The GuideStar Blog retired September 9, 2019. We invite you to visit its replacement, the Candid Blog. You’re also welcome to browse or search the GuideStar Blog archives. Onward!

GuideStar Blog

Public Confusion and Phony Nonprofits


I’ve written before about how confusing the nonprofit sector appears to most Americans. Some of this is of our own doing. For starters there’s the term we use to describe ourselves: “nonprofit.” To many it suggests something small, or something that is missing (a “non”), or certainly something less important than for-profit. Adding to the confusion is the way we often fundraise, suggesting in our appeals that we’re poor, run by volunteers or underpaid staff, teetering on the edge of collapse. Yet we know many nonprofits that are strong financially, well-run, and providing meaningful—often critical—services.

Because it so easy to start a nonprofit organization, we often hear about nonprofits that do not fit our normal definitions of charity or public service. One of my biggest pet peeves is the proliferation of nonprofits started by elected officials. Although undoubtedly many of these nonprofits are doing good work, the connection to fundraising and lobbyists is a little too close for my comfort.

Now the New York Times has reported on a new way to beat the system: The creation of nonprofit subsidiaries of for-profit companies that are started for the sole purpose of receiving earmarks from Congress. The Times reports on several examples of nonprofits that just happened to specialize in the same kind of work performed by for-profit companies—and at the same address.

The proposed earmarks are among dozens—totaling more than $150 million—from around the country that would indirectly benefit profit-making companies, according to an examination by The New York Times of House appropriation requests submitted after the new rule was imposed in March. …

Companies have shown remarkable ingenuity in skirting the rule or veiling their requests through nonprofit organizations, the Times review found. Among the examples:

The Virtual Reality Medical Center, a California-based company that sells visual simulation headgear as an experimental form of medical therapy, had sought nearly $6 million in earmarks before the ban. Soon after, company officials instead proposed that the money go to the Interactive Media Institute, a nonprofit group controlled by the center’s top executives, which had been set up to sponsor educational conferences. …

In Pennsylvania, General Electric is likely to get as much as 80 percent of a $2 million earmark proposed by Pennsylvania State University for research on clean-burning GE locomotives. At the suggestion of the company and the university’s lobbyist, according to a Penn State professor, the university is listed as the lead player in the collaboration instead of GE, as was done previously. …

In New York, the Copper Development Association, a nonprofit group controlled by copper manufacturers, is pursuing a $4.1 million earmark to hire suppliers to install its members’ copper products in New York City subway cars, asserting that the metal has qualities that inhibit the spread of infectious diseases.

And a group called the Solar Energy Consortium in Kingston, N.Y., is pursuing nearly $30 million in earmarks, with the help of Representative Maurice D. Hinchey, Democrat of New York. The group, working out of a tiny office above a machine shop, does not perform its own research. Instead, it plans to pass on most of the earmark money to local businesses, some of which directly collected federal earmarks for solar projects this year but would no longer qualify.

My conclusion: These are obvious examples of phony nonprofits that are designed to circumvent a Congressional ban on earmarks, and they unfortunately add to the public’s confusion about nonprofit organizations, thereby potentially hurting every nonprofit trying to provide meaningful service and win the confidence of the giving public. It hurts the public’s trust in the good work of nonprofits. For the sake of the nonprofit sector, I’d like to see the IRS be tougher in applying standards for creating a new nonprofit and exercise a little more oversight.

04de175.jpgThe preceding is a guest post Bob Ottenhoff,  Chief Executive of the Center for Disaster Philanthropy. With an entrepreneurial spirit, strong technology focus, and a quest to make an impact in the world, Bob has the ability to take an organization and lead it into strong performance, sustainability, and industry leadership.

Topics: Policy Nonprofits