The Economics of the Modern Tzedaka Industry

Boruch Clinton

There are currently 1,237 tax exempt organizations registered in Lakewood New Jersey’s 08701 zip code. That’s compared with a national average of somewhere around 50 per zip code. On the one hand, that single statistic nicely illustrates the Jewish people’s ancient and enthusiastic relationship with charity and communal care. But it also suggests that there’s probably significant competition for every dollar that’s donated. And the sheer numbers of competing organizations can make choosing between them difficult for potential donors.

By and large, most charities do a fine job communicating their goals. We all understand what to expect from organizations with names like “Bikur Cholim,” “Tomchei Shabbos,” and “Bais Yakov.” (Although we can be forgiven for confusion over exactly what an organization with “Meir Baal Hanes” in its name does.) But try to get a sense of how effectively they’re spending your money or whether they’re compliant with applicable regulatory frameworks, and things can become more confusing.

Why Transparency Is Important

Enjoying a long-term personal relationship with the people behind a particular tzedaka is great. But, especially when we’re approached by organizations from half way around the world, it’s not always possible. While we certainly want to contribute as much as we can to our communities, we’re also eager to get the most value from our donations.

One problem is a systemic lack of financial transparency in the way many charities operate. There’s nothing necessarily illegal about that. In the US, at least, many tax exempt organizations associated with houses of worship are not required to file Form 990s each year. So the availability of the kind of reporting we’ve come to expect from for-profits and non-profits in other parts of the world just isn’t available.

As an example, just 81 out of the 318 US-based non profits with “kollel” in their names file 990s, and only one out of the 84 non profits with “mikva” in their name filed. So not even the simplest program expense ratio data is easily available.

Why should we care about program expense ratios? Take the Cancer Survivors’ Fund in the US. Their professional fundraising fees consume 88.1% of their total budget which, after administration costs, leaves only 8.5% for their actual program. And that’s assuming their accounting accurately reflects their financial reality. They’re not breaking the law, but do you really think there’s a lot of value in making a donation?

Well, no matter how altruistic and honest our local charity managers might be, how are we supposed to know that there aren’t “Cancer Survivors’ Fund” equivalents operating in our own communities?

And I might as well name the elephant in the room right away: do we want to support and associate with organizations that engage in fraud? It goes without saying that many, many of the tzedakos serving our communities are beyond reproach. But they’re definitely not the whole story. I’m aware of dozens of cases over the past couple of decades involving indictments and convictions of “Orthodox” non-profits for money laundering, program fraud, and out-and-out theft.

On November 27, 1993, the Permanent Subcommittee on Investigations Committee on Governmental Affairs of the US Senate heard extensive, in-depth testimony from the director of the Office of Special Investigations concerning Pell Grant abuse involving a significant number of “yeshivas” in the New York area. Schools claimed many millions of dollars in grant funds on behalf of ineligible, non-consenting, and non-existent students. That wasn’t a kiddush HaShem.

Tragically, it happens. How can we protect ourselves?

What Can Go Wrong

What exactly is it that we’re looking for? Well of course we’re concerned about the possibility of criminal activity like fraud or money laundering. But assuming there’s none of that going on, we should look for money that’s wasted.

Organizations that, for example, hire professional meshulachim who travel extensively might be giving up a significant proportion of their revenue in operating costs. It’s not uncommon for meshulachim to hire “drivers” to both share their knowledge of local individuals of interest and transport them between visits. For their services, those drivers can often take 30% or more of the money a meshulach collects. Travel and accommodation expenses are over and above that, along with credit card processing fees – not to mention the meshulach’s own income. Those are all legitimate expenses. But at a certain point, the whole thing might just not be worth the effort.

Older organizations might have long settled into operating patterns that worked well back in the Seventies, but haven’t aged well. With no one periodically reassessing the way they do things, such organizations might not realize that some of their fundraising activities are now losing money, or that they’re not compliant with modern regulatory and accounting standards.

How it Should Work

The best place to begin this part of the discussion is with the Rambam (מתנות עניים י:ח):

One shouldn’t contribute to a charity fund (קופה של צדקה) unless you know that the manager is trusted, wise, and understands appropriate practices (נאמן וחכם ויודע להנהיג כשורה) like Rabbi Chananya ben Tradiyon (see Avoda Zara 17b).

As Rabbi Moshe Feinstein (אגרות משה יורה דעה א סימן קמט) famously ruled relating to the question of whether we should support local Jewish federations, the tzedaka fund manager needn’t be a Torah scholar quite like Rabbi Chananya ben Tradiyon, but he must fear God and be expert in how to manage money intelligently and how to select recipients.

I believe it’s obvious that funds breaking the law – even by illegally spamming email lists or making exaggerated claims – are clearly not run by trusted, wise, and understanding individuals. But even funds whose managers are decent and scrupulously honest may not fit halacha’s standards if they’re not constantly working to improve their operations and compliance.

Everyone hurts when service organizations lose their way. The charities themselves are wasting their good efforts and, as a result, find it more and more difficult to gain and keep the trust of donors. Donors, because they’re unable to assess charities and are reluctant to take a chance wasting their money, give less than they can and should. And most of all, as charities become less effective and efficient, the people and institutions they’re supposed to serve are left without the support they need.

Increasing transparency by, perhaps, publishing the results of regular financial audits and even notes from internal meetings, can make a difference. Sure, it would take some money and time, but those might prove profitable investments. If the process results in greater engagement in charitable activities, it would be well worth the effort.

What’s Next?

We’ve barely scratched the surface of this topic here. I hope to explore the tzedaka industry in much greater depth in articles that should follow soon. In the meantime, be in touch with your own thoughts.