April 16, 2011
State Payments to Virginia Nonprofits Frozen
In late January, the Attorney General of Virginia, Ken Cuccinelli II, issued an opinion stating that the Virginia Constitution forbid the state from making payments to "any charitable institution not owned or controlled by the Commonwealth." The immediate cause for the opinion letter were several requests for funding before the legislature. See the January 28 Washington Post article here. The larger impact of the opinion is now appearing. See today's Washington Post article here. After the opinion was issued the Governor's office began a review of nonprofit groups that received state funding. Because the initial review determined that at least 100 nonprofits could be affected, the Governor's office asked agencies to work with the Attorney General's office to determine whether payments were constitutional. The state froze payments to a number of nonprofits that had received funding from the state for years. These nonprofits provide health care services to the needy, serve as food banks, and work to prevent child abuse, among other things.
Yesterday, the Attorney General's office announced that after its review of the Department of Health, a number of grants were found to be unconstitutional. These include grants to groups that provide services for some of the state's neediest residents. The names of the groups will be released next week, after officials deliver the news.
One work-around is to have state agencies contract with providers rather than making direct grants to providers. That approach will not work in every situation but may help in some cases.
The Attorney General's opinion is just that - an opinion - but it certainly carries a lot of weight.
April 15, 2011
Mass. AG Asks for Legislation to Limit NP Board Payments
Yesterday, Massachusetts Attorney General Coakley issued a report pressing for legislation that would allow her to prohibit fees paid to board members of nonprofit health insurers. The report notes that most nonprofit charities in Massachusetts have volunteer boards, so the industry norm is to have unpaid directors. The report also notes that paying directors creates a potential conflict of interest. Further, the report expresses concern that paying board members further blurs the distinction between nonprofit and for profit health organizations.
The AG contacted four insurers and gave them a chance to response to the AG's concerns about payments to board members. Two of the four, Blue Cross Blue Shield of Massachusetts and Fallon Community Health Plan of Worchester, suspended payments to their directors, but Harvard Pilgrim Health Care and Tufts Health Plan did not. Both say that the payments are justified and are necessary to attract top qualify board members. They will continue to pay board members amounts ranging from $20,000 to $60,000 with one director receiving more than $80,000 a year. For a list of compensation paid to directors at these two nonprofits, go here.)
The AG's report responds to justifications for paying directors sent to the AG by the four health insurers. One of the arguments the AG dismisses is an argument that because the health insurers are organized as 501c)(4)s rather than (c)(3)s, they should be given more leeway in compensating directors. The AG acknowledges that this distinction (no fundraising) distinguishes them from 501(c)(3) charities, but the AG does not think that has any bearing on the issue of compensation.
The report concludes with statements of the two actions the AG's office will take. Beginning next year the office will require that every public charity that compensates its independent directors file an annual report, stating the basis and rationale for the practice. The AG will make public an annual report from its office that will include the statement from the public charity, the director compensation levels, and the AG's evaluation of the charity's report.
The second step the AG will take is to file legislation "to authorize our office to prohibit your organizations from continuing to compensate directors without proper oversight." Under the legislation, charities that intend to compensate directors must obtain approval from the AG's office in advance, and the AG will grant approval only to those charities that have a clear and convincing rationale for compensating directors.
To read the Boston Globe story, go here.
April 14, 2011
Q&A on Hospital Mergers
The Chicago Tribune hosted a live chat this morning on hospital mergers. The chat featured Kenneth Robbins and Scott Becker, both from 'national health law firms," and was moderated by Bruce Japsen from the Tribune. Topics included the hospital's role in the community and charity care. To see the comments and responses, follow this link.
Unfortunately, embezzlement cases continue to surface. The Illinois Attorney General has charged Aurea Picasso, the former director of the Welfare Services Department of Hanover County with stealing $193,000 in welfare funds including $25,000 from a food charity. She had been given access to the charity's bank accounts and apparently lack of oversight led to thefts over a period of time. The Tribune had asked about Picasso's role in the food charity, which is now defunct, and that led to the investigation.
This sad story points out two constants in policing the nonprofit sector. First, oversight by the charity of its financial assets is important. When someone has access to a bank account, another officer or employee should have the authority to review the accounts and maybe more, depending on the circumstances (if one person has sole control of the money, fixing the accounts to look ok may not be difficult). Second, investigative journalism fulfills a valuable role in identifying possible problems in charities.
Automatic Revocation Exempt Status - Guidestar Guidance
Guidestar has made available a guide for nonprofits that have their nonprofit exemption revoked as a result of their failure to file a 990-N. The guide, titled "What Automatic Revocation of Nonprofit Tax Exemptions Means for You: A Review of Nonprofits, Grantmakers, and Donors," is available for free by registering on this Guidestar webpage.
Cruise Ship Donation
The Boston Globe reports today the resolution of a cruise ship donation gone bad. Back in 2007 Alan Lewis, the owner of Grand Circle Travel, told the Boston Foundation he wanted to donate a 40 percent share in the cruise ship the m/s Paul Gauguin, a high-end ship used for expensive cruises in the South Pacific. Alan owned the ship with his brother, Hank, and they were planning to sell the ship. When they did, the Foundation would receive as much as $40 million! Alan told the Foundation the money should be used for youth violence programs in the poorest neighborhoods in Boston. Hank added 3 percent from his half of the ship.
