Nonprofit Law Prof Blog

EU – Impact of Financial Regulation on Non Profit Sector

Last month, the European Commission published a Synthesis Report on Submissions to the Public Consultation on the Review of the Financial Regulation. The Financial Regulation (FR) is the EU’s financial manual.  The Commission is conducting the review and proposing updates to the FR in response to the passage of the Lisbon Treaty in 2009. 

The Synthesis Report covers responses submitted by 235 citizens, NGOs, and public authorities across the EU to questions published by the Commission, focusing on grants and the Commission’s handling of financial files.

NGOs submitted 46% of the responses. 

The Synthesis Report raised a number of issues regarding the FR that concern nonprofits.  One of the topics highlighted most by respondents was flexibility in the interpretation of the nonprofit rule.  The nonprofit rule determines access to EU grant money.  According to the report, the majority of respondents saw a need for greater flexibility while only the minority supported the status quo on the nonprofit rule. 

The current rule requires that “grants may not have the purpose or effect of producing a profit for the beneficiary.” (Art. 109(2) FR).  Under the Implementing Rules (IR) which explain the FR, the meaning of “profit” is determined by the type of grant that is provided.  (Art. 165 IR).  In the grant for action context, “profit” means “a surplus of receipts over the costs incurred by the beneficiary when the request is made for final payment.”  In the operating grant context, “profit” means “a surplus balance on the operating budget of the beneficiary.”                          

According to the European Center for Not-for-Profit Law, once finalized, the future FR will be adopted jointly by the European Parliament and Council following the entry into force of the Lisbon Treaty, and the IR will then be proposed by the Commission, and are expected to be adopted.

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US – A New Type of Entity

We posted an article earlier this week on a symposium hosted by Catholic University in Washington, DC.  During the symposium, Russell Sullivan, staff director for the Senate Finance Committee, raised an issue currently under consideration by Congress; the creation of a new type of entity somewhere between tax exempt nonprofits and private taxable companies.  Mr. Sullivan referred to the new choice of entity as a “for-benefit corporation.”

The Chronicle of Philanthropy reports that an example of the kind of company that falls into this in-between category are the state-based cooperatives being created to sell insurance under the new healthcare reform legislation.  These cooperatives are not state-owned entities, but they are also not the usual private-sector driven corporations

Mr. Sullivan stated that the issue is that the US tax code tries to put companies in one of two buckets, either for-profit and taxable, or not-for-profit and exempt.  The problem is that profit and social good are less mutually exclusive than they once may have been and companies are blurring the lines more as the purposes for which they are organized become increasingly complex. 

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Murray on "Private Management of Public Spaces: Nonprofit Organizations and Urban Parks"

Michael Murray has published Private Management of Public Spaces: Nonprofit Organizations and Urban Parks in the Harvard Environmental Law Review.  Here is the abstract:

This Article argues that current nonprofit organization theories must be refined to account for the ways in which these organizations take responsibility for public spaces. Nonprofit organizations (“NPOs”) take responsibility in two ways that reduce the cost of monitoring their performance and, consequently, allow them to harness residual demand for the public good of public spaces, helping to create positive outcomes for these spaces. First, NPOs as single entities assume physical responsibility for public space in a way that contrasts strongly with the diffuse accountability of governmental managers and makes their performance easier to monitor. Second,NPOs centralize responsibility for the financial success of the public space in a way that both contrasts strongly with insulated civil servants and reduces the cost of monitoring the attainment of a critical mass of funding for the space. Taking responsibility also places the burden on the NPO, instead of on individuals outside the organization, to compile and communicate information about their operation for monitors. Private managers, therefore, are more accountable for their actions than governmental managers because they are more responsible and, thus, less costly to monitor. NPOs in Central Park and Bryant Park illustrate these principles.

LHM

Georgia State Hosts Forum on "Social Enterprise and Social Change: Should Nonprofits Embrace Business"

The Nonprofit Studies Program at Georgia State University is hosting a forum on social enterprise on April 22, 2010.  The forum will feature Michael Edwards, author of Small Change: Why Business Won't Save the World, and a panel including corporate citizenship and philanthropy officers from IBM, the ING Foundation, and Newell Rubbermaid Corporation.

