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For too many nonprofits, charity starts at the top

For too many nonprofits, charity starts at the top

By Ames Alexander/Charlotte Observer

December 22, 2009

In Cornelius, a nonprofit set up to help people in debt paid its chief executive more than $5 million – nearly everything it had.

In Anson County, a charity that worked to keep troubled children in school paid its leader about $300,000 a year, roughly twice as much as the county superintendent of schools.

In Spartanburg, a nonprofit religious broadcaster paid its president and her husband nearly $800,000 – a third of the organization’s budget.

On paper, federal law prohibits charities from awarding excessive compensation to their leaders.

But in practice, loopholes and understaffed regulators allow nonprofits to pay almost any salary, an Observer investigation found.

“The (IRS) criteria for excessive compensation are so loose that they’re virtually worthless…,” says Pablo Eisenberg, a senior fellow at the Georgetown Public Policy Institute. “The sky’s the limit.”

Regulators rarely enforce the rules that do exist. Most years, fewer than 10 of the nearly two million U.S. nonprofit leaders are penalized for receiving excessive compensation. And the IRS office that monitors nonprofits is so thinly staffed it examines just 1 percent of their returns.

Taxpayers and charitable donors pay the price. Each year, charities get tax breaks worth more than $60 billion.

To be sure, most nonprofit leaders do crucial, difficult work for relatively little pay. The majority get less than $100,000 a year, according to data compiled by Guidestar, a group that collects information on thousands of nonprofits. Most spend the bulk of their budgets on charitable works rather than executive compensation.

“Most nonprofit executives are terribly paid,” notes charity watchdog Rick Cohen.

But there are glaring exceptions.

More than 200 charities across the nation pay CEOs over $1 million a year. And more than 80 nonprofit leaders in the Carolinas have collected compensation exceeding $500,000.

While salaries for corporate executives dropped about 9 percent last year, the economic downturn did little to curb pay for charity CEOs. Nonprofit leaders got a 6 percent raise, on average, according to a study by Charity Navigator, which evaluates nonprofits.

Ken Berger, Charity Navigator’s president, says most nonprofits aren’t trying to line the pockets of their executives. But he’s troubled by the many who are.

“These kinds of scoundrels poison the public’s trust in the whole sector,” he says.

Confidence in Charlotte’s United Way took a beating in 2008 following news of a $2 million pension package awarded to former CEO Gloria Pace King, who was fired amid outrage over her pay.

Hospital executives and university presidents – who usually bring home between $100,000 and $1 million a year – dominate the list of best-paid nonprofit leaders. But even smaller charities that depend on donations and tax dollars can receive generous salaries.

To understand nonprofit compensation in the Carolinas, the Observer analyzed a database listing pay for more than 10,000 nonprofit executives.

Reporters then looked in-depth at top-paying nonprofits in several categories, taking into consideration the organizations’ budgets and how they compared to their peers. Several charities stood out:

When Cornelius-based American Credit Counselors Corp. folded in 2005, it paid executive director John Waskin $5.1 million – almost everything in its bank account. Most of that money was payment for a pension distribution approved by the group’s board of trustees. As founder of the group, which helped consumers manage their debts, Waskin played a key role in choosing the trustees.

Rainbow Enhanced Academic Developers ( READ), a Wadesboro group which has counseled about 175 youths with behavior problems, in 2007 paid CEO Lawrence Elliott about $312,000. Since 2005, the group has received more than $10 million in Medicaid money.

LC Industries, a Durham-based nonprofit that hires blind people to manufacture mattresses, military equipment and other products, in 2008 paid president William Hudson $716,000 in total compensation. About $1.1 million more went to three other executives. With a budget of about $45 million, the fast-growing company says it has become the nation’s largest employer of the blind. But it pays its leader about 2 1/2 times more than the average charity in its size category.

Spartanburg-based Bible Study Time, which spreads the gospel through television and radio programs, paid president Freda Crews $370,000 in 2008. Her recently deceased husband, the group’s founder, received about $416,000. A son and grandson also were on the payroll. The combined pay to the family approached $1 million – about 40 percent of the organization’s budget.

Even higher salaries went to the leaders of two other religious nonprofits. David Cerullo was paid nearly $1.7 million last year for running the Inspiration Networks, a religious broadcaster headquartered in Lancaster County, S.C.

Franklin Graham, meanwhile, collected $1.2 million in 2008 from two groups he leads – Billy Graham Evangelistic Association and Samaritan’s Purse. Graham agreed to go without pay from BGEA and forgo future payments to his retirement accounts in October, after Observer questions about his compensation.

Hudson of LC Industries declined to be interviewed. But others said they have labored long hours running complex organizations and doing vital work.

