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From the President's Office, January 2008

Dear Friend:

The advent of 2008 brings two exciting advancements in GuideStar's efforts to provide you with quality nonprofit data. From many fronts—individuals, professionals, and the media—we hear many ideas about how to encourage better philanthropic decision making, but all of these ambitious plans require better source data.

Two recent developments will help us make progress in achieving our goal of being the most important source of timely and accurate nonprofit data: the beta launch of the GuideStar Exchange and the IRS's release of the new Form 990.

GuideStar Exchange

Last month, we announced the launch in beta of the GuideStar Exchange, a new program to expand the nonprofit information we offer our users. Like our current program, which has more than 126,000 participating organizations, the GuideStar Exchange allows nonprofits to provide valuable context for information gleaned about them from IRS records. Both the Exchange and our current program enable nonprofit leaders to present information about their missions, programs, goals, accomplishments, and leadership to GuideStar's users.

The GuideStar Exchange, however, takes this vital activity to a new level. Donors and funders expect more from nonprofits than they did when we launched our current program more than a decade ago. They want to know that the organizations they support are legitimate nonprofits. That's why we require that every nonprofit listed on the Exchange have an official IRS letter of determination.

Donors and funders also want to know that the nonprofits they support are financially stable and that they use their gifts wisely. That's why we require every nonprofit listed on the Exchange to provide an independent annual audited financial statement.

Just as donor and funder expectations have changed, so has the Internet. An increasing number of users seek to interact in cyberspace, rather than just use it as a huge information repository. Organizations listed on the GuideStar Exchange can reach out to this audience by posting logos, photos, and video on their beta report pages. As time passes, we expect to increase the interactivity provided through the GuideStar Exchange.

As I write this, the GuideStar Exchange is in beta. That means we are collecting feedback on the program's scope, the information required for a listing on the exchange, the mechanics of providing that information through the GuideStar Exchange Form, and the effectiveness of communicating the data via our new beta report pages. Your comments and questions are guiding the development of the next generation of the GuideStar Exchange.

In the meantime, you are welcome to provide information through our current program. Just log in, click Update my nonprofit report at the top of the page, scroll to the bottom of the next page, and click Manage my eDocs and old nonprofit report.

New IRS Form 990

As you know, posting IRS Forms 990 on our Web site put GuideStar on the map. Since October 1999, when we first made the returns available to our users, millions of people have come to GuideStar to access 990s.

To be frank, however, the current 990 has its strengths and weaknesses as a source of nonprofit data. On the plus side, it is the only form filed annually by hundreds of thousands of exempt organizations. It is a public document. It can provide valuable information about a nonprofit's mission, programs, and finances.

On the other hand, Form 990 was designed to provide the IRS with the information needed to ensure compliance with the U.S. tax code. It doesn't always tell people what they want to know about the organizations filing the return, and the data it does contain are often difficult to locate and interpret. The accuracy of the information provided can be questionable (even professional preparers disagree about the data required for a complete and accurate return) and outdated (with extensions, a nonprofit can file its return 10½ months after its fiscal year ends).

The IRS released a new Form 990—the first wholesale revision of the return since 1979—December 20, 2007. I want to take this opportunity to applaud the IRS for listening to the diverse needs of the sector and for fashioning a responsible new Form 990. The revised return clearly reflects the service's consideration of the more than 700 e-mails and letters (totaling approximately 3,000 pages) it received about the draft version of the revised form. On the whole, my colleagues and I believe that the changed form and its staggered introduction will increase the accuracy of the data collected, and we urge the IRS to continue exploring ways to improve the form in future years. Read more about the new Form 990 >

This looks to be an exciting and eventful year, and we plan to do our best to be your trusted partners in this interesting and important adventure!

Happy New Year,

Bob Ottenhoff
President and CEO

On-line Monthly Giving - A Review of Nonprofit Programs


Monthly giving (also known as a recurring donors or sustainers program) has come a long way from the early days of child sponsorship.

Now a centerpiece of many direct-marketing programs, monthly giving provides a reliable, low-cost stream of revenue that sustains ongoing programs. It also increases the annual value (and loyalty!) of low-dollar donors. And now that it is possible to handle both sign-ups and payments on-line, one-time donors are becoming recurring donors at a faster pace, boosting retention rates and helping organizations cut down on billing costs.

