Paul Nelson is president of the Evangelical Council for Financial Accountability (ECFA). The organization was formed in 1979 on the heels of Congressional hearings into allegations that evangelical charities were abusing their tax-exempt status. The allegations arose from press scandals involving corrupt televangelists, and leaders in Congress threatened to pass new federal regulations on religious nonprofits. In response, Billy Graham and other evangelical leaders established ECFA as a voluntary nonprofit accrediting agency for evangelical ministries. Today, ECFA is a membership-based group that ensures each of its 1,165 dues-paying members, which together receive $14 billion annually, comply with its seven basic standards for operating a nonprofit organization.
Last year, Nelson was asked to serve on the Panel on the Nonprofit Sector. Formed in 2004 by Independent Sector at the urging of the Senate Finance Committee, the Panel’s job is to prepare suggestions for Congress on how best to oversee the tax-exempt world. Its interim report was released in March 2005, and its final report is due in June 2005.
Recently, Nelson sat down with Philanthropy to discuss the proposed Congressional reforms of the tax-exempt sector, the role of the Panel on the Nonprofit Sector, and the way ECFA ensures its members are responsible stewards.
PHILANTHROPY: You recently spoke at a meeting hosted by the Alliance for Charitable Reform in Washington, D.C., that dealt with proposed legislative changes to the nonprofit sector. Could you summarize your remarks to that audience?
MR. NELSON: My main objective was to demonstrate the breadth of changes to the nonprofit sector being discussed in Congress. The Joint Committee on Taxation’s suggestions, in particular, reach far beyond addressing particular problems with current law. They would create an oversight environment that imposes onerous financial and reporting requirements on all types of nonprofits.
It’s O.K. to fix the problems in the existing law. I support that. Clearly, there have been issues that need addressing, the most obvious being the car donation rules, which everyone agrees were ripe for abuse. There are also well-known problems with Type III supporting organizations. But all these problems involve a small sub-sector of the charitable world. Congress should fix the loopholes—Congress made them, after all. But Congress is proposing we go far beyond basic fixes.
PHILANTHROPY: One fix that has been proposed is to make a group’s tax-exempt status contingent on some sort of private accreditation. Is this wise?
MR. NELSON: Absolutely not. First and foremost, it’s important to ask if Congress is even allowed to do such a thing. To accomplish this, Congress would have to delegate the accrediting process to an outside agency, and I don’t think it can delegate away the authority to make tax decisions.
Second, the accreditation process will layer unnecessary costs on law-abiding charities. Organizations will spend innumerable hours and countless dollars filing reports that in all likelihood will never be reviewed. It’s an awful waste of energy and resources. And every dollar wasted on that kind of oversight is one dollar less for the mission of a charity.
In a word, I fear that this move would be an attempt to federalize local charities. Large charitable groups such as the Red Cross, World Vision, and Salvation Army, which fund nationally and internationally, could absorb some of the costs. But these charities are not representative of the vast majority of groups which are local. Community charities are very efficient and effective in their work, and they do great things for civil society. But if we force them through an accreditation process, the government will be taking money out of their pockets, money that should be spent on mission.
The Joint Committee on Taxation paper lays out how much money the government could take in by doing this. In effect, the committee is talking about funding government deficits on the backs of charities.
Finally, accreditation is a process ripe for politicization. We must be very careful here. At ECFA we insist on a series of checks and balances to keep the process honest. But that would be very difficult to do at the federal level because of the oversight required to make it work.
PHILANTHROPY: The Senate Finance Committee’s discussion draft holds out the possibility that government funds would go to private accrediting groups. Would ECFA accept taxpayer funds for its work?
MR. NELSON: Never. Our reasons stem both from our belief in the separation of church and state, and from our desire to retain our religious identity. If we were to accept government funds, we would have to accept the strings that go with them, whether it’s Equal Employment Opportunity Commission hiring regulations, or something else. We would never, even if offered, accept government funds.
PHILANTHROPY: You serve on Independent Sector’s Panel on the Nonprofit Sector, which avoided most of the “hot button” issues in its interim report.
MR. NELSON: I need to make it clear these are my personal views and that I am not a spokesman for the panel.
