Why Everything You Know About Charitable Giving Is Wrong
Policy + Politics

Why Everything You Know About Charitable Giving Is Wrong

Getty Images

Charities usually see huge spikes in financial donations in the waning days of December, mostly because contributions are tax deductible – at least for now. But giving away your hard-earned money in a rush at the end of the year is probably not the best way to be a philanthropist.

“If you’ve waited this long, you’ve already put yourself in a pinch,” says Dan Pallotta, an expert on the nonprofit sector. “You should be thinking about your charitable giving in January.” Beginning the process early in the year allows time to perform important due diligence on the organizations you’re thinking of giving to, so you can maximize the impact of your donations. 

RELATED:  Are You Getting the Most Out of Your Charitable Giving?

Pallotta, who’s worked in the nonprofit sector for more than two decades and is the author of the new book, Charity Cases: How the Nonprofit Community Can Stand Up for Itself, advises finding a charitable “partner” for life, assuming your level of giving is significant. “Pick an organization or group you can really care about – and start thinking of yourself as a philanthropist,” he says. “This is not just about Bill Gates and Warren Buffett. It’s about your role as a philanthropist. Even if you only have $250 a year to give, you want to give that money conscientiously, thoughtfully.”

In an interview with The Fiscal Times, Pallotta shared other tips about charitable giving and nonprofits busting a few myths along the way: 

Asking about overhead is a fool’s game – you deserve better .
“The public doesn’t like to see high executive salaries,” says Pallotta. “The public wants every gala dinner and walkathon to send 100 percent of its money back to the cause. But what people don’t realize is that low overhead is not a path to ending world hunger or curing cancer.”

Here’s why: If you ask an organization about its overhead, you’re not going to get “information about the quality of what’s going on at that organization,” he says. “Let’s say it’s a soup kitchen. A low overhead figure doesn’t tell you about the quality of the soup, or whether the staff is friendly to its clients, or whether the place is open 24 hours a day. For all you know the soup might be rancid and the staff is rude and the place is closed half the time.”

Over time, the overhead figure “has become a proxy for indicating waste and fraud, but it doesn’t do either of those things. Waste can happen in any part of the pie,” says Pallotta. “And as for fraud, the way the overhead percentages come to the watchdog agencies or the attorneys general is through the organizations’ own tax forms – so unless people are really stupid, they’re not going to report fraud on their tax forms.”

Ask, instead: What are your goals? What progress are you making toward those goals? And how do you know you’re making progress?
The answers to these three direct questions can deeply inform you about the charity you’re interested in – and a site visit is the best time and place to get these answers, Pallotta says.

“Meet with an executive director, a development director, or the head of a program at that charity – and explain you’re considering partnering with them over time and want to get to know what they’re all about.” You’ll know fairly quickly if what they’re doing inspires you or not. “If it’s a breast cancer charity and they say, ‘We’re working hard to fund the best research,’ well, OK, that’s one kind of goal. But another organization might say, ‘We’re on a mission to end breast cancer within the next ten years’ – and that may be far more interesting and appealing to you.”

Key question: Will the organizations even make time for you? You wouldn’t expect that if you’re giving, say, $25. But for a significant level of giving, “my experience is that they will make time for you,” says Pallotta. “A big organization like the American Red Cross has large development staffs and programs staffs, and the fundraising operations of these charities are in the business of responding to donors and giving tours to donors.” He adds that most would be jumping up and down to know that someone was intrigued enough to spend time checking out what they do and how they do it.

Watchdog agencies don’t tell you much so beware your trust in them.
Americans give away $300 billion a year to nonprofit organizations and charities – with little or no infrastructure in place to help figure out where or how that money can be most effective. Right now, says Pallotta, “All we have are watchdog agencies, which really only have overhead ratios for a handful of charities.”

Consider:  There are 1.2 million nonprofits in the U.S. – and “yet the biggest of the watchdog agencies only looks at 7,000 charities,” says Pallotta. “All they do is share tax information with you and maybe tell you a little about whether the charity has an adequate board of directors or not. None of the watchdogs – not Charity Navigator, not the Better Business Bureau, not Charity Watch – none does any real research on the effectiveness of a charity’s programs. GuideStar, which has a much larger database, also doesn’t do any research on a charity’s effectiveness.”

Charity Navigator launched in 2002 and says it “works to guide intelligent giving.” Pallotta, however, says that “it is a $1 million dollar-a-year operation, with about 11 staff. It’s tiny. That’s a problem. There are other things out there, like Great Nonprofits, but unfortunately that’s a kind of popularity contest. A charity can tell someone, ‘Hey, go on there and give us a five-star rating.’ That’s pretty simplistic. It’s just telling you is that they have a good grassroots PR operation.”

All of this speaks to why Pallotta feels the nonprofit sector needs to stick up for itself and develop an identity, as other sectors have. It’s why he’s begun the Charity Defense Council, which seeks to change the way people think about nonprofits.

Consider spreading out your donations, so they’re affordable.
Let’s say you want to give $2500 – but you can’t afford to do it right now.

Pallotta’s advice: Spread that donation out over five years, put it on a credit card at $50 a month – and now “it becomes affordable.”

It’s with that sort of commitment, he says, that people can truly see themselves as philanthropists and change their relationship with the charities they give to. Bottom line: When it comes to charitable giving, even in a difficult economy or especially in a difficult economy, you can make a difference if you do it right.