After failing to get a charity registration bill passed in the 2001 legislative session, the state attorney general's office changed strategy.

It stripped the proposal of some of the requirements the industry considered onerous and, the following year, arranged to have a new measure introduced.

This time the attorney general's office proposed the simplest, most minimal form of registration: Charities would simply have to submit a copy of their federal tax returns each year.

The bill didn't even make it past the first committee.

As a result, Hawai'i five years later remains one of the few states that do not require charities to register, allowing thousands of organizations to take in donations from the public with virtually no regular oversight from regulators.

The fate that the registration bills met in 2001 and 2002 underscores the influence that the nonprofit industry has at the Legislature.

The membership rosters of many of Hawai'i's most prominent charities read like a list of who's who in the community.

Corporate heads. Civic leaders. Major lobbyists. Government officials. Union executives.

Even state legislators sit on the volunteer boards.

So if a particular bill generates strong opposition in the nonprofit community, the chances of passage are slim, according to some in the industry.

"There are some very influential, very important business people on those boards, and they're the ones saying more regulation is not good," said Jonathan Won, who has lobbied at the Legislature for various nonprofit groups for the past 30 years. "The whole idea of regulation — people just don't like it, especially business people."

The reasons nonprofit representatives cited back then to lobby against the bills are similar to what they cite today in expressing reservations about a registration system.

Critics of the 2002 bill called the requirements overly broad. They said a registration system would put unreasonable burdens on nonprofits, especially smaller ones, hurting their ability to carry out their missions. They said abuse hadn't become a big problem in Hawai'i. If the state needed copies of tax returns, they added, it could request them from the federal government.

But national experts say requiring charities to register is important for states to understand the industry landscape and develop an effective oversight system.

"It's a first step, and not even a big step," said Trent Stamp, president of Charity Navigator, an organization that evaluates charities.

Getting Hawai'i legislators to agree to such a step, however, could be difficult, according to Won and others familiar with the legislative process.

STRIKING A BALANCE

Current and former legislators say more oversight of the industry hasn't taken hold at the Legislature partly because of a lack of a public outcry for change. But some current lawmakers say they welcome a dialogue on the issue.

Sen. Rosalyn Baker, the Senate Ways and Means chairwoman, said there is a need for nonprofit board members to better understand their fiduciary duty to the charities, perhaps through better training. She also said the state can play a role in improving monitoring of the industry.

"If we're going to have any meaningful oversight, I think it has to be done at the state level," Baker said. "It seems to me we need to make sure the nonprofits are on the up and up, and people providing donations should have assurance their money is going as it's intended."

The key in developing legislation is striking a balance, said Brian Schatz, a former legislator who now heads the charity Helping Hands Hawai'i.

"We've swung from the extremes, from overregulating and making everything subject to rigorous auditing standards to doing nothing at all," Schatz said.

Schatz shares the view of some in the industry that nonprofits would support a registration requirement that would give the state more information about charities as long as fulfilling that requirement doesn't become a bureaucratic burden, interfering with their missions.

Kelvin Taketa, president of the Hawai'i Community Foundation, believes education, self-policing and self-reporting are more effective than creating additional government oversight.

"It's less glamorous but, frankly, it'll be more robust on what it can achieve," Taketa said.

John Flanagan, president of the Hawai'i Alliance of Nonprofit Organizations, said getting the Internal Revenue Service, which has a wealth of information on charities, to share more of that information with the state would be a better answer than increased regulation.

That will be especially so as the IRS requires more organizations to file their tax returns electronically and as improved tax forms are phased in, increasing the timeliness and ability to analyze the information, Flanagan said.

"We're basically very much in favor of accountability," he said. "That's not the same thing as regulation."

But analysts and regulators said recent efforts to get the IRS to share more information mostly have been unsuccessful.