LHM

NonProfit Investigative Journalism Group Wins Pulitzer

We previously blogged about the growth of nonprofit news organizations.  Now a reporter with one of those entities has won a Pulitzer Prize.  Sheri Fink, of ProPublica, "an independent non-profit newsroom that produces investigative journalism in the public interest," won the investigative reporting prizefor the story published in the New York Times Magazine chronicling what happened at a hospital that was cut off by the Hurricane Katrina floodwaters.  For press coverage, see the L.A. Times.

LHM

Federal Allocation of Funding Threatens Federally Funded Non-Profits Focused on Literacy

The New York Times recently reported that the new federal plan for allocating funding to fight illiteracy may have some unfortunate results.  The federal budget proposed for 2011 provides for the pooling of all federal money that is now directly granted to organizations like Reading Is Fundamental (RIF) and the National Writing Project  (NWP), and distributing that money to state and local governments for allocation.  The Department of Education argues that this change will enable agencies to focus on the areas of greatest need to improve student performance.

This pooling, however, will mean that groups like RIF and NWP will face an abrupt increase in their administrative costs.  Presently, RIF and NWP deal directly with the federal government.  Going forward, they will have to partner with individual state and local governments to get access to funding.  This will require hiring people to write grant applications specifically tailored to the requirements of each state, resulting in a diversion of limited resources away from providing books to children, and towards covering added administrative costs.  The threat to RIF and NWP highlights a larger problem in the non-profit sector.  When innovation becomes a goal in itself, it can hurt effective, established programs, especially when innovation is not coupled with new funding to support it.  RIF and NWP have built their institutions and positive impact on continued federal funding. 

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Update on the World Bank’s Move Towards Greater Transparency

Ms. Isabel Guerrero, the Vice President for South Asia at the World Bank, recently gave an interview with Civil Society, which was reposted on the Bank’s website.  Ms. Isabel Guerrero, Vice President for South Asia, discussed the Bank’s upcoming shift towards transparency set to kick off on July 1^st of this year.  As I have noted in previous posts, this new policy moves the Bank from a system of limited document disclosure to a more permissive system of limited exceptions to document disclosure. 

The interview gives insight into the origins of the new policy and some of the questions left to be addressed.  The new policy is a progression from original disclosure policy that was created in the 1980’s, which responds to pressure from inside and outside the Bank for greater transparency.  However, Ms. Guerrero stated that the Bank will amid to balance the push for transparency with the need to protect the privacy of Bank employees and the financial privacy of Bank member countries.  Accordingly, there are three categories of exceptions in the new policy: (1) personal staff emails, (2) the Bank’s internal project design debate, and (3) ongoing corruption investigations.

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Washington, DC – Debating Equality of Tax Treatment Across Charities

The Chronicle of Philanthropy reports that Catholic University in Washington, DC is hosting a symposium today, April 14, entitled  "Philanthropy in the 21st Century: Should All Charities Be Equal?"  The primary focus of the symposium is consideration of whether tax law should distinguish between different types of charities.  This issue raises questions of line drawing and what to emphasize in distinguishing charities from other companies and from each other.  Many charities engage in activities that closely resemble for-profit companies but enjoy more favorable tax treatment. 

One of the most recent and high profile examples of the issues in this area is the Provena case recently decided by the Illinois Supreme Court.  That case upheld denial of a charitable hospital's property tax exemption because the hospital had failed to provide sufficient charitable services.  Another question regarding the charitable exemption is whether charities directly aiding the poor deserve greater tax benefits.

The panelists include Diana Aviv, head of Independent Sector; Richard L. Schmalbeck, a professor of law at Duke University; Eugene Steuerle, a fellow at the  Urban Institute, a Washington think tank; and Russ Sullivan, chief of staff of the Senate Finance Committee and an aide to its chairman, Sen. Max Baucus, Democrat of Montana.  The moderator is Professor Roger Colinvaux, professor of?, Catholic University?.

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A Trend Towards Longer-Term Giving

According to the Wall Street Journal, the recent economic crisis has helped people to focus on long-term change rather than donating to the cause de jure.  This trend is due partially to governments’ diminished ability to sustain charitable programs; and partially to the improved availability of information to the public on charities’ long term needs.