Then after the economic downturn of 2008, the brothers began feuding over a failed merger of their two travel companies. The Foundation, to protect its asset, and Alan, to protect his gift, entered into binding arbitration with Hank. The decision was made public this week when it was filed in a Suffolk Superior Court. The arbitrator awarded the Foundation $29.2 million for its share of the ship, plus $1.6 million in interest.
The article describes what it calls "the sometimes insidious efforts of the younger brother [Hank] to undermine what began as an odd but generous donation to one of Boston's premier charities." According to the arbitration award, Hank had tried to buy the Foundation's share in the ship for significantly less than its value, knowing that the Foundation needed to see the interest within five years of the donation to avoid excise taxes. Hank has appealed the award.
April 12, 2011
A bill in the Oregon legislature, SB 40, would allow the Attorney General to issue an order disqualifying certain charities from receiving contributions that are deductible as charitable donations for Oregon tax purposes. In other words, a charity on the disqualification list could receive contributions, but the donors could not take deductions for the contributions and the charities would be required to disclose in solicitation materials that contributions were not deductible. The charities that might end up on the list are charities that fail to expend at least 30% of the charity's total annual functional expenses on program services. Those terms have the meaning they have on the IRS Form 990 and the calculation for Oregon purposes is to be based on the amounts listed on the charity's 990 or other federal return.
The percentage is based on a three-year rolling average, and the Attorney General has discretion not to issue a disqualification order for a charity if the charity establishes (1) that the charity made payments to affiliates that should be included in program services, (2) that the charity is accumulating revenue for a specific program purpose consistent with representations made is solicitation materials, or (3) such other mitigating circumstances as the Attorney General identifies by rule.
Disqualification orders will not be issued for private foundations, community trusts, qualified charitable remainder trusts, charities that are not required to file a Form 990 (so smaller charities are excluded), charities that receive less than 50% of total annual revenues from contributions or grants, and charities that have been in existence for less than four years.
The bill was developed by the Attorney General's office and reflects the frustration may charity regulators feel about their inability to curtail fundraising by private fundraisers who keep most of the money they raise. Statutes in other states have attempted, in the past, to restrict fundraising if a specified percentage of the amounts raised does not go to the charity, but the Supreme Court has held the statutes unconstitutional on First Amendment grounds because speech (concerning the charitable purpose and activities of the charity) is usually intertwined with the appeal for donations.
SB 40 passed the Oregon Senate on April 11 and will next be considered by the House.
Celantropists and the "Warm Glow"
A columnist writing for The Globe and Mail uses the occasion of Elizabeth Taylor's death to talk about Liz's deep involvement in raising money and awareness for HIV/AIDs research, about Madonna and other current celebrities who sometimes stumble in their charitable work, and about the reasons people give to charity. The article talks about a book called Philanthrocapitalism, by Matthew Bishop and Michael Green, that applauds celebrities who use their status to push for change and get others involved in charitable causes. Those authors coined the term "celantropists" to describe these celebrities. The article also mentions research conducted at Yale that that found that social recognition can motivate charitable giving and notes that earlier research suggested that "people gain utility from giving in three ways: as a material benefit (perhaps a tax break, or a free pen), as a burnished social reputation or as the generator of a 'warm glow.' This may be called 'impure altruism,' but a warm glow happens to look great on a red carpet, though all of us can wear it well."
The article concludes with the hope that celebrities will use their power for good, and maybe, over time, become as "deeply involved" as Liz Taylor was. Here's to a warm glow for all of us.
Is the Rose Safe?
The Boston Globe reported recently that Brandeis University has received funding to enable it to undertake major renovations of the Rose Art Museum. The renovations will enable the museum to better protect its art collection. The main part of the museum will be closed this summer during the renovation, but it will reopen in the fall for the 50th anniversary of the founding of the museum.
In January 2009 Brandeis announced that it would close the museum and sell its famous art collection. After significant criticism the university backed off, but the final decision about whether any art would be sold has not been clear. The news about the renovation suggests that the museum won't be closed any time soon.
The article notes that the suit filed by three museum overseers (who were also donors to the museum) is scheduled for a hearing in April.
"Uncharitable" Author Interviewed
On April 3 the Boston Globe published an interview with Dan Pallotta, founder of Pallotta TeamWorks and author of "Uncharitable." Pallotta TeamWorks was a fund-raising company that raised money for charities. The company went under in 2003 after concerns about the profits earned by the company. In his book, Pallotta argues that charities - and the for-profit companies they employ - should be able to compete the way they would in the free market. If executives make huge salaries, that's ok if the end result is money raised for charity.
Pallotta opposes reliance on overhead and expense ratios or says that information about costs is less relevant than that services being provided. He argues that charities should be able to pay their executives more in order to attract talented people.
The interview concluded with the following exchange: "Many people take a more traditional view - that you shouldn't be driving a BMW if you run a charity. What do you say to that?" Pallotta responded: "My whole motivation for this is that we're not solving any problems. One billion people are hungry in the world; it was 890 million 10 years ago. We have the same old statistics every year . . . . Who cares if people get BMWs if we solve breast cancer?
A letter published on April 10 challenged Pallatto's approach. Bruce Horwitz wrote, "We do not donate to a charity based on the quid pro quo of received value, as we do with a business. I don't care how much the CEO of Ford makes; I only care if the car I buy delivers the value I expected for my money. But if I'm donating to find a cure for cancer, I am turning my money over to a conduit with the expectation that my money will go to pay for research, not to help Pallotta buy a fancy car."
I'll post separately information about the Oregon Attorney General's concerns that charitable fundraisers take too much of the money they raise for charity.