Saturday, January 16, 2010
On Monday we blogged about the Charity Hospital dispute in New Orleans. FEMA and the State of Louisiana are at odds over how much FEMA should pay for damage to the hospital as a result of Hurricane Katrina. The settlement will be used to help build a new hospital, so the stakes are high. An article in today's New Orleans Picayune reports that the week-long federal arbitration hearing concluded on Friday. The three-person panel of arbitrators from the Civilian Board of Contract Appeals now has 60 days to issue a decision. The arbitration process for this sort of dispute is a new process, created just last year by Congress. Other cases have used the process, but the Charity Hospital case is the largest dispute to date.
With every disaster come scams - the efforts of a few bad-spirited folks to take advantage of the generous spirits of others. A number of articles warn about making donations to Haiti relief efforts carefully. A good article appeared today in the Chicago Tribune and lists a number of reminders. A blog called Good Intentions Are Not Enough (An honest conversation about the impact of aid) provides excellent resources - advice and guidelines on giving from aid workers and links to a variety of sources of information.
A few years ago Amber Munger, a student in my Nonprofits class, impressed me with her enthusiasm for nonprofit work. Just this fall I had the chance to see her when she returned to campus for a short visit. I learned that she was working with an NGO in Haiti, and we talked about having her visit my class electronically this spring as a guest speaker. Then the earthquake struck Haiti. For two days or so we didn't know whether she was ok. Finally Amber was able to send a message to the law school community and other friends. She was outside Port-au-Prince when the quake struck, but shortly afterwards she and some co-workers headed into Port-au-Prince. She is now doing relief work through her organization, Konbit Pou Ayiti. She is posting messages on a blog, and they are worth reading. More than any of the news reports, they capture what it is like for someone there, trying to help without medicine, tools, gas, or money. She and her co-workers have set up a triage hospital, and she writes about medical work being done without proper equipment or anesthesia. She writes about the growing desperation due to a lack of food and water. About gunfire in the night. About the problem of sewage and dead bodies. And she also writes about singing - Haitians singing songs of solidarity and thanks for surviving and perhaps singing to deal with the fear they must feel. The singing and crying goes on all night, making sleep difficult.
Wednesday, January 13, 2010
Lei Zhang came from China to Yale University and earned a Master's Degree and an MBA in 2002. He then returned to China and founded Hillhouse Capital Management. He is the managing partner of the company and he has apparently done very well, because Lei has now given the School of Management (SOM), $8,888,888 (the amount determined by the Chinese lucky number 8) to help build a new building and also to provide scholarships for Chinese students and to support China-related activities at the school. A CNN story notes that the gift has generated controversy on Chinese blogs and internet sites. Some posters have expressed outrage that the money did not go to Chinese universities, but 49% of responses to a survey found nothing wrong with the gift (39.5% thought he should have given the money to Chinese schools and 11% were undecided).
The Chronicle of Philanthropy describes a survey conducted by the Nonprofit Management Research Panel at SEI, an asset-management firm. The survey reveals that many nonprofits cite liquidity as a key focus this year, and many are keeping more assets in cash than in the past. The survey also reports that most (88%) of those surveyed invested some of their assets in alternative investments and that 70% of the nonprofits use an outside investment consultant. The report is available for free from firstname.lastname@example.org.
Aid groups based in Haiti are struggling to find staff members while delivering what aid they can. Partners in Health, a nonprofit that provides medical care, has set up a temporary field hospital. Based two hours from Port-au-Prince, the organization's facilities were shaken but not damaged and all their workers are safe. The Red Cross has already distributed what supplies it had in its Port-au-Prince office, which was destroyed in the quake. Only 3 of its 15 staff members had been found by Wednesday afternoon. Save the Children was also trying to account for the safety of its staff - 36 of 58 had been found. The organizations are all requesting help while trying to do what they can. See the article in the Chronicle of Philanthropy.
The Chicago Tribune published a lengthy "watchdog" article today, discussing the rules and norms of compensation for nonprofit executives while focusing on compensation paid to the president of the Chicago Dwellings Association - $685,000 in 2008.
- The board of CDA has only three members, a number permitted by Illinois statutes but small for an organization of this sort. Oliver is one of the three members.
- Housing and nonprofit experts say Oliver's salary is three times that paid to CEOs of other local nonprofit housing development corporations. According to Guidestar data, median income for executives running Chicago housing or shelter nonprofits in 2007 was 129,358.
- In 2007 a Northbrook (Chicago suburb) low-income housing nonprofit paid its CEO $575,000. A director for that foundation explained that low-income housing was only a small portion of the projects of the foundation, which also manages trust funds and investments. That foundation brought in outside consultants to set the salary.
- Oliver borrowed nearly $500,000 to buy housing for herself (it is unknown which of her three homes - a house on the north shore, a condo in Lincoln Park, or a condo in Florida - she bought with the loan).
- Residents in some of the buildings managed by the CDA are upset about the condition of the buildings - holes that aren't fixed, rats, mice, cockroaches, and dirty common areas. One resident has sued CDA for chronic problems - broken elevators, mice infestations, and a dirty air ventilation system.