They also said the federal tax forms, called 990s, often are inaccurate, incomplete or untimely and that requiring charities to fill out comprehensive registration forms would provide the state and public with more useful information. Many states use a uniform registration statement, which includes such information as whether the organizations or their fundraisers have ever had their registrations denied or suspended, whether they've entered into consent decrees with regulators and what fundraising methods the charities use. In addition to completing the statement, the charities often are required to provide copies of their tax returns.

Hugh Jones, the deputy attorney general who oversees charity oversight for the state, said his office supports adopting a registration system and providing more resources for monitoring the industry. It also favors requiring audited financial statements for nonprofits with incomes exceeding $250,000.

As difficult as it may be to get the industry and regulators to agree on legislation, many believe something needs to be done to improve the existing system and boost donor confidence.

"I don't think doing nothing is an option," said Schatz, the charity executive.

RED FLAG WATCH

Without a registration system, the attorney general's office is able to provide regular oversight to only one small slice of the industry, and that's only because of U.S., not state, law. Private foundations, which make up about 10 percent of the charitable organizations in Hawai'i, are required under federal law to provide a copy of their 990s to the attorney general's office.

The office reviews each of those returns and pursues any red flags.

Such was the case with The Catalyst, a private foundation that promotes global harmony and a "flag for all people," according to its tax returns. The organization is run by Honolulu resident John O'Keefe, who personally donated more than $600,000 to it in 2001 and 2003, the returns show. Donations like that normally entitle the contributor to significant tax deductions.

The Catalyst's returns, which Jones said were incomplete and inaccurate, attracted the attention of state and federal regulators.

One area of focus was the lack of grants. Under The Catalyst's tax-exempt status, the organization is required to give the equivalent of 5 percent of its assets each year to charities. But it gave no grants from 2001 through 2004 and issued a $5,000 grant in 2005 to a homeless shelter, the returns show.

Authorities also questioned the thousands of dollars in rent that the foundation paid for the Ilikai condo where O'Keefe was living, according to the tax returns and Jones. The organization classified the rent as an expense when it should have been listed as compensation to a director, Jones said.

O'Keefe said he spent hours answering questions from state and federal authorities and eventually addressed all their concerns. He didn't elaborate and later told The Advertiser not to call him again.

An IRS spokeswoman declined comment.

Jones said the state required the foundation to take significant actions, including correcting its returns, seeking an IRS ruling on its exempt status and paying for the state's cost of its investigation.

The Advertiser's review of tax returns for dozens of randomly selected Hawai'i charities also turned up many red flags, which raise questions about a charity's operations but don't necessarily indicate something is wrong.

The Center for A Sustainable Future, for instance, paid its president $116,000 in 2004 for working an average of eight hours a week, tax records show.

The charity's president, C. Barry Raleigh, a renowned scientists, also was a full-time faculty member at the University of Hawai'i that year.

On its face, a six-figure fee for essentially a day's worth of work each week would raise questions about excessive compensation.

But Raleigh in an e-mail said he worked much more than eight hours a week, including on weekends and holidays. He said the university allows faculty to work only eight hours weekly on consulting, and the remainder of the week he did the work for which UH paid him.

"I put in over 12 years working on behalf of CSF as its president without compensation of any sort, using my free time to do so," he wrote. "If you included that time in the calculation, I was paid $10,000 per year or $25 per hour."

Raleigh said the charity's board approved his consulting fee, and his paid work lasted for slightly more than a year, ending in April 2006.

In a speech to nonprofit executives last year, Jones said his office has made numerous inquiries of foundations based on its reviews of their 990s.

Among the examples he described was a foundation that was formed to operate a home for autistic children but for numerous years leased the property to college students instead. The tax returns of another organization indicated that a trustee was paid $48,000 for working an average of zero hours per week.

If those kinds of red flags were discovered through a regular review of foundation 990s, what kind are going unchecked because the vast majority of Hawai'i charities operate without such government scrutiny, analysts ask.

Given the lack of oversight, Daniel Borochoff of the American Institute of Philanthropy had this simple advice:

"Let the donor beware."

Reach Rob Perez at rperez@honoluluadvertiser.com.