Update on multi-state nonprofit registration

For Mari, Laura, Peter and anyone else who commented on my various blog posts or passages in "Climbing the Nonprofit Ladder to Success" concerning whether they have to register and disclose their donors to raise funds in states other than their own:

A recent issue of Don Kramer's newsletter Nonprofit Issues discusses a recent California 9th Circuit Court of Appeals decision regarding providing donor information to register in that state.

Unlike myself, Mr. Kramer is an attorney (for more on Mr. Kramer see: http://www.nonprofitissues.com/about-nonprofit-issues), so his information is a lot more credible and up-to-date than mine.

Again, I want to stress that if you only raise funds in your state, this might not concern you unless you are incorporating in one of the states that does require disclosure of major donor information from your 990.

Even then, for most fledgling organizations, the donor disclosure is dependent upon the aggregated  amount of the donations, meaning that as a start-up it probably will not affect you. 

Still, California courts tend to establish early precedent for other jurisdictions, so should you decide to register there, in New York, or you are conducting broad-based internet appeals it would behoove you to consult your legal team to be sure that you are operating within the applicable law.   

Evaluating the charity evaluators

As any nonprofit client or prospective client who has worked with me can tell you, I am committed to nonprofits providing documented proof of legitimacy to donors.

I don't work with or support scammy appeals or organizations, and I qualify my clients on many of the same criteria that donors use. Why? Because if they can't meet minimum reporting  requirements, they aren't going to find funding. I do a lot of research to ascertain if they have a shot at succeeding with their funding plans.

Unfortunately, some of the research resources available to me don't cover most of the clients I serve.

I'm talking about the so-called charity rating or evaluation sites/organizations. Most of these organizations do not rate any charity that files anything other than the 990. They don't accept audited financial statements, annual reports, 990EZ's and certainly not the 990N, the so-called postcard.

In effect, that means that if your revenues aren't already well above six and even seven figures, you aren't going to get rated.

For instance, one of the best known and most highly respected evaluation organizations is Charity Navigator (CN). I use them where applicable, and I support their mission to bring transparency to the world of charitable giving, so I definitely don't have an axe to grind with them. And you can access information about some smaller charities, you just can't get a rating for them.

CN's rating criteria is an excellent example of the shortcomings of the methods used to rate public charities. They don't rate every public charity, not even close to it. They rate about 7500 charities as of July 2014, according to their own reporting. The National Center for Charitable Statistics (NCCS) lists over 1 million 501(c)(3) IRS-approved organizations in the U.S. as of 2010.

You can't even get a rating from these ratings organizations unless your nonprofit meets certain criteria.  For example, on CN's website they list this information relative to qualifying revenue dollar amounts and length of time in business required to receive a rating:

"We do not evaluate organizations that file the Form 990-EZ. The Form 990-EZ requires less financial reporting than the Form 990, and as such, we would lack important data needed in our analysis.

Sources of Revenue:  Because our goal is to help individual givers, we evaluate only those charities that depend on support from individual givers. Specifically, we require public support to be more than $500,000 and total revenue more $1,000,000 in the most recent fiscal year. And we do not review charities that receive most of their funding from government grants, or from the fees they charge for their programs and services.

Length of Operations: We require 7 years of Forms 990 to complete an evaluation."

In theory, I don't have a problem with revenue or time in business being used as qualifiers. The 990 is a legal document that implies that the data is certifiably reliable, and that's a good thing. It's not only the criteria that the rating sites use, it's the criteria used by both grantors and individual donors as well.

Substantial existing revenue and longevity certainly impact the effectiveness and scalability of programs, so I understand why it is important to both rating organizations and grantors or donors. It's good in theory, as far as it goes.

When theory meets reality

Between theory and practice there often exists a wide gulf. In practice, these ratings almost guarantee that substantial funding for smaller nonprofits is, if not nonexistent, certainly drastically curtailed.

Again, it isn't the concept of ratings I oppose. Anything that protects donors from the all-to-prevalent con artists using charity as a cover story is a good idea. But it allows for some serious gaps that put both smaller nonprofits and the general public at risk.

As someone who works with both start-up and small but established nonprofit clients, I can attest that concept doesn't serve to maximize diversity in problem solving.