- The city sued CDA last June for 20 building code violations but dropped the suit after the violations were fixed.
- The CDA commented that "Oliver took CDA from the brink of bankruptcy and built it into a self-sustaining, financially stable organization that funds research and sponsors conferences on affordable housing."
- CDA also says the IRS audited CDA in 2005-2007 and found no problems with Oliver's salary.
Tuesday, January 12, 2010
An editorial in the Globe and Mail, a Canadian paper, talks about the Goldman Sachs story we blogged yesterday. While noting that it is unfortunate to have to mandate charitable giving for executives making huge salaries, the comment concludes that "if that is what it takes to have people fulfill their responsibilities to society, it is a message that should be heard around the world."
According to a report in Bloomber news, Harvard is one of 40 colleges and universities whose backsides the IRS will crawl into and look around. In all the cases, we will probably find a few minor adjustments relating to UBTI but that's about it, I betcha:
The audit “is just now beginning,” the Cambridge, Massachusetts-based university said in documents detailing plans to sell $400 million of tax-exempt securities this week. The “examinations typically extend over more than a year and involve a team of agents reviewing a broad array of activities,” according to the documents. In October 2008, the IRS sent questionnaires to 400 colleges and universities asking how they manage taxable operations as well as how they “invest and use endowment funds,” according to a description of the so-called compliance project on the federal agency’s Web site. The IRS is probing whether the institutions’ tax-exempt status should apply to income from activities not related to their educational mission. The questionnaire also sought to “determine types and amounts of executive compensation,” according to the IRS Web site. Bruce Friedland, an agency spokesman, declined to comment. Harvard received and responded to the IRS questionnaire and then learned it was one of 40 colleges and universities subject to a subsequent audit this year, the school said in its bond offering documents. Harvard “has no reason to believe that the examination will have an adverse effect on the tax-exempt status of the university or any other aspect of the university’s operations,” the school said in the documents. John Longbrake, a Harvard spokesman, declined to comment. Harvard is the world’s richest college with an endowment of $26 billion as of June 30, down from a peak of $36.9 billion in 2008. An alumni group criticized pay at the school’s endowment, known as Harvard Management Co., in 2003 after the top six in- house managers earned a combined $107.5 million the prior year. Jack Meyer, who ran the endowment for 15 years, left in 2005. Jane Mendillo took over Harvard Management in 2008. Senator Charles Grassley, an Iowa Republican, has been examining finances at universities, including how much funding rich schools give to student financial aid, and drug company payments to university researchers. Grassley called the IRS probe “long overdue” when it began in 2008.
If you ask me, this is just a waste of time and money. As my last post suggested, almost anything goes in the nonprofit tax exempt world these days. I may not agree with Colombo on PILOTS but lets face it, colleges and universities can do no wrong. They get in trouble only when their administrators are way beyond stupid. The Service would be better off devoting their scarce resources to something that will lead to concrete results, not spending money so that their agents can go back to their old frat and sorority houses. Blame Colombo for my cynicism on this one, by the way. The auditing project was preceded by a lengthy questionnaire that he IRS sent out to nearly 400 colleges and universities. The Association of Governing Boards of Universities and Colleges and the National Association of College and University Business Officers commissioned a joint statement on and analysis of the questionnaire and the Service's enforcement efforts against College and Universities in general.
Students at Stanford University Center on Philanthropy and Civil Society recently completeled a study in which they concluded that the IRS will approve just about any application for tax exemption, regardless of the purpose, as long as the organization complies with the private inurement, private benefit and political activity restrictions. The study is appropriately entitled "Anything Goes" and is summarized below:
The IRS approved more than 50,000 new organizations as 501(c)(3)nonprofits in 2008. It has approved more than 50,000 organizations for every year of the past decade, leading to a massive growth in the nonprofit sector. The number of 501c3s has grown by more than 50% in just a decade. What kinds of organizations are most often approved? How strict or lax is the approval process?Stanford’s Center on Philanthropy and Civil Society (PACS) new report examines the approval of nonprofit status by the IRS. The report is based on research conducted by faculty co-director Rob Reich over the summer with two terrific students, Lacey Dorn and Stefanie Sutton.They found that the approval rate in 2008 was above 98%. And they found that some of the organizations that had been approved are truly bizarre. The report is entirely descriptive, but the findings raise some important questions, I think, about the nonprofit sector in the United States:1. Do we need 50,000 new 501c3s every year? Do we have too many nonprofits?2. Need an organization demonstrate anything beyond the so-called “non-distribution constraint” — no profits to shareholders — in order to obtain nonprofit status? Does the charitable sector not have any substantive content to it beyond not-for-profit?3. Have Americans conflated the undeniable importance of freedom of association with an entitlement to tax benefits?4. Is the IRS the best agency to issue determinations of nonprofit status?
