TIME: Almanac 1995

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<text id=93TT0216> <title> Aug. 16, 1993: Remember The Greedy </title> <history> TIME--The Weekly Newsmagazine--1993 Aug. 16, 1993 Overturning The Reagan Era </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 36 Remember The Greedy </hdr> <body> Exploiting their tax-exempt status, a growing minority of nonprofits put themselves before the poor By ADAM ZAGORIN/WASHINGTON Those who have lost bets on the smile of Ed McMahon, the pitchman for the Publishers Clearing House $1 million sweepstakes, might be interested to know that the bassooned-voiced Oz of fast, painless money feels a bit betrayed himself these days. McMahon has filed suit to prevent American Veterans Assistance Corp., a California charity, from using his name to solicit money for, among other things, a veterans' shelter. More than 90% of the millions raised so far, according to a separate complaint by the California attorney general, was actually funneled in fees to several fund-raising companies owned or under contract to the man who controls AVAC, a former clothing-store owner named Mitchell Gold. "I wanted to jump in with both feet helping veterans, only to be deeply disappointed," says McMahon, a onetime Marine airman. "We have to make sure that charities and nonprofits are doing the Lord's work." Amen. The vast majority of charities are well run and dedicated to helping others. But in recent years, as their number and size have increased, they have attracted a rising number of swindlers, creative bookkeepers and richly paid executives. Says Richard Blumenthal, Connecticut's attorney general, who chairs a committee on charitable solicitations for the National Association of Attorneys General: "There has been a dramatic increase in abuses and complaints in every state that actively monitors nonprofits and charities over the past five years." Last week, while some Congressmen were busy negotiating the fine points of President Clinton's deficit-reduction package, others took time to hear about the fiscal frivolity of nonprofits. Testimony before the House Ways and Means Subcommittee on Oversight produced one case involving the Trevor B. Ewing Foundation for Brain Tumor Research. The group raised $350,000 but allegedly squandered most of it on polo matches staged in the posh New York City suburb of Darien, Connecticut, and on expensive ice sculptures at luncheons held before the sporting events. Other testimony cited a charity executive who used tax-free funds to pay for his child's college tuition, lease a luxury car for his wife, have his kitchen remodeled and rent a beach hideaway; he also charged nearly $60,000 in personal expenses on the office credit card. Says subcommittee chairman J.J. Pickle of Texas with a drawl of understatement: "Unfortunately, not all charities and nonprofits are run by people with halos." Of course, tricking big-hearted people out of their money has been around as long as false prophecy. But the problem is causing more consternation than usual these days because the nonprofit sector is getting too big to ignore. With $1 trillion in assets and an annual turnover of $500 billion, nonprofits now account for 6% of the nation's gross domestic product and employ 7 million people, or 1 out of every 18 members of the labor force. Despite the sluggish economy, these companies are proliferating (29,000 came into existence in 1992 alone), and donations reached $124.3 billion last year, a 6.4% increase over 1991. Growth in this area has been four times as fast as the U.S. economy as a whole since 1970 and has accelerated the scramble for money among more numerous rivals. Just last week New York attorney general Robert Abrams filed suit against the National Awareness Foundation, a Washington group with the slogan "Hugs Not Drugs." Abrams says NAF placed 1,800 candy-vending machines and honor boxes bearing its name with New York merchants. The suit charges that most of the money was kept by the merchants and that the small portion turned over to NAF ended up in the pockets of leaders Ruth and Ed Shaw, who spent it on personal cars, credit-card purchases and a honeymoon in Hawaii. NAF denies all charges. Even a few Girl Scouts have been drawn into a squabble over their organization's spending practices. Earlier this year Beth Denton, a troop leader in West Haven, Connecticut, blasted regional Scouting bureaucrats for devouring too much of the proceeds from the annual cookie sale, which generates $400 million nationwide in tax-free revenue, and for leaving the girls with less than 14% of the earnings they had been promised. Denton's protest inspired three other troops to refuse to sell cookies. But the Girl Scouts of America denied that the money was divided unfairly and last February expelled Denton from the organization. Meanwhile the Freedom Forum, headed by former Gannett Co. chairman Allen Neuharth, a $700 million nonprofit with opulent headquarters in Arlington, Virginia, is under investigation in New York State for "excessive or imprudent" expenditures. What gave rise to the latest spurt of outrage over the extravagant habits and poor management of nonprofit organizations was the 1992 scandal involving United Way president William Aramony. Accused of nepotism and free spending, Aramony was forced to resign his $441,971-a-year post. Since then he has demanded $4 million in retirement benefits, which has produced another round of headlines. While that controversy lingers, new ones about excessive salaries and lavish perks in the nonprofit sector have surfaced. As in the private sector, links between pay and performance are often weak, with salaries varying wildly. At the Salvation Army, the national commander makes less than $60,000. But John Rowe, president of tax-free Mount Sinai Medical Center in Manhattan, pulls down $799,492 in salary and an additional $26,249 in benefits. Many nonprofit officials contend that big paychecks are not only deserved but necessary in order to compete for talent with private employers. Yet a number of independent compensation experts argue that the megasalaries are sometimes out of line with the requirements of the job, not to