Thursday, June 16, 2011

CATO Institute Report: Nonprofit Higher Education is a Pig!

In a report released yesterday, the Cato Institute severely criticizes nonprofit higher education for its "profligate" spending at the expense of students and taxpayers and concludes that government policies should not favor nonprofit over for-profit higher education.  Indeed, the report suggests that the massive government subsidies for higher education stimulate price increases and have the perverse effect of making education less accessible.  Instead of increasing supply, to put it in economic terms, and thereby increasing access, government subsidies are spent on anything but needy students, thereby decreasing access!  As an intuitive matter, I have always tended to agree.  It seems to me, and I have been working in higher education first as an administrator in 1991 and since 1999 as a educator, that there is a correlation between increased financial aid and higher prices, for example, whether in nonprofit or for-profit higher education.  So long as the government subsidizes ability to pay, higher education has no incentive to hold down costs.  Eventually, as seems to be the case today, costs increase at rates exponentially greater than subsidies, with subsidies remaining at least sufficient to lure students into incurring incredible and unsustainable amounts of debt.  The lion's share of the cost increases, contrary to popular notions perhaps, are being horded by private and public nonprofit higher education, according to the report. 


Here is an abstract from the report:

Undergraduate education is a highly profitable business for nonprofit colleges and universities. They do not show profits on their books, but instead take their profits in the form of spending on some combination of research, graduate education, low-demand majors, low faculty teaching loads, excess compensation, and featherbedding. The industry's high profits come at the expense of students and taxpayer.

To lower the cost of education, federal government policies should encourage competition. Regulations should not favor nonprofits over for-profits. Further, the accreditation process should be reformed so that any qualified institution can easily enter the industry. The financial-aid process should be redesigned to remove the bargaining advantage that colleges currently hold over prospective students.

The higher-education industry is heavily subsidized by the federal government. These subsidies play a significant role in the high profitability of the industry and represent a massive transfer of wealth from the taxpayer to the industry. This should change. All tax credits and deductions should be eliminated immediately, as should all direct subsidies. The federal loan program should be restructured to eliminate the government subsidy and ensure that any deserving student can graduate from college without excessive debt, and eligibility for Pell grants should be tightened significantly. The net result of these changes would be greater efficiency and annual savings of $50 to $60 billion. To the extent that the federal government continues to play any role in higher education, its goal should be to ensure that all deserving students have access to higher education, not to maintain high industry profits.

Here is an early indictment from the body of the report:

The profligacy of nonprofit colleges is well known. As long-time Harvard president Derek Bok once quipped, "universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires."Why do nonprofit colleges behave this way? Thirty years ago, Howard R. Bowen, an economist and president of three different colleges, proposed what is known in education circles as Bowen’s Law. It can be summarized as "colleges raise all the money they can, and spend all the money they can raise." Bowen’s Law is well-accepted by scholars of higher education economics. But don’t colleges try their best to keep costs low in order to keep tuition down? No! As Bowen points out:  The question of what ought higher education to cost—what is the minimal amount needed to provide services of acceptable quality—does not enter the process except as it is imposed from the outside. The higher educational system itself provides no guidance of a kind that weighs costs and benefits in terms of the public interest. The duty of setting limits thus falls, by default, upon those who provide the money, mostly legislators and students and their families.  This isn’t to say that most college insiders necessarily realize they are spending excessively. Rather, spending for just about anything is justifiable to them in the name of reputation and the pursuit of knowledge. Further, the culture of academia tends to see practical financial concerns as anathema to the scholarly ideal.