This is all great news for nonprofits. But what  else do we know (or need to know) about on-line monthly giving? How should you manage your program? How can you measure success? What are your peers doing?

Should you consider yourself lucky to get $10/month from your recurring donors, or are you in urgent need of an upgrade strategy?

We surveyed nearly 70 organizations and analyzed the on-line donor data of 8 large nonprofits to get some answers.

Summary of Key Findings

Acquisition

  • Some organizations send their first solicitation within eight weeks of a new registration. Others focus their timing on the date of a donor's first gift, and others run annual or quarterly recruitment campaigns.
  • With an average monthly growth rate of 11 percent, the monthly donor programs we reviewed grew by 132 percent each year.

Retention

  • The groups we surveyed retained 70 percent of their on-line monthly donors in their first year, but retention rate dropped to 52 percent the second year.
  • On average, 12 percent of on-line monthly donors missed at least one monthly payment in two years.

Value

  • The average on-line monthly gift (for all groups except international aid organizations) was $16. The average monthly gift for international aid organizations was significantly higher at $28.
  • On average, 42 percent of on-line monthly donors had given a one-time on-line gift before becoming monthly donors. Almost 20 percent gave a one-time on-line gift within a year after they signed up.

Surveying the Landscape: What Are Other Groups Doing?

The competitive landscape for monthly giving is all over the map; it is difficult to pinpoint a baseline or prevailing strategy.

Our survey revealed interesting trends in monthly donor management, but the main conclusion is that there is not, as of yet, a standard practice for promoting and managing monthly giving programs.

Promoting the Program. Navigation items promoting monthly giving on Web page(s) were our survey respondents' marketing method of choice, followed by e-mail appeals and e-newsletter features. More than half of the groups featured monthly giving on their main donation pages. See the chart below for a breakdown of the popularity of various marketing channels.


Of the Columbus Foundation, PowerPhilanthropy, DonorEdge®, and GuideStar

The Columbus Foundation, one of the nation's largest community foundations, has launched PowerPhilanthropy, an on-line resource designed to connect people with high-quality information about local nonprofit organizations.

Based on the DonorEdge® community leadership process developed by the Greater Kansas City Community Foundation, PowerPhilanthropy features detailed profiles of more than 300 organizations from the Central Ohio region.

PowerPhilanthropy is available for use by the general public, with expanded information offered to the foundation's donors. Users can create personal accounts that facilitate secure and easy on-line giving.

What is GuideStar's connection to PowerPhilanthropy? GuideStar has partnered with the community foundations of the DonorEdge Learning Community in the interest of creating more grassroots, community-strengthening on-line resources. Currently, seven community foundations, including the Columbus Foundation, have adopted the DonorEdge process to serve their regions more effectively. Several other community foundations have also expressed interest in becoming part of the DonorEdge Learning Community.

GuideStar is working with DonorEdge to create a new generation of scalable, sustainable technology that can be replicated across the country. By creating regional knowledge banks that facilitate effective philanthropy, the DonorEdge-GuideStar alliance seeks to increase charitable giving, build public trust in the nonprofit sector, teach donors how to become smarter charitable investors, and help nonprofits successfully communicate the differences they are making in their communities.


Principles from the Panel on the Nonprofit Sector: Yet Another List of "Shoulds"?


With increased enforcement by the IRS and state charity regulators, renewed Congressional interest in investigating just what it means to be a charity, and continuing media stories highlighting some nonprofit abuses, the Panel on the Nonprofit Sector (convened by Independent Sector) published Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations in October to help guide charities in these sometimes difficult times. What's in this report that you need to know?

The Panel list of principles and practices attempts to strike a balance—listing what nonprofits must do (legally required) and adding recommendations on what they should do. Although some find the Panel's format of "recommendations" too weak to establish the system of self-regulation needed to bolster public confidence (see comments by Peter V. Berns in the November 1, 2007, Chronicle of Philanthropy, for example), others find this report a positive beginning step.

