Friday, September 3, 2010
What Happens When the Regulator Runs Out of £?: UK Health Care Charities Dodge Public Benefit Scrutiny
ThirdSector reports that the Charity Commission for England and Wales has canceled planned public benefit assessments of health care charities because of limited resources. In the wake of the Charity Commission's issuance of new guidance on the "public benefit" requirement for charities (see this report), the Commission announced planned public benefit assessments of a limited sample of charities, including hospitals and other health care entities. While the Commission has completed sixteen public benefit assessments of independent schools, religious charities, arts charities, and others, and has begun assessments of four sports and recreation charities, it has decided not to pursue assessments of health care charities, citing "limited resources." Given the size and complexity of hospitals and other health care charities, it is understandable that such assessments would have been time consuming and costly. Yet especially in light of their heavy level of fee dependence, it also appears unwise. In an era of deficit-fighting, however, such decisions are perhaps to be expected, not only in the UK but in the US and other countries as well.
The Chronicle of Philanthropy reports that the Direct Marketing Association's Nonprofit Federation paid for and released two reports that criticized both the evaluation systems used by various charity watchdog organizations and the effect on charities of such evaluations. The criticized organizations were the American Institute of Philanthropy (which operates the Charity Watch website), the Better Business Bureau's Wise Giving Alliance, and Charity Navigator. George Mitchell, a doctoral student affiliated with the Transnational NGO Initiative at Maxwell School of Syracuse University prepared one report, which he based on in-depth interviews with leaders from 152 nonprofit organizations. Jessica Sowa, a professor at the University of Colorado Denver's School of Public Affairs, prepared the other report (for which I could not find a publicly available Internet copy), which compared current charity rating scales against research on nonprofit organizational effectiveness. The Chronicle of Philanthropy article includes responses from leaders of the watchdog groups, some of whom questioned the impartiality of the studies given their funding source.
Evelyn Brody (Chicago-Kent) has posted "All Charities are Property-Tax Exempt, But Some are More Exempt than Others," published at 44 New England Law Review 621 (2010). Here is the abstract:
Attention from the media notwithstanding, the nonprofit sector continues to achieve remarkable success in state supreme courts and statehouses in defending property-tax exemptions. But budget pressures remain. While the intermediate use of “payments in lieu of taxes” has not yet become a systematic compromise solution, PILOTs are attracting growing interest from local taxing jurisdictions. This Article highlights three issues – who decides the parameters of exemption, legislatures or courts; what are the specific factors and vulnerable subsectors; and how exemption is granted or withheld in practice – and concludes with several PILOT case studies. The Appendix sets forth a fifty-one-jurisdiction review of state constitutions, statutes, and high-court decisions, and finds that the regimes generally are more similar than not.
Melanie Leslie (Cardozo) has posted Helping Nonprofits Police Themselves: What Trust Law Can Teach Us About Conflicts of Interest, which was published at 85 Chicago-Kent Law Review 551 (2010). Here is the abstract:
duty law seeks to minimize agency costs that occur when the interests
of the agent and principal diverge. That law is context specific: the
substance depends upon the objectives of the fiduciary relationship and
the degree to which other forces, such as markets and social norms, help
align the incentives of principal and fiduciary.
Trust law has no business judgment rule, and prohibits even "fair" conflict of interest transactions unless they are approved by fully informed beneficiaries. Strict rules bolster norms against self-dealing and compensate for trust beneficiaries’ poor monitoring abilities and inability to exit or diversify. Corporate fiduciary duty law is more relaxed, and does not require the board to obtain advance approval prior to engaging in "fair" transactions with board members. The standard is more generous because diversified shareholders want to encourage risk, and because market forces pressure corporate directors to avoid conflicts that are not in the corporation’s best interests.
Neither monitors nor markets exert meaningful pressure on nonprofit fiduciaries. When nonprofit corporations function effectively it is because the most vocal directors have internalized fiduciary duties as social norms. Fiduciary duty law in the nonprofit context should therefore seek to support and reinforce fiduciary duties as social norms.
Trust law teaches that clear rules are superior tools for generating and supporting social norms. That lesson has been lost on policy makers, who have transplanted fuzzy corporate law fiduciary duty standards to the nonprofit context. The result has been the erosion of the fiduciary duty of loyalty.
