A Project of the American Enterprise Institute and the Federalist Society

Red Cross Borrowing Funds for Storm Aid

The Washington Post

October 28, 2005

By Jacqueline L. Salmon and Elizabeth Williamson

Loan of $340 Million Comes as Nonprofit Draws New Scrutiny

The American Red Cross said yesterday that its response to hurricanes Katrina and Rita has depleted its Disaster Relief Fund, forcing it to borrow $340 million to cover costs -- the first time in its 124-year history that the charity has sought a loan for disaster relief.

Of the $2 billion in donations the organization said it needs to handle relief efforts from the Gulf Coast hurricanes, it has received $1.3 billion and spent all of it. "Our best projections indicate we're going to have a shortfall of about $400 million," spokeswoman Carrie Martin said. "We're still determining how much Wilma will cost."

The financial problems come as some members of Congress and other relief agencies have begun to question the Red Cross's Katrina response, its largest ever. Many of the difficulties the charity has encountered this year mirror problems that surfaced in past catastrophes, records and interviews show.

The Red Cross holds near-mythic status as the premier U.S. disaster relief agency, a role reinforced by the federal government, which has incorporated the organization as a key part of its disaster response.

But the $3 billion charity spends two-thirds of its resources on blood collection, not disaster relief. And 90 percent of its disasters are small fires and local mishaps. During larger events -- such as violent storms, wildfires and the Sept. 11, 2001, terrorist attacks -- the Red Cross has stumbled repeatedly, misleading donors on how contributions are used and underserving victims, particularly in rural minority communities, according to other relief groups and experts on nonprofit agencies.

Although they acknowledged some missteps, Red Cross officials said the charity is more than capable. The problems and the current financial shortfall, they added, were due to the massive scale of the storm. "It's just staggering when you have an area affected that is the size of Great Britain," said chief executive Marsha J. Evans.

Critics said that is precisely the point: Similar problems have cropped up in at least a half-dozen other large disasters in the past 16 years, from the Loma Prieta earthquake in San Francisco and Hurricane Hugo in South Carolina in 1989 to the Sept. 11 terrorist attacks.

"The question is not whether we need something like the Red Cross, but whether its capacity is scalable to true catastrophes and multiple disaster events," said Kathleen Tierney, director of the Natural Hazards Center at the University of Colorado. "Now we're talking about a pandemic. Where would the Red Cross be?"

The Senate Finance Committee, which has oversight of nonprofit agencies, has said it is "monitoring" the group's performance.

"The Red Cross in its disaster response was more than a charity. It was also a federal contractor," said Sen. Charles E. Grassley (R-Iowa), chairman of the committee. "It's appropriate for Congress to verify whether taxpayers got their money's worth."

On the House side, Rep. Bennie Thompson (D-Miss.) has sent the organization a letter asking about delays in helping Katrina victims; procedures for providing aid and training volunteers; and steps the charity has taken to "reach out to religious organizations, especially African-American religious entities."

Evans responded with a seven-page letter laying blame for delays on the Federal Emergency Management Agency, and she assured the committee that "the American Red Cross seeks to develop long-term cooperative relationships with community and faith-based organizations."

Chartered by Congress in 1905, the Red Cross today is designated by the federal government as the nation's front-line responder in national emergencies in providing "mass care" -- shelter, food and first aid for disaster victims. It also functions as a support agency to the government in providing blood, first aid and counseling services.

Those services are not affected by the current shortfall in the disaster fund. The Red Cross has taken out a $1 billion line of credit from seven banks and continues to raise money from the public.

Although this hurricane season marks the first time the Red Cross has borrowed money for disaster relief, the organization has turned to Congress several times to make up shortfalls. Most recently, it received a $70 million appropriation last year after four hurricanes raked Florida.

Some question the Red Cross's current claim of financial hardship, suggesting that the organization could divert money from its other operations.

Daniel Borochoff, president of the American Institute of Philanthropy, which monitors how charities spend their money, said that based on the organization's most recent IRS reporting form, it has $700 million on hand to use.

"For them to claim that they have nothing is not being very responsible," he said. "They have funds available for a disaster, even if it is not in the Disaster Fund."

But yesterday, the Red Cross disputed that assessment. "We have [the funds] as a resource, but it needs to be spent on what it's designated to be spent on," Martin, the spokeswoman, said.

Beyond the internal constraints, the Red Cross has vowed to respect donors' wishes when they give to a particular disaster. Complaints that it had failed to do so were raised after the bombing of the Oklahoma City federal building in 1995, the Red River Valley flooding in 1997 and the California wildfires in 2001. After the Sept. 11 attacks, the charity established a policy against redirecting earmarked contributions.

Public policy and disaster relief experts said the Red Cross should submit to a systemic, independent audit of relief operations. They suggested that such an examination probably would reveal troubled relations between the national leadership and local chapters, faulty coordination of relief and fundraising efforts, and poor cooperation with other charities.

Many of these problems have arisen in the eight weeks since Katrina struck.

Last week, the Red Cross was embarrassed when it discovered it had grossly overestimated the number and costs of a hotel program for Katrina evacuees: There were 200,000 people in hotels, not 600,000, officials acknowledged.

Earlier, evacuees in rural communities waited days for the Red Cross to show up. Those who could find phones dialed for hours to reach a toll-free number set up to link them with Red Cross financial help. In Shreveport, La., the shelter in the Hirsch Coliseum was so short of basic supplies that Red Cross staff went begging to a local church for diapers and underwear.

At the same time, some African American organizations accuse the Red Cross of ignoring rural black communities, particularly in coastal Mississippi.

"It was the poorest logistical planning for communities of color that could possibly have happened," said Joe Leonard Jr., executive director of the Washington-based Black Leadership Forum and organizer of relief efforts in that region after Katrina. Leonard said churches and civil rights groups, which survivors dubbed "the Black Cross," stepped in to provide aid in the absence of the Red Cross.

"When you've got communities that don't have any visit by the Red Cross at all, no shelter, no water or food and in terrible straits . . . Lord, I'm surprised more people didn't die," said George Penick, president of the Foundation for the Mid South, which helped channel aid to the gulf region and coordinate relief efforts.

Yesterday, the Red Cross acknowledged that its response to minority evacuees during Katrina and Rita was lacking, with some African American communities having less access to aid than white communities. Leaders met last week with 60 faith-based groups, ethnic groups and community organizations to talk about developing a "broader sense of inclusion" in its disaster-relief efforts, said Rick Pogue, the charity's chief diversity officer.

Ultimately, the Red Cross needs to open itself to greater outside scrutiny and address its shortcomings, said Peter Dobkin Hall, a lecturer on nonprofit organizations at Harvard University's John F. Kennedy School of Government.

"What happens if you don't do that is you live off your myth and you conceal problems," he said. "They're an organization obsessed by its own myth, that thinks it can do it all itself."

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