The Panel's 33 principles include 6 required by law and another 27 that charities should consider adopting if they make sense based on their legal status, operational structure, and purpose. The focus on accountability and transparency is not going away, and this compilation by the Panel shows how charities can improve their governance themselves, without the addition of more federal and state laws.

First, a review of the Panel principles described as legal requirements:
Principle #1—Comply with all applicable laws and regulations—federal, state, local, and international. Check out IRS's Stay Exempt Web Site for guidance from the IRS about what is required.

Principle #3—Have policies and procedures for conflicts of interest. Charity regulators require that board members and staff disclose any interest in a transaction or action that could be viewed as affecting their objectivity or independence. First, any potential conflicts should be disclosed. Then there should be policies to deal with them transparently. If a board member has a material conflict of interest, the law requires that he/she not discuss or vote on the issue. An Internet search will provide sample conflict-of-interest policies to use as a model.

Principle #21—Keep complete, current, and accurate financial records, preferably audited or reviewed by a qualified independent financial expert. State laws vary on the sizes and types of organizations that are required to have audits or reviews by an outside accountant, so check on your state's requirements. Creating an audit committee of board members (including some with financial expertise) helps reduce a possible conflict of interest between the paid staff and the outside auditors.

Principle #25—Establish clear written policies for paying or reimbursing business or travel expenses. The IRS does not want to see "lavish, extravagant, or excessive expenditures." A review of IRS Publication 463, "Travel, Entertainment, Gift, and Car Expenses," can help you write your reimbursement policies.

Principle #26—Do not pay for expenses or reimburse travel for spouses, dependents, or others who accompany someone conducting business for the charity. This restriction doesn't apply for small costs (such as a meal) or if the person is also working on charity business.

Principle #27—Be accurate and truthful in your solicitation materials. What you need to address is covered in A Donor Bill of Rights, developed by the Association of Fundraising Professionals.
Whereas all nonprofits must adhere to the six principles above, there are a number of additional practices that will help ensure that charity regulators won't be focusing on you. The IRS is looking at compensation and benefit levels for nonprofit executives these days and actually assessed nonprofits over $21 million in fines in 2007. Adopting some of the other recommendations in the panel's list can help you deal with regulator and media questions.

Here's a review of the principles that relate to compensation and benefits—often sensitive issues with board members, federal and state regulators, the media, and the public.
Principle #8—Have a governing body responsible for reviewing and approving the organization's mission and strategic direction, annual budget and key financial transactions, compensation practices and policies, and fiscal and governance policies. Not being responsible about compensation can cost money—in fact, the IRS's Executive Compensation Initiative Project report concluded that there was need for "a continued enforcement presence in this area."

Principle #12—Have a substantial majority of independent board members. Board members should not be compensated as employees or independent contractors. They should not have compensation determined by individuals compensated by the organization, not receive material financial benefits, and not be related or residing with those who are not independent.

Independent judgment is required of board members, and the organization's interest must be placed above personal interests. Thus, most individuals on the board should be free of financial conflicts of interest.

Principle #13—The Board should hire, oversee, and annually evaluate the performance of the CEO and conduct an evaluation prior to any change in compensation. This is the board's responsibility, and the IRS guidance is clear:

  1. Set compensation in advance using appropriate comparability data.
  2. Make sure no one involved in setting the salary has a conflict of interest.
  3. Document decisions on compensation.
The IRS regulations call for "reasonable" compensation—the amount that would be paid for "like services" by "like enterprises" (could be taxable or tax-exempt), under "like circumstances." Small organizations should have at least three comparables, and the IRS implies that larger organizations should have more than three.

Principle #20—The Board should serve without compensation. If compensated, use appropriate comparability data to determine the amount to be paid. Because compensating board members is unusual, detailed documentation is necessary if a charity does more than reimburse expenses. If board members are setting their own compensation, they clearly have a conflict of interest, so use an independent data source.
The panel principles outlined above provide a blueprint for good compensation practices that keep an organization in legal compliance and also strengthen transparency and ethical standards.

Just document the compensation decisions, ensure that those with conflicts of interest are not included in the decision making, and collect information on comparable salaries (for like services, in like enterprises, in like circumstances) from independent data sources. Implementing what's required and what's recommended on compensation will let you focus on your mission, not defending the credibility of the organization.