From the outset, the panel had to develop a working cohesiveness before tackling hot-button issues such as board compensation, periodic review of tax-exempt status, and the valuation of non-cash contributions. It’s by design that these were put off until the final report. Many of these issues required more research to do them justice. Also, by design, the Panel is very diverse, which makes it likely to become more divided on some of these issues.
PHILANTHROPY: Is there a working assumption on the panel that more government oversight is needed?
MR. NELSON: At the time I was invited to join the panel, I thought perhaps some members of the panel might harbor that assumption, which I don’t share. Still, to be practical, we have to recognize that Senator Grassley is going to introduce legislation, and so I think it’s better for the community to be at the table. Otherwise, government bureaucrats are going to set the rules. Once you go to the table, of course, the danger becomes that you serve as an enabler for legislation. I don’t believe the panel assumes there’s a need for extensive new regulations. I would say most of those serving on the panel believe there are problems in our sector, including me. Now do the problems rise to the level that require the drastic regulations suggested by some Congressional proposals? I don’t think so. But that’s the debate.
PHILANTHROPY: Some critics argue that the panel is insufficiently representative of the world of tax-exempt organizations. For example, there aren’t a lot of representatives from the nonprofits that you cover at ECFA.
MR. NELSON: Yes, and yet I was invited there. The panel started out with the intention of being diverse. This was a group that was already meeting as an ad hoc committee beforehand, and it had to face the issue of so many people wanting to be part of it.
The panel has gone to great lengths to ensure that the full diversity of voices is being heard. We’re now at something like 175 people. In fact, we’ve reached the point where the efforts to be inclusive are slowing us down because we want to give deference to every voice.
PHILANTHROPY: Some would argue the market is already addressing many of the problems in the tax-exempt world through the recent increases in private watchdog groups like ECFA, CharityNavigator, and others.
MR. NELSON: Yes, clearly. Self-regulating groups have been actively expanding for the past five years to fill donors’ ever-growing desire to learn more about the organizations they’re funding. There are problems with these self-regulation groups, to be sure, and I’ve written about that. [See Philanthropy, “What Donors Need to Know About Rating Services,” January/February 2004.] But for all their problems, these private watchdogs are a better solution than government. Self-regulation allows donors to decide through the marketplace which charities are valuable and which are not. That’s our system.
Further, there’s good reason to believe that watchdog groups are having a positive impact on American giving habits. The spotlight on the nonprofit world is as bright as it’s ever been. For all the talk in Congress about the troubles of the nonprofit world, the recent tsunami disaster showed that Americans have not lost trust in charities. The public still believes in charities, and they’re ready, when the chips are down, to line up and send their dollars. That’s a healthy sign of a compassionate society.
PHILANTHROPY: What are the shortcomings of watchdog groups?
MR. NELSON: I think the biggest weakness is that there is too much emphasis on so-called efficiency, and the public doesn’t draw the distinction between efficiency and effectiveness. Our preoccupation with the percentage of funds going to fundraising demonstrates my point. A fundraising percentage will identify con artists who take 95 percent of all the money collected for themselves. But is one charity necessarily less effective if its fundraiser takes 15 percent of dollars collected versus 12 percent for another? I think not.
When charities allow themselves to be defined by these ratios, they’ve done a poor job of articulating what they’re accomplishing with the dollars donated to them. Charities need to spend more time telling their donors what they did with the last dollar received than what they’re going to do with the next dollar collected.
PHILANTHROPY: What standards does ECFA use to enforce its seal of approval, and are they tougher than those required by law.
MR. NELSON: Yes, our standards are tougher than those required by law. This is by design, and it’s worked well, I believe, although there are those in the current environment who disagree.
As for the standards themselves, we’ve tried to keep them simple—not simplistic, but simple. We focus on what we believe the public wants to know. Does a charity practice transparency and disclosure with its finances and other operations, is it governed independently and responsibly, free of conflicts of interest, and does it raise funds with integrity?
If these items are handled well, you have an organization that’s in control. Beyond these standards, donors should investigate other things to ensure the organization is pursuing excellence, exercising best practices, etc. But if you’re a donor and you want to know your dollar will be spent with integrity and managed properly, our standards go a long way toward ensuring that occurs.