The reduction in availability of government funds requires a major shift in donor thinking.  Traditionally, a foundation might provide a grant to get a charity going on the assumption that the charity would thereafter sustain itself through other contributions and government funding.  As these other sources of funding dry up, foundations are looking at more long-term relationships with the charities that they fund and pursuing approaches such as promising continued funding to charities that have a sustainability plan in place.

The increase in longer-term funding is also a product of the increased availability of information to donors.  The internet provides donors with a wide range of metrics that enable them to pick and choose where their money goes based on a charity’s performance.  The other side of this coin is an increased knowledge base among charities on how to get their message out and an improved ability to show the long-term effects of their work, and their future plans.

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Lithuania – NGO Forum

The Baltic Sea NGO Forum 2010 is set to take place on April 16 – 17 in Vilnius, Lithuania.  According to the European Center for Not-For-Profit Law, the forum will discuss strengthening civil society and democracy in the region, empowering civil society actors to participate in decision making; and NGO operation with state institutions.  The forum will culminate in the drafting of a resolution to draw attention to the NGO sector and proposals for its improvement. This resolution will be presented at the 8th Summit of the Baltic Sea States which is due to take place June 1-2, 2010

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Oklahoma – Charity Corruption Investigation

Oklahoma’s Attorney General has filed another in a series of corruption investigations against Feed the Children.  The investigation focuses on the ousting of Larry Jones as the nonprofit’s former president.  The investigation is part of an ongoing case between Mr. Jones and the nonprofit over his termination and management of the organization.  The judge in the case permitted the Attorney General to intervene as of March 23 to protect the public’s interest.

Feed the Children alleges that Mr. Jones took bribes, hid sexually explicit magazines at the charity and set up secret recording devices in the offices of executives at the charity.  Mr. Jones’ response alleges that the charity knowingly failed to pay taxes, misrepresented operations to encourage donations, mismanaged funding, and improperly fired whistleblowers.  Criminal charges against Mr. Jones are one possible outcome of the investigations.

Mr. Jones is seeking reinstatement as president of the nonprofit in a separate lawsuit. 

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More information is available at NewsOK and The Chronicle of Philanthropy.

Multilateral Development Banks (MDBs) Collaborate to Fight Corruption

Last week, the leading Multilateral Development Banks (MDBs) signed an Agreement for Mutual Enforcement of Debarment Decisions designed to fight fraud and corruption.  The MDBs signing the new agreement include the African Development Bank Group, the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank Group and the World Bank Group. 

The agreement has a direct impact on cooperation between the sanctioning mechanisms of MDBs.  Typically, MDBs sanction entities via reprimand, conditions on future contracting, or debarment.  Debarment is a declaration that an entity is no longer eligible to bid on projects funded by financing flowing from an MDB for a period of time.  The new agreement only applies to instances of debarment for a period of more than one year and only where they are made public by the sanctioning MDB.

Under the new agreement, when any one of the signatories publically debars an entity for more than one year, all  the other signatories will do the same.  For instance, if a contractor fraudulently diverts money from a World Bank project resulting in debarment, all of the other signatories will blacklist that contractor from bidding on future projects funded by them for a period of time.  In addition to abiding by the agreement, all of the signatories will continue to manage their own independent strategies to prevent fraud and corruption.

This agreement is a validation of the MDBs’ commitment to a 2006 agreement as part of the International Financial Institutions Anti-Corruption Task Force.  The parties to the 2006 agreement promised to harmonize their definitions of practices that are subject to sanctions and to share information to combat fraud and corruption.

The World Bank reported this cross-debarment agreement in a Press Release and a News Article.

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UK – Universal Youth Civil Society Involvement Proposed

According to Third Sector, the UK Conservative party is proposing a promising new program to try to increase youth involvement in civil society.  The program, called the National Citizen Service, is intended to be a two-month summer volunteering program for 16-year-olds.  Initially, the idea was to make it compulsory for all youth; however, the Conservatives pulled back from that idea on the ground that it was going too far too fast.  As currently proposed, the program will not be compulsory but Conservatives hope to make it a high quality program that will eventually become universal.  If the program materializes,  it  is projected to cost £50 million over 2011 and 2012.

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