Linda M. Lampkin, ERI Economic Research Institute
© 2008, ERI Economic Research Institute

Linda M. Lampkin is director of research of ERI Economic Research Institute, a company that provides Form 990 compensation data for use by nonprofits, and former director of the National Center for Charitable Statistics at the Urban Institute. She can be reached at Linda.lampkin@erieri.com or (877) 799-3428.

IRS Issues New Implementing Guidelines for FY 2008

Are you interested in what's going on at the IRS? Curious about what they have planned for the year ahead? If so, it might be worth your time to take a look at the Implementing Guidelines for fiscal year 2008, which were recently issued by the Exempt Organizations Division. This document serves the dual purpose of taking a look back at the division's achievements during the past year and outlining its plans and strategies for the year ahead.

According to the guidelines, projects anticipated for 2008 include: (1) the redesign of Form 990, based on comments the division received on the draft version released in June 2007, and (2) several programs designed to control donor abuses, such as the over-valuation of non-cash contributions.

The document also contains brief summaries of three new compliance initiatives: a National Research Program that will focus on employment taxes; an Exempt Organizations Research and Compliance Initiative that will focus on colleges and universities; and a Voluntary Compliance Program that will assist non-compliant organizations in filing their required forms and avoiding penalties. (For more information on the Voluntary Compliance Program, see last July's "IRS Update.")

The division also plans on improving customer service by expanding on-line offerings for nonprofits. Projects include an electronic tracking system, a Web-based tool for guiding new organizations through the application process, and an expansion of on-line training programs.

If you'd like further details on these planned initiatives—and more—you can download a copy of the Fiscal Year 2008 EO Implementing Guidelines.

Patrick Ferraro, January 2008
© 2008, Philanthropic Research, Inc. (GuideStar)

Patrick Ferraro is a freelance writer in Seoul, Korea, and a former editor of the Newsletter.

Is Your Organization Ready for On-line Social Networking?

Now that user-generated content—blogs, video, discussion groups, chats, and so forth—is the norm and users expect their Web experience to provide interactivity in addition to information, many nonprofits are faced with deciding when and how to use on-line social networking as part of their Web presence.

The simple brochureware site (one that just contains information about the organization) and direct donation site of the past are no longer enough. Fortunately, it is not necessary to build your own on-line social networking site. But you do need to know how to become part of an existing community, and tie it to your existing Web presence, to use social networking effectively.

The great promise of on-line social networking is in being able to have a two-way dialogue with an engaged population in a way that is not possible using only traditional media outlets. As every nonprofit knows, it is hard to get press in traditional outlets—a great deal of time and money is spent in an often fruitless attempt to get coverage.

The greater burden, however, is trying to be heard in a cluttered and chaotic Web. Although the ease of access to social networking tools does a great job of leveling the playing field, it makes that field very cluttered.

As a result, before you decide to enter the world of social networking, it is essential to have a clear idea of what you want to accomplish, how to find the audience you are trying to reach, and then to invest the time and money necessary to do so effectively.


Communicating Your Organization's Culture to Job Candidates

In our daily conversations with nonprofit hiring managers, we constantly hear how cultural fit is one of the most important criteria for hiring. A challenge for some nonprofits, however, is communicating organizational culture in every stage of the hiring process. Can a hiring process genuinely reflect an organization's distinct personality and values? The answer is yes, provided the organization is aware of its organizational culture and makes an intentional effort to demonstrate the various attributes of its culture to job candidates.

Unveiled: The IRS Introduces the Redesigned Form 990

Updated to Serve a Changing Sector

For the first time since 1979, the IRS has completed a significant overhaul of the reporting form tax-exempt organizations are required to file each year. The redesigned Form 990 was officially released on December 20, 2007, approximately six months after the IRS introduced a draft version of the form and solicited comments from the public. Returns filed for the tax year 2007 will still use the current form, with the new form coming into use beginning with returns filed for tax year 2008.

The general purpose of the redesign was to update the Form 990 to reflect the many significant changes that have occurred in the nonprofit sector over the past 28 years, specifically addressing the increased demand for transparency and accountability.