In general, small nonprofits aren't particularly attractive grantee prospects until they have been around for awhile. Typically about three years is the point at which they are somewhat stable and have results to display. That still leaves a big gap between three and seven years, at precisely the point where the nonprofit needs to be actively growing.

Obviously, these rating favor larger charities. But is larger always better?

Large organizations tend to be cumbersome for front line staff working at the grassroots level. There are so many layers of bureaucracy to penetrate that some of the best solutions to problems never make their way into the communities or demographic that the parent organization purports to serve.

Still, size does matter. The larger the organization, the larger the revenue line gets and that supposedly equates to greater effectiveness. For charities working at the local level, that simply isn't true. In a way, when we only donate to the big, visible and well funded charities, we may in fact be perpetuating rather than solving problems.

At the same time, we want to know that the money we donate isn't going to pay for a fancy car or a private island in the Bahamas for the CEO or the charity founder. The only somewhat objective way we have to assess legitimacy is through the rating organizations. It's a vicious cycle. You can't get rated without money, and you can't get money without being rated.

Why should we care about some little grassroots charity?

All industries need new ideas and fresh approaches. The communications industry did not develop the personal computer, the shoe-box sized mobile phone or the smartphone. They exist because someone saw a need to approach old problems in new ways. Every big company was once a small company.

Not every charity should survive, any more than any other small business should survive. Be that as it may, there is a huge gap between 7500 and 1,000,000-plus. Somewhere in that gap there are good small organizations with the potential to become much greater forces for good.

If not this way, then how?

There has to be a better way to evaluate start-ups and smaller organizations for effectiveness than just their revenue.

When revenue is the main criteria for even selecting a charity for review, it does a disservice to everyone.

If a small or newer charity is taking in $50,000 and growing that figure by 10% Y-O-Y and achieving maximum impact with that money,  it may very well have discovered or implemented an approach that can be repeated elsewhere if it can expand. It can't build capacity without more money, and it can't get more money if prospective donors can't research it. Capacity building grants are usually not something that are awarded without considerable research by the grantor and most of them start with the ratings organizations.

 Instead of growing, many of these smaller NPO's struggle at the same level year after year, never realizing their full potential. They can't hire better, more effective staff or attract capital because from a ratings standpoint they simply don't exist.

If the goal of charity evaluators is only to keep existing organizations in business and stifle competition for already scarce support dollars they do a very good job. If they exist to help donors make informed decisions about supporting new blood and better ways to solve problems, I rate them at less than one star.

What's the answer?

There has to be a way for these evaluators to include a "small organization" component.

Perhaps they could reduce or eliminate the revenue requirement in favor of an effectiveness rating for smaller organizations.

Smaller nonprofits could receive a rating like "effectiveness increasing, effectiveness adequate or insufficient effectiveness". The financial reporting might be accomplished by accepting audited or accountant's reviewed financials or annual reports together with the 990EZ. Or even put them on a progress watch list. If they continue to report stable performance for a period of time, they could receive a "OK to donate" stamp.

What are your thoughts on the matter?

Capital Campaigns - What's your battle plan?

In the life cycle of nonprofits there often comes a time when you need to expand your brick-and-mortar footprint. Maybe you need a larger administration building, or you want to build or renovate a structure to house clients, or expand your capacity by adding a larger warehouse. None of these things are free, so you may think that your first need is funding…lots and lots of funding.

New or inexperienced nonprofits typically think that because the need is so obvious the money will just magically arrive on time, and too often, that time frame is stated in weeks or months. In reality it can take years, and the process can resemble a military campaign.

Some nonprofits immediately start to look for grants to finance the construction or purchase. In reality, that's almost the last step.

After you establish a clear need and define the impact, most grantors want to see that your community monetarily supports the project, so making grants your first step is going to be pretty futile. In general, grantors do not want to provide more than fifty percent of the cost. The exception to that may be asking for funding for a feasibility study and sometimes for a planning document or architectural plans. So, if getting grants for the construction or purchase isn't first, how do you move forward with a capital campaign ?

1. Define the need.

Why does your organization want to do this and what will the community or your clients get out of it?  Why doesn't your current building inventory meet that need?  While you may feel that your organization "deserves" nicer quarters, unless that contributes to mission accomplishment, your funding appeals are going nowhere.