PHILANTHROPY: What are the benefits of measuring groups by a few simple standards?
MR. NELSON: The greatest advantage comes in enforcement. If you have too many standards, it’s nearly impossible to enforce them all. Our annual accreditation process is very intrusive. A simple set of standards ensures we can enforce them all. A second advantage is that the standards are easy to understand, both for the organization and for the public. Any violation of these standards turns the boat over. We provide many “best practice” models to help our members pursue excellence beyond just meeting the standards.
PHILANTHROPY: Could you be more specific?
MR. NELSON: Yes, the violation of any of the standards becomes grounds for termination, which involves ECFA pulling its seal. Before pulling the seal, however, we try to work with the offending organization. In fact, I believe our best work is done in these situations. We will sit down with an offending party, point out its shortcomings, then work with it to make things right.
For the most part our organizations will work with us under that type of confrontation. Remember, they joined voluntarily. If an organization is ready to work with us and we determine that the violation was not a willful act—there’s a lot of ignorance about many aspects of the charitable world—we’ll set a course for getting the organization on track.
We try to do this privately, but it isn’t always possible. When the media is involved in high-profile cases, we’ll often issue a public statement acknowledging an organization has violated the standards and that we’re working to bring them into compliance.
In some cases, it’s clear that the transgression was egregious. In these circumstances, we may suspend the organization, which involves pulling the ECFA seal. Yet even then we will continue to work with the organization to bring it into compliance. If it can’t be brought in line, then we terminate our relationship with that group. Regular termination of members adds credibility to the seal and, I believe, is a reason ECFA continues to grow.
PHILANTHROPY: Why does ECFA not set standards for compensation of executives and/or board members of organizations?
MR. NELSON: That’s a decision that belongs with a Board. We try never to usurp the fiduciary responsibility and judgment entrusted to the Board. We concentrate on ensuring that the Board is functioning properly—a major component of our on-site reviews. We monitor compensation for “obscene” salaries, but there are none in ECFA’s membership. A bigger problem in our community is salaries that are too low. To my knowledge, no ECFA member organization compensates its Board members for Board service.
PHILANTHROPY: What prevents ECFA from abusing its power?
MR. NELSON: Organizations are accountable to our standards, yes, but ECFA is accountable in return. Because our members pay dues to ECFA, if we misuse the power the membership gives us by being too soft or too hard on organizations, our members will leave, thus undermining the whole effort. Good organizations are not going to invest in a seal if they believe they are sharing it with unworthy organizations. The fact that ECFA continues to grow suggests that our members trust we are doing our oversight work effectively and fairly.
PHILANTHROPY: What has the impact of ECFA been?
MR. NELSON: Many people look at the evangelical community and say, “You evangelicals.” We are bound by a common statement of faith (Standard #1) that is the glue that makes ECFA an exclusive organization. What many fail to understand is that there are a hundred different denominations that can rightly call themselves evangelicals, but each is fiercely independent. And yet, they have all come together under a wide umbrella to declare that, despite their differences, they are all committed to honesty and integrity in their ministry.
ECFA is also being used as a model around the world. In just the past year I’ve spoken to Roman Catholic bishops in Austria, met with all the charity regulators in Europe, and another group trying to get started in Melbourne, Australia.
I’ve also been to China—if you can imagine—at the request of the Chinese government. An Indonesian group has been trained in Virginia to run a program similar to ours. And we’ve had inquiries from groups in Africa and South America that want us to extend our seal. We will not do that, but we will do all we can to help them form their own groups in their countries.
PHILANTHROPY: What do you see as the greatest challenge facing charities today?
MR. NELSON: I think the greatest challenge ahead for charities is to not lose the public’s trust. If we do, the game’s over. That would be terrible for our country. To avoid losing that trust, charities must demonstrate they’re serious about transparency. They’ve got to do what the evangelical community did 25 years ago and say, “For the common good of us all, we need to lay aside our differences. We need to come together and demonstrate that we are going to be open and that we’re going to be harsh with anyone who would privately benefit from a public trust.”