After releasing the Form 990 discussion draft in June 2007, the IRS held a 90-day comment period, during which more than 3,000 pages of suggestions from the public were received in letters and e-mails. These comments were the basis of many of the modifications that were incorporated into the final version of the form.

Although there were some major changes, the final version retains the same basic format as the draft. There is an 11-section core form supplemented with 16 schedules lettered A through O, designed to replace the attachments that are currently used. The entire core form must be completed by all filers, but organizations are not necessarily required to fill out every schedule. The final version of the form features a checklist that will allow preparers to determine quickly which schedules are applicable to their organizations.

Other changes from the current Form 990 include a summary page designed to provide a financial "snapshot" of the organization and a section that requests information concerning the organization's board and governance policies.

Transition Relief for Smaller Organizations

In the interest of making the changeover easier for small organizations, the redesigned Form 990 will be phased in over a three-year transition period. The new form will be put into use beginning with tax year 2008 returns filed in 2009, but at the same time the threshold of eligibility for filing a 990-EZ will be adjusted to include more organizations. The Form 990-EZ itself will remain unchanged, although certain schedules from the new Form 990 will replace attachments that are currently used.

Starting with tax year 2008, the financial threshold for 990-EZ filing will be changed to gross receipts of less than $1 million and assets of less than $2.5 million. Over the next two years, however, this threshold will be gradually tightened, requiring more organizations to file the new Form 990. For tax year 2009, it will be adjusted to gross receipts of less than $500,000 and assets of less than $1.25 million, and in 2010 it will be set at gross receipts of less than $200,000 and assets of less than $500,000. Also effective for tax year 2010 will be a change in the threshold for 990-N (e-Postcard) filers, adjusting it from $25,000 to $50,000 in gross receipts.

There will also be a phased-in transition period for Schedules H and K, which were designed for hospitals and reporting on tax-exempt bonds. For tax year 2008, only some basic identifying questions will be mandatory, with the rest of the requested information considered optional. Beginning in tax year 2009, however, all of the information requested on these schedules will be mandatory for the organizations that are required to file them.

Responding to Comments from the Public

The final version of the new Form 990 features several major differences from the discussion draft. Notable changes include the decision to continue to allow group return filings and the addition of Schedule O, which provides organizations with space to include further explanations and relevant supplemental information.

Security concerns were also addressed. Organizations will no longer be asked to provide the private addresses of employees, officers, and board members. Furthermore, in the interest of protecting individuals in volatile areas of the world, Schedule F no longer requires organizations to list the countries in which they conduct activities—instead they are requested to provide a general region.

GuideStar took part in the public comment process on the discussion draft, offering an eight-page letter outlining our suggestions and concerns. Like many others in the sector, we were particularly concerned with the ratios and percentages that were featured on the summary page of the draft form. In the interest of providing a more complete and relevant picture of the filing organization, we suggested requesting preparers to supply two years of basic financial information that could be compared at a glance. This change was implemented into the final version of the form.

Other suggestions made by GuideStar (and undoubtedly others) that were incorporated into the final version of the Form 990 were: the removal of the request for the Social Security Number of the form's preparer in the Signature Block; moving the statement of program accomplishments to a more prominent position at the front of the form; and raising the thresholds for 990-N and 990-EZ filing.

"My colleagues and I applaud the IRS for listening to the diverse needs of the sector and for fashioning a responsible new Form 990," stated Bob Ottenhoff, GuideStar's president and CEO. "The revised return clearly reflects the service's consideration of the comments it received about the draft version of the revised form. My colleagues and I believe that these changes and the gradual introduction of the new form will increase the accuracy of the returns and mitigate the costs of the transition to the new form."

Learn More

The IRS plans on releasing draft instructions for the revised Form 990 sometime in the first quarter of 2008. In the meantime, GuideStar representatives will be speaking at conferences around the country on the changes to the Form 990 and what they mean to nonprofits.

Patrick Ferraro, January 2008
© 2008, Philanthropic Research, Inc. (GuideStar)

Patrick Ferraro is a freelance writer in Seoul, Korea, and a former editor of the Newsletter.