What I worry about most, besides how I am going to pay for my own kids college education, is how long the higher education bubble can keep expanding before it blows up in our faces.  Like housing values ten years ago, higher education values are grossly overstated, almost to the point that stakeholders are begining to use words like "fraud."  States are already saying "no more" to higher education spending and our noble nonprofit bubble is no longer persuasive to most people.  We in the acadmey tend to turn up our noses at for-profit higher education but the Cato report suggests we might benefit from some capitalistic discipline, meaning cutting costs and doing without government subsidy.  The counter-argument, of course, is that profit-making and qualitative outcomes are at some point mutually exclusive; at some point, high quality will necessarily be sacrificed for profit.  There is some legitimacy in the argument but right now we have gone in the extreme opposite.  We have completely eschewed low cost and efficiency ostensibly for the sake of high quality, as if the those two things are mutually exclusive.  Instead of first seeing how we can squeeze more quality out of what we already have, we assume that higher quality necessarily requires more money, either in the form of taxpayer subsidy or higher tuition and certainly not for the purposes of increasing the number of students given access to higher education.  What a stupid policy. 


June 16, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 15, 2011

GAO issues Report on ACORN

The GAO today released a report on ACORN.  Coincidentally, Project Veritas, the organization that published the surreptitious videos on ACORN, NPR and others recently gained tax exempt status, according to this report in the Chronicle of Philanthropy.  NPR appears to have survived but ACORN is all but dead, leaving behind a sad and cautionary tale.  

 James O’Keefe     James O'Keefe, Project Veritas

 Here is the GAO Report abstract:

What GAO Found

Seventeen of the 31 agencies identified more than $48 million—$44.6 million in federal grants and at least $3.8 million in subawards (grants and contracts awarded by federal grantees)—to ACORN or potentially related organizations, primarily for housing-related purposes, during fiscal years 2005 through 2009. Agencies were not required to collect data on subawards; consequently, agencies were limited in their ability to identify all funding they provided to ACORN or potentially related organizations through subawards.

Agencies reported that their monitoring of awards to ACORN and potentially related organizations was based primarily on the award amount or available resources and ranged from reviewing progress reports to conducting site visits. We found that agencies’ monitoring of these awards generally did not detect issues identified by inspectors general or internal audits. Audits conducted by inspector general offices or the internal audit unit at six of the agencies supplemented agency monitoring and identified issues regarding the organizations’ use and documentation of funding—such as lack of proper recording and accounting for how funds were spent—that were not detected by the agency, except in one case. The audits were generally more detailed than agency monitoring. Agency officials said they plan to use the findings of the audits to modify their monitoring processes for future grants, for example by revising monitoring guidance.

Of 22 investigations and cases of election and voter registration fraud and wage violations involving ACORN or potentially related organizations from fiscal years 2005 through 2009, most were closed without prosecution. One of the eight cases and investigations identified by the Department of Justice resulted in guilty pleas by eight defendants to voter registration fraud and seven were closed without action due to insufficient, or a lack of, evidence. The Federal Election Commission (FEC) reported five closed matters; for one, the FEC reached a conciliation agreement with a penalty. Another matter was dismissed, and FEC found no reason to believe the violations occurred for three matters. The Department of Labor identified eight wage and hour disputes, plus one delinquent reporting of required documentation, all of which resulted in an organization complying or agreeing to take corrective measures to comply with the applicable requirements.

Twenty-seven of the 31 agencies within the scope of our review were subject to fiscal year 2010 appropriations restrictions on funding to ACORN and certain related organizations, and all took action to comply with the restrictions. Most agencies alerted staff of the restrictions through e-mails, memorandums, or oral communications. Other actions included alerting awardees, and the Department of Housing and Urban Development and National Science Foundation provided guidance on which organizations may fall within the scope of their respective funding restrictions. Eleven agencies reported that they took action to implement the restrictions, at least in part, as a result of our inquiry and subsequent discussions.

