You can find out for free whether the charities have met the bureau's standards by checking its Web site. A full report costs $9.95 per charity. The criteria developed by BBBs and the NCIB are also a useful guide for donors who want to review charities that have not been evaluated by either group. The standards include benchmarks on appropriate fund-raising practices, the share of total income a charity should spend on programs, and the composition of the charity's board of governors. The standards are available free online or by mail.
PERSISTENT DEFICIT? Charity experts suggest that donors who want to do hands-on analysis should obtain a nonprofit's annual report or other descriptive material, financial statements, and its tax return known as IRS Form 990. Many charities post these documents on their Web pages. Moreover, both GuideStar and the National Center for Charitable Statistics, run by the Urban Institute in Washington (nccs.urban.org), are rushing to post the 990s online. About 220,000 charities are required to file these tax returns with the government, though Congress does not require the reports from churches or nonprofits with less than $25,000 in revenues. Under the new law, a charity must make its return available to the public, either immediately, if a prospective donor shows up at its office, or by mail within 30 days of the request.
The most important question a prospective donor should answer is whether a nonprofit is meeting its objectives. A charity's Web site, annual report, and often the tax return itself will describe the group's mission and offer some measure of its success in reaching its goals. In its 1998 annual report, Save the Children Federation noted that it provided food to 9,792 Ethiopians ravaged by floods, and that it set up 800 village schools for 50,000 children in Mali.
The trickiest part in vetting a charity is measuring financial efficiency. The 990 is not easy to read, though even a casual perusal offers some clues. Is there a persistent deficit? Is it paying top executives an exorbitant share of gross revenues? If the entity is getting federal grants, the government has probably checked it out. Part I of the 990 will list general sources of funds, including government grants. If it gets a large share of funds from the general public, that's one indicator of trust, unless a huge part of its contribution income is spent to solicit donations. Says Vivian Moore, senior manager in KPMG's exempt-organizations tax practice: "Look out for things that seem out of whack."
The NCIB recommends at least 60% of an organization's annual expenses go to program activities, while the BBB's benchmark is at least 50% of income. The American Cancer Society's 990 shows it spent $208 million in 1998, with $161 million--or 77%--going to program services. But Arthur W. Schmidt Jr., president of Philanthropic Research, warns that donors should use such ratios with care. A new organization could have high fund-raising and administrative costs as it gets established, even though it's showing progress in accomplishing its mission.
Once you've made your decision, you have several options for donating. You can send in a check or donate online via credit card. Other charity-related sites will forward your donation, but check out the fees. One site that charges only a credit-card processing fee is Helping.org, a new collaboration of GuideStar, the AOL Foundation, and several other groups. The site allows users to donate to most of the 620,000 charities in the GuideStar database.
Vetting charities may take more time than you're used to. But doing so will help ensure your efforts to do something for humanity are not wasted.