“Most of the company was built on my name and my experience,” said Elliott of READ Inc. “…This company is paying for my expertise, my experience, my education and my ability to run the company successfully.”

Some nonprofit leaders also contend they could make far more money in the private sector.

But charity watchdogs say that argument misses a crucial point: Nonprofits are expected to serve the public interest – and keep executive pay in check. That’s why they receive tax exemptions worth billions.

“Some entities now use their privileged status to achieve ends that Congress never imagined when it conferred tax-exemption,” former IRS Commissioner Mark Everson told a Senate panel in 2005. “They are wantonly abusing the generosity and faith of the public.”

Nonprofit in name alone

The nation’s nonprofit sector has grown rapidly in recent years, with total revenue approaching $2 trillion. That exceeds the combined annual revenue of America’s eight largest corporations.

If all those tax-exempt organizations were for-profit companies, they’d likely be required to pay at least $60 billion a year in taxes on investment income alone, according to a recent report by the Congressional Research Service.

At times, though, tax-exempt organizations can be just as profit-driven as companies owned by investors, says U.S. Sen. Chuck Grassley, R-Iowa, who is pushing a proposal that would make it harder for nonprofits to justify enormous salaries.

“Sometimes the only difference is that investor-owned entities return profits to shareholders while tax-exempts return profits to executives,” Grassley said recently.

Virtually all charities have to do to pass muster with the IRS is show they examined salaries of people in comparable positions and left the decision to independent boards.

The rules allow nonprofits to compare their pay packages to those of executives in the for-profit world, where seven-figure compensation is common.

The result: Nonprofits “can find a justification (for pay) that any person on the street would find problems with,” says Dean Zerbe, former tax counsel for the U.S. Senate Finance Committee.

In one case under investigation by Sen. Grassley, a salary study for a nonprofit leader compared his pay to that of Oprah Winfrey and Britney Spears.

Federal rules also let charity executives and board members profit by doing business with the nonprofits they run.

American Credit Counselors, for instance, paid millions for services provided by companies owned by chief executive Waskin and his wife, Cheryl.

The law allows charities to strike such deals – as long as they’re at fair-market value.

Weak enforcement

The IRS can impose fines – known as “excise taxes” – on nonprofit leaders found to be receiving excessive pay or benefits.

But in reality, that rarely happens. Since 2003, the IRS has taken that step about 10 times a year on average.

Part of the problem, experts say, is thin staffing at the IRS office that’s supposed to monitor nonprofits.

From 2005 to 2008, the number of charities filing returns with the IRS increased by 38 percent, according to data from the National Center for Charitable Statistics. But staffing in the IRS branch that monitors nonprofits declined over that period.

About 460 people in that office are responsible for enforcement. That works out to roughly one enforcement agent for every 4,000 tax-exempt groups nationally.

Marc Owens, who headed the IRS’s nonprofit branch for a decade before leaving in 2000, said the office doesn’t get the attention it deserves from the IRS – an agency that is primarily concerned with collecting taxes, not regulating charities.

The office also isn’t set up to react quickly to complaints about charities, he said. The reason: It relies on annual tax returns as its chief fact-finding document, so its agents often don’t see what’s gone wrong at a charity for two years.

That’s why Owens favors setting up a new oversight agency outside the IRS.

“It would have its own independent source of funding so it wouldn’t be an orphan embedded in the collection agency of the IRS,” Owens said. “It would be its own master.”

A call for change

The IRS’s nonprofit bureau isn’t likely to get a large infusion of resources anytime soon, says Lois Lerner, who heads the office.

“I’m not going to have my staff multiplied by 100 so we need to use other tools,” Lerner told the Observer.

With research and new reporting requirements, the agency has tried to get a better handle on how charities pay their executives, Lerner noted.

During a project launched in 2004, the IRS examined 782 nonprofits that reported significant pay to their executives. In most cases, the agency found the charities could justify the pay. But the agency found problems at 25 organizations and assessed $21 million in penalties.

The agency recently revamped its Form 990 – the return filed by nonprofits – to collect more information about nonprofit pay and how it’s set.

“We’re doing a pretty good job,” Lerner said. “That doesn’t mean that if we had more staff we couldn’t do more exams.”

Lawmakers could help, some experts say, by turning to an appropriate source of revenue: the excise taxes collected from nonprofit foundations. Those taxes, based on the investment income foundations earn, now go into the general fund. Beefed-up enforcement could help pay for itself by generating more tax revenue.

While experts have divergent thoughts about how to fix the system, they agree on this: The time is ripe for change.

“The sector is hugely important in the lives of our citizenry,” said Owens, the former IRS official who now works as a lawyer representing charities. “The government and the public deserve someone paying attention to how well the system is working.”

STAFF RESEARCHERS MARION PAYNTER AND MARIA DAVID CONTRIBUTED.

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