mention the spirit of the organization. Oversight subcommittee chairman Pickle is considering legislation that would require the IRS to approve a compensation package that exceeded the $200,000 earned by the President of the U.S. A recent congressional study of the pay of 2,000 top executives at the nation's 250 largest tax-exempt organizations shows that 300 are paid more than $200,000. Of those, 64 receive between $300,000 and $400,000 and 38 make even more; a few take home more than $1 million. At one tax-free educational trust, four trustees are paid almost $700,000 each. "The cupidity virus is often transmitted to nonprofits through board members who are making a lot of money in the private sector," remarks Graef Crystal, a leading expert on executive compensation. "Many of the heads of big institutions are testing g-r-e-e-d positive." Some nonprofit behavior is merely unseemly, but illegal practices are also spreading. Pennsylvania has accused four charities that raise money in the state of engaging in an elaborate accounting scheme to conceal the fact that most of their money is spent on perpetuating themselves, not on helping the needy. The four, all employing the same accountant, allegedly swapped expired vegetable seeds, stale cookies and damaged books in paper transactions among themselves before much of the material ended up on an Indian reservation in South Dakota. The complaint charges that each claimed a donation valued at more than $2 million, listed on tax forms as services to the poor, which then boosted the groups' attractiveness to donors by creating an artificial credibility. It was only when the seed producer who made the donation discovered that huge quantities of its packets were either being thrown away or sold out of the back of pickup trucks by the South Dakota Sioux, that the scheme finally became public. Then there is the story of Princess Pale Moon, a self-proclaimed American Indian and the head of the American Indian Heritage Foundation in Falls Church, Virginia. Her group sent out flyers pleading for donations to help what it described as the starving Paiute Indians in the Alaskan village of Port Graham. "The icy hand of winter is already reaching for Port Graham, threatening to strangle the little ones in a death grip," ran the direct-mail appeal. But an investigation by the Anchorage Daily News charged that no one had told the village of the appeal and that it suffered from no food shortage. Outraged Port Graham officials pointed out that the Paiute tribe is located in Nevada, not Alaska, and refused to accept 1,000 lbs. of frozen beef liver that the Indian Heritage Foundation attempted to foist on the community. An officer of the charity calls such reports exaggerated and claims the whole episode was based on a misunderstanding. The final affront: some critics say Princess Pale Moon is no princess at all. Born Rita Ann Suntz, "she could just as well claim to be the Queen of England," as one Indian leader put it. But Pale Moon says she is Native American on both sides of her family, and her foundation insists it remains active on behalf of that population. Its latest financial statement claims it distributed nearly $21 million in donated gifts, money and services to needy Indians. Some abuses of nonprofit status are not about deceptions, even unintentional ones, but about unwillingness on the part of charities to behave charitably. Such was the case of Methodist Hospital in Houston, which has annual tax-free revenues of $500 million. The Texas attorney general filed suit against the hospital, charging it was failing to fulfill its charitable purpose because it excluded non-emergency, uninsured patients unless they could pay a deposit equal to the entire cost of their care. The suit said the hospital devoted only about $5 million annually to charity care even though it received more than $40 million each year in the form of tax exemptions. Meanwhile the hospital was showing $76 million in excess revenue (the nonprofit equivalent of profits) and had accumulated more than $600 million in its cash reserves. A court dismissed the case in February when it could find no state law requiring a specified level of charity care. But adverse public reaction to reports of Methodist's valet parking, well-appointed suites for high-paying patients and gourmet dining, helped spur the Texas legislature to pass a landmark bill forcing tax-exempt hospitals to plan for and provide prescribed amounts of care to the needier members of their community. Methodist will henceforth be obliged to devote 4% of its revenues, or about $19 million, to care for indigent patients. Officially, the burden of ferreting out questionable practices at nonprofits falls on state and local governments as well as the Internal Revenue Service. Unfortunately, a patchwork of conflicting regulations across the country makes it relatively easy for abusive operators to slip through the cracks. In many states and at the federal level, enforcement has fallen far behind the enormous growth of tax-free institutions. A hiring freeze and attrition at the Washington-based IRS division responsible for monitoring nonprofits has shrunk the staff to 100 from 120 five years ago, even as the number of groups claiming nonprofit status has exploded. Last year the IRS conducted a mere 1,852 audits of such groups, down from more than 5,000 in 1986. Earlier this year, Republican Senators John Warner of Virginia and Jesse Helms of North Carolina introduced a bill that would require tax-exempt organizations to provide more information about the way they raise funds and spend them. On a practical level, the bill would help donors make better choices. But for the burgeoning nonprofit sector of the U.S. economy, a lot more is at stake--namely, the ability to coax millions of Americans every year into making a tiny leap of faith. "It's not just the organization in the headlines that gets a black eye," says Daniel Langen, an official of the National Charities Information Bureau, a New York watchdog group. "Some guy who works hard for a living starts reading the newspaper and gets the impression that all nonprofits are just as bad." </body> </article> </text>