The study bemons the fact that there is no apparent consistent thread regarding the definition of "charitable" for tax exemption purposes and lists 20 approved tax exempt organizations the center considers "bizarre" and implicitly not worthy of tax exemption. My reaction, of course, is that the students are laboring under a fundamental misunderstanding of the meaning and purpose of tax exemption. Tax exemption is certainly not a governmental stamp of approval for the particular activity; indeed, tax exemption is often conceptualized as a means of encouraging activities that most people might view as "bizzare" (though that is not the only justification offered from time to time). There is insufficient political or financial support to gain government support for what might turn out to be a good idea over time. Anti-slavery and women's sufferage were once thought to be bizzare activities. Outlawing the consumption of animals seems bizzare to some people but supporting PETA through tax exemption is still a good idea. Which, by the way, brings me back to my debate with John Columbo regarding the propriety of PILOTS.
Its hard to essentialize someone else's argument so I apologize in advance if I get this wrong. Colombo's primary assertion, as I understand it, is that nonprofits should not be exempt from contributing to the local government fisc because the benefits they provide are no more greater than could be obtained from a taxable organization. This, I think, is the crux of our difference. In fact, I am surprised because if the argument works on the local level, it necessarily works on the federal level. I think I am correct that Clombo supports tax exemption for some activities, though he would not limit exemption to those that necessarily serve the poor. Yet the argument he relies on to subject charities to local property taxation is that local governments can get the same benefit from taxable entities without the loss in tax revenue. If true, tax exemption is a wasted subsidy in any instance. The overlooked point, I think, is that nonprofits (at least theoretically) must recycle their excess revenue into a public rather than private purpose. So it is not true that local governments get the same benefit from a taxable entity. We must necessarily speak on the theoretical level, by the way, because most certainly there are nonprofits that do not devote their excess revenue to the public good the way we would hope. This is a matter of enforcement and, if CMU is not operating for the purpose of public benefit -- even beyond the fee based provision of edcuation -- it ought to lose its exemption. But CMU does not prove the case. One of the problems in this debate is that Colombo is expressing understandable populist outrage at the exhorbitant cost of attending CMU, a cost that likely precludes all but the most wealthy from attending. Agreed and maybe Colombo is moving closer to the notion that tax exemption should be limited to organizations that extend goods and services to the poor. Even if the comparison should be between the benefits provided by tax exempt and taxable entities, it is theoretically false that taxable entities provide the same benefit. Even a respectable taxable entity does not legally obligate itself to improve the community, though it may do so as an incidental or unintended consequence of its pursuit of profit. What Hansman called the "nondistribution constraint" -- and actually got famous for coining that economic mumbo jumbo -- is that very thing that makes tax exempt entities particularly beneficial, certainly more than taxable entities and thus, arguably entitled to a tax concession. Taxable entities need never lift a finger to make life better for anybody. They can sell cigarettes or pornography or soft drink or hamburgers. Theoretically, then, it is not true that any taxable entity invariably or even likely provides as much benefit to the community as a tax exempt entity. It is only true if we do not believe that the nondistribution constraint necessarily results in public benefit (which may very well be the case as a pragmatic matter, but we are dealing with the theoretical basis for tax exemption).
The discussion necessarily allows us to hone and refine our positions so I freely admit that a vacant lot is less beneficial than a lot occupied by any legal taxable entity, even one that may contribute to obesity or cancer. But occupation by a taxable entity employing the exact same number of persons as a tax exempt entity does not provide the same marginal increase in public benefit that has always justified tax exemption. The extortion that PILOTS represents is ultimately an attack on the belief that legally mandated community benefit is of value sufficient to justify tax exemption. It is an expression of political disbelief. If Colombo is correct that taxable entities provide as much public good as tax exempt entities, then we ought do away with tax exemption altogether.
Stanford's study is appropropriately relevant to Colombo's argument because it points out that just about anybody can claim they are benefitting the public. That, though, is a matter of policing. If the claim is true, tax exemption is an appropriate trade though it is hard to know if each side receives exact value for value. If it is false, exemption should be withdrawn not whittled away in a piecemeal fashion that provides cover to local politicians who have not the courage to cut costs or raise taxes. And certainly not in a way that lends credence to the idea that community benefit is of no value.
Monday, January 11, 2010
Just a year ago, Brandeis announced that it would close its Rose Art Museum and sell off the collection. Today, the Brandeis website includes an article titled, "Art critics call new Rose exhibition 'astounding' and 'spectacular.' The current exhibit showcases the Rose's extensive permanent collection, and has had rave reviews. No mention of the controversy concerning the decision to close the Rose appears in the article or on the website.
- The New York Times reports that Goldman Sachs is considering whether to increase the charity requirement it imposes on top executives who receive high salaries. Goldman's current program requires 400 partners to contribute an unspecified amount to charity - either through Goldman Sachs Gives, a fund that manages donor-directed funds for Goldman employees, or to other charities. Goldman has not disclosed the amount the partners must contribute and has not said whether changes would mean creating a new program or simply expanding the current program. As described in the article, the primary concern about whether to expand the charity requirement is whether doing so will blunt public criticism when huge bonuses are announced.
Charity Hospital was damaged by Hurricane Katrina and has been closed ever since. The state of Louisiana is trying to get compensation from FEMA, but the federal government and the state government disagree about the appropriate compensation for the loss of the building ($150 million vs. $492 million). While that controversy continues, local residents have urged the state to fix and reopen Charity Hospital.