2. Demonstrate the benefits to the community or to your core mission.

What will the new building do to help your core clients? For instance if you are a food bank, adding a cold storage warehouse will allow you to improve the diets of your clients by adding fresh produce to your food inventory. This is your case statement or statement of need. What will be the positive impact of the expansion?

3. Set a budget goal.

For this you will need to some preliminary research on actual costs. At this stage, you might be able to get by simply researching what similar buildings and/or land costs in your area have been historically. You might call a few builders and architects and see if they will give you hypothetical per square foot building costs, or you may be able to research construction permits for similar buildings in the recent past. Check with your county clerk to see if you can research the permits. If your county keeps a record of land sales (not taxable value) you can look those over if you are contemplating purchasing land, or consult several real estate firms to see what comparable sites have brought in the recent past. You are looking for a ballpark amount for now, but you will have to pay to firm up the costs and planning at some point.

4. Establish your organizational capability to accomplish the capacity growth.

When establishing a preliminary goal, don't forget that you may need to increase staff to support mission expansion. Donors want to know that after the building phase is complete there will be staff or other resources on hand to attain the service objectives you have outlined in your statement of need. You will not include this cost in a capital campaign, but it is a question that comes up with some regularity on applications and onsite interviews. Organizational readiness and capability are definitely considered by donors.

5.Is the project feasible?

Determine if there is any monetary community support for the project. At this point you aren't looking for a full-blown feasibility study, just  a feel for whether this project is something the community will donate to accomplish. Grantors often don't even consider funding until you have raised fifty percent of the funds locally or at least regionally. Note: whatever your budget guesstimate is at present, be aware that inflation and rising costs will have a significant effect by the time you actually start construction or close a purchase deal. That is because it takes time to raise money, and prices typically do not go down over time. A rule of thumb is to add in at least 5% a year, or more if there are significant inflationary pressures.

6. Establish a timeline for fundraising.

Larger capital building campaigns take at least two years and often five years or more before everything comes together and you can break ground and actually construct the building. Outright purchases of existing space will have a shorter timeline for acquisition, but of course while you are raising money, the property could be sold to someone else. It is much better to have the funds on hand before moving forward. Break your project timeline into stages so that you can fund raise in phases. For instance you may want to raise ten or fifteen percent of the total for a feasibility study and architectural plans. Donors can relate to visuals, i.e. plans much better than they can to a general description.

7. Create a fundraising strategy.

Most capital projects receive their seed money from one or a few major local donors. Local individual contributions are helpful, but usually don't contribute enough money fast enough to accomplish the whole project on schedule. When you can see that you are at or approaching pledges or actual donations of 50% of the total cost then you can approach foundations, corporations and even the government for the balance from grants. You should have already researched the best prospective grantors, and perhaps even started to create a dialogue with them if they are local. At the very least find out when they typically open their grant cycle, and what their giving history has been in the past.

8. Think about loans.

Everyone wants to think that they can fund raise for all of the costs, but at least consider loans. If your nonprofit has a reasonably steady income from fees or services, this could be your fastest route to success. Donations are not usually considered as good collateral, since they can vary considerably year over year. If you typically have excess funds at the end of the year that can be committed to servicing the loan, this could the route for you. Again, if you have 50% of the cost covered by donations or pledges, loans become much easier to secure.

9 . Formalize your planning.

If you have gotten this far, it is probably time to move to funding a formal feasibility study, case statement and building plans or quotes for the structure. This is one area that you may be able to find grant funding to provide financing. The cost is less than the whole project, and grantors would rather see that you are doing your due diligence than throw money at a dream. If you have a well designed project, good preliminary cost projections, a clear need and a provable future benefit, there may be grantors willing to provide  seed money to formalize your planning.

10. Be prepared to pay for professional assistance.

While the director of development or even the ED may be willing to assume this responsibility, formal feasibility studies are more readily accepted if they are done by objective third parties. These firms will conduct extensive interviews of past and present board members, staff, donors and even vendors to prove (and in some cases disprove) the feasibility of going forward with the project. Architects do not provide plans for free.  By doing the first nine things above well, you may considerably shorten the amount of professional time necessary to create the formal documents. Conversely, you may want to turn it over to the pros in the beginning, simply to free up staff time.

Constructing and implementing a capital campaign is labor intensive, but like most things in life, you will get out of it what you put into it.