Many communities impose fees on charities to help cover community services paid for through property tax dollars. About a month ago the city of Deerfield in Florida decided to impose fees for fire services on nonprofits for the first time. The goal was to reduce the pressure on property taxpayers in the city who were already facing a significant increase in the fees they would owe. After hearing from nonprofits, especially churches, the city commissioners agreed to reverse the decision. Nonprofits will not be reasonable for any fire fees. The change will mean even higher increases for individual homeowners and businesses. This year the fee on a single-family home will increase 44%.
One city commissioner said that in the case of churches, it felt like people were paying the fee twice - once at home and once at church - and that did not seem right.
This time the charities had not invested in the Ponzi scheme, but several Florida charities received gifts from Scott Rothstein, a man convicted of and sentenced to 50 years in federal prison. A story on Monday said that charities were returning $1.6 million in donations, and a story today mentioned six charities in particular, including Dwyane Wade's foundation (Wade's World Foundation), that would be returning part of the donations they had had received. Investors will likely get little back: they are owed $317 million and Rothstein left behind only $25 - 30 million. The paper describes the entire Ponzi scheme as involving $1.4 billion. The bankruptcy court dealing with the bankruptcy of Rothstein's failed law firm is trying to find money that can be returned to investors and other creditors. Yes, sadly, Rothstein was a lawyer.
Thursday, September 2, 2010
The Charity Commission in New Zealand has refused the attempt by Exodus Ministries Trust Board, the New Zealand affiliate of Exodus International, to register as a charitable entity. Exodus is a Christian ministry that promotes "release" from homosexuality based on its belief that homosexuals can become heterosexual and that homosexuality is morally wrong. Consistent with these beliefs, it provides counseling and conducts seminars and study groups. Interpreting New Zealand's statutory law, the Commission found that the organization was not charitable - citing to the Preamble to the 1601 Statute of Elizabeth from which the definition of "charitable" in most if not all common law countries, including the United States, can be traced - and also that it was unclear whether the group would provide a public benefit. The ruling appears to have been reported in the U.S. primarily if not exclusively in the gay press (see, for example, the Edge's coverage) to date. One interesting question the decision raises is whether similar reasoning could be adopted in the U.S., the U.K., or other countries that use a similar definition of charitable, although at least in the U.S. the explicit provision of "religious" as an acceptable purpose for a charity (for federal tax purposes) may provide an alternate ground for maintaining the charity status of Exodus and similar groups.
The N.Y. Times reports that the L.A. Dodgers have confirmed that the Dodgers Dream Foundation received a letter from the California Attorney General's office. The focus of the letter is apparently the compensation paid to the Dodger's senior vice president for public affairs, especially the previously reported 2007 compensation of more than $400,000. That figure represented a quarter of the Foundation's budget for that year, although the same individual received significantly lower compensation in 2006 ($172,000) and 2006 ($139,000), and has not received any compensation since 2007. The story is unusual, in that most concerns about charities associated with professional sports have centered on organizations founded and run by players, not teams.
Tuesday, August 31, 2010
Earlier this month, the Chronicle of Philanthropy reported that New York Governor David A. Paterson signed into a law a bill that limits wealthy individuals - those with adjusted gross income above $10 million annually - to a deduction equal to 25 percent of their charitable contributions. Previous law only imposed a 50 percent limit, which is still the limit for other New York taxpayers. While only directly affecting about 3,500 people, it is estimated that the provision will raise up to $100 million in the current fiscal year alone (according to an earlier Chronicle article), indicating that a significant amount of contributions will be hit by the now lower limit. Given that President Obama has proposed a similar, although less draconian, limit on charitable contribution deductions by the highest earners (as previously blogged about), it will be interesting to see what effect, if any, the NY law has on giving in that state.
As detailed in an opinion by federal District Court Judge Paul S. Diamond, the Receiver supervising the recovery of assets on behalf of investors defrauded by Joseph S. Forte in a Ponzi scheme has stated viable claims for recovery of over $900,000 from the Malvern Preparatory School. The judge therefore denied the School's motion to dismiss the Receiver's Complaint. While the School argued that it had received the contributions in good faith, and the complaint does not appear to have asserted otherwise, the judge determined it still might be "unconscionable" (as required under Pennsylvania law for an unjust enrichment claim) to allow the School to retain the contributions. The judge also permitted two claims under the Pennsylvania Uniform Fraudulent Transfer Act to stand as well. For more information and analysis of the case, including the financial hole the school apparently dug for itself - including borrowing $3.3 million to complete the project that Forte was helping finance - as a result, see this post by Jack Siegel on his blog.