Taking Up the Cause of High Fees

When the California Organization of Police and Sheriffs wanted to raise money two years ago, it hired Civic Development Group, one of the nation’s largest police and fire telemarketers. The company raised $1.3 million for the police group -- but kept more than $1 million as fees and expenses.

Across the country, professional fund-raisers bring in an estimated $1 billion per year from similar relationships with nonprofit organizations, most of it from telemarketing, with some returning as little as 10% of the take to the charities.

State attorneys general and charity regulators say that fund-raising campaigns with high expenses are fraudulent and misleading, because consumers believe most of the money they donate will go to the nonprofits.

Courts have not always agreed. But this month, the Supreme Court said it will decide an Illinois case where high-fee fund-raising was prosecuted as common fraud.

State regulators, who have questioned high-expense fund-raising for years, say an opinion in their favor could mean a reduction in fraud and an increase in the amount of money going to charities. Some states -- among them California, Ohio, Massachusetts, New York, Vermont, North Carolina and South Carolina -- issue annual reports for consumers that track how much money professional fund-raisers in their states keep, and how much goes to the charities.

“If the majority of the money is not going to the charity, that is fraud,” Utah Atty. Gen. Mark Shurtleff said.

But professional fund-raisers and their clients say that expensive campaigns are the only way for many nonprofits to raise money, particularly if the cause is less well-known or perceived as less popular. They say that 10% or 20% of $1 million is better than nothing.

In a series of decisions in the 1980s, the U.S. Supreme Court found that restricting fees would not reduce fraud and agreed that some charities, by necessity, have higher fund-raising expenses. The court also said that limiting or defining allowable expense ratios restricted the freedom of speech of the nonprofit groups, and ordering the disclosure of fund-raising expenses was unconstitutional.

The case before the Supreme Court pits the attorneys general of Illinois and other states against Telemarketing Associates Inc., an Illinois company whose client, a Vietnam veterans group, received only 15% of the money raised in its name.

The California attorney general’s office is considering filing a friend-of-the-court brief in the case. Florida and other states are already writing their briefs, which are due in December.

“We are looking carefully at the fact that the court has taken this case,” said Tom Dresslar, spokesman for California Atty. Gen. Bill Lockyer’s office. “Our concern overall is that donors are adequately informed about how their money is going to be spent.”

California named 127 fund-raisers in its most recent list of telemarketers that keep at least 85% of the money they raise, including 10 associated with CDG. “Historically, on average, less than one-half of the dollars collected by commercial fund-raisers in California have actually gone to charities,” the attorney general reported.

Floyd Perkins, chief of the Illinois charitable trusts bureau, said a court victory could strengthen the negotiating position of nonprofit clients and mean more money for charities.

But Errol Copilevitz, who said he will argue the case for Telemarketing Associates and is Civic Development Group’s outside counsel, disagreed: “There will be fewer charities, fewer opportunities for these groups to have their voices heard.”

Illinois’ position “has huge implications across the board,” said Copilevitz, a leading industry lawyer. If the state wins, it will be up to regulators to decide what fund-raising expenses are acceptable, and which would have a “chilling effect” on the nonprofits’ free speech and their ability to raise money.

Consumers are often surprised when they discover how much of their donations never make it to a charity or police and fire fraternal organization. A 2001 study by the Better Business Bureau’s Wise Giving Alliance found that 97% of those surveyed thought that charities should receive 50% or more of the money raised in their names.

Wise Giving and the American Institute of Philanthropy say that fund-raising costs for charities should never exceed 35% of the contributions.

“As a nonprofit, you kind of get caught up in it,” said Charles McLain, chief executive of the California Veterans Advocacy Corp., which recently switched from a large commercial fund-raiser to an in-house group.

A close look at CDG, one of the country’s leading telemarketing firms, shows how fund-raisers targeted by the Supreme Court case work, why regulators have had trouble stopping them and why nonprofits continue to hire them.

Over the last eight years, New Jersey-based Civic Development, its parent group CDG Management and related companies have collected more than $291 million for charity, police and fire causes nationwide, and kept all but $49 million, according to state reports.

CDG has used 28 names since 1992 to solicit money, but all the firms are tied back to the same for-profit company in New Jersey, according to the Federal Trade Commission.

CDG has been repeatedly accused of false and deceptive fund-raising. It is operating under special conditions imposed by state regulators in South Carolina, Pennsylvania, Oklahoma, Idaho and New Jersey. It has run afoul of regulators in at least 18 states and the FTC in the last 15 years, paying more than $1 million in fines.

Company officials declined to be interviewed and referred all questions to their attorney. Copilevitz said that “virtually every organization that raises money for public safety groups has been the subject of regulatory scrutiny at one time or another.”

“CDG has been able to resolve its regulatory problems in a positive manner, which has made the company bigger, stronger and more effective.”

CDG, based in an office park in northern New Jersey, employs about 5,500 solicitors in 35 call centers in 11 states across the eastern half of the country.

Some CDG contracts guarantee nonprofit clients as much as $400,000 a year. Others guarantee a percentage of all funds raised -- 10% to 20% to the client with the rest going to CDG.

CDG’s expense filings in Georgia and Florida, where more detailed records were available, report 40% of the total money raised paid for the telemarketer’s employees’ salaries. Almost 20% more went to phone charges and mail processing.

Despite warnings from regulators -- trade commission attorneys said in 1997 that the CDG played “on people’s law enforcement sympathies for profit” -- the firm and its affiliates still represent most of the nation’s state fraternal orders of police.

The Organization of Police and Sheriffs was among a dozen California nonprofits -- half of them police-related -- that have used CDG and related companies to solicit millions of dollars over the phone in recent years. Of $5.8 million collected from 1999 to 2001, the groups received $939,000, state records show.

The groups that hire CDG see it as a win-win deal. Even if CDG keeps the bulk of the money it raises, the police still end up with more money than they would have gotten otherwise.

The New York State Fraternal Order of Police raised just $300,000 before signing with CDG in 1994. But since then, CDG has raised more than $25 million in the group’s name. The FOP’s share has been more than $7.3 million -- enough to support salaries for the group’s officers, scholarships and contributions to other police groups.

CDG, however, has had its share of problems. It paid a $125,000 fine to New Jersey regulators in 1999 after authorities alleged that it made false claims that it was raising money for local police. State officials said that of the $8.6 million raised for the State Law Enforcement Officers Assn. over six years, “almost nothing” went to law enforcement officers.

CDG nearly had conflicts with charity regulators after last year’s terrorist attacks. On the morning of Sept. 14, 2001, CDG readied a special script for the FOP that spoke of an “emergency relief fund” set up to “assist the families of the police officers who gave their lives in the World Trade Center disaster.”

The campaign was pulled in minutes, after New York Mayor Rudolph W. Giuliani warned consumers against Sept. 11-related telemarketing and threatened telemarketers with arrest.