Hat Tip: Professor Harvey Dale



June 15, 2011 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 14, 2011

GAVI Alliance and GlaxoSmithKline; More on Private Benefit vs. Private Inurement

An article in the Wall Street Journal today provides another opportunity to continue my rant regarding private benefit vs. private inurement.  In my post below regarding Newt's Nonprofits, I argue that the facts raise a private inurement issue because the transactions, though effectuated via a quid pro quo exchange, involved an enrichment of an insider acting on both sides of the transaction.  The WSJ article, on the other hand, involves the relationship between GAVI Alliance, a global vaccine charity, and unrelated private pharmaceutical companies.  Observers criticize the charity, saying that it has too cozy a relationship with certain drug companies and those companies are benefiting from the sale of their pharmaceuticals to GAVI.  It is the absence of an insider on both sides of the transaction, IMHO, that makes this a classic private benefit question.  In Newt's case, the insider on both sides of what is otherwise a fair market value transaction raise the dangers more often associated with insider profit-making at the charity's expense; hence, Newt's case involves private inurement, GAVI involves private benefit.  But enough about me!  Here's an excerpt from the article; I think it makes for an interesting classroom case study:

LONDON—Large donations from the U.K., Norway and the Bill & Melinda Gates Foundation helped a global vaccine charity raise $4.3 billion at a summit Monday, exceeding its targets and allowing it to carry out all its immunization plans through 2015.

GAVI Alliance, the international vaccine agency, raised $600 million more than the $3.7 billion it had been seeking to plug a budget shortfall that threatened the agency's ability to fund its work. GAVI is one of the world's largest buyers of vaccines for poor nations.

Some relief groups such as Doctors Without Borders and Oxfam have criticized GAVI in recent weeks, saying it could make better use of its money by pushing pharmaceutical companies for lower prices. The groups have accused GAVI of having too cozy a relationship with drug companies, two of which sit on GAVI's 27-person board. GAVI has rebuffed this criticism, saying it needs to work closely with drug companies to keep vaccine supplies flowing.

Another online article spells out the concern with greater detail:

Particularly irksome to the relief agencies is a funding scheme, sponsored by GAVI, under which two multinational drug makers, GlaxoSmithKline and Pfizer, have agreed to sell 30 million doses annually for 10 years in exchange for $10.50 per child immunized, plus a subsidy of $225 million to each company.

Drug makers in developing countries have said they could sell similar pneumococcal vaccines at $6 per child, according to Doctors Without Borders, more than 40 percent less than the $10.50 per child currently being paid by GAVI before the subsidy.

Executive Director of the Doctors Without Borders Campaign for Access to Essential Medicines, Dr. Tido von Schoen-Angerer, called  the new funding “great news.”  But, he said,  ”it’s very disappointing that the prices agreed with two big pharma companies will be too high for countries to afford when donor support is not, or is no longer, available.”

GAVI says it needs to cooperate with drug companies to keep vaccine supplies flowing, and the drug companies say their prices are much lower than those charged in Western countries.

At a news conference Monday, Bill Gates said he feels “great about the prices we’ve got” from drug companies, the Journal reported, but he added that he was eager to see new low-cost Indian and Chinese manufacturers accelerate their vaccine output.

If there is not an insider on both sides of the transaction, all we can really do is criticize the charity's business judgment, something we ought not do.  In such cases, its really only a question of whether the private benefit is truly incidental to the charitable goal.  And remember, sombody has to benefit particularly if everyone is going to benefit generally, that is just the nature of the capitalist world in which socialist charities operate.  But wait!  The WSJ article notes that insiders are in fact on both sides of the transaction, since two of the drug company execs sit on the charity's board of directors.  So maybe this is more private inurement than private benefit.  Tax law, of course, is administrable only to the extent we are able to rely on convenient proxies.  For example, the presence of an insider on both sides of the transaction is a useful proxy for the dangers underlying the private inurement/excess benefit transaction.  The problem, one that is likely demonstrated by this case as opposed to Newt's case, is that proxies are not always accurate.  There are indeed insiders on both sides of the transaction in this case but there are also 25 other unrelated directors who do not benefit from the transaction.  In which case, I would argue that the private benefit doctrine is sufficient to police whatever impropriety observers are complaining about.  In the absence of some check on the insider's control over both sides of the transaction, I would favor applying the stricter, private foundation like private inurement prohibition.  That's my tap dance and I am sticking to it. 


June 14, 2011 in In the News | Permalink | Comments (0) | TrackBack (0)

Newt's Nonprofits Under Scrutiny


ABC News today is reporting today that Newt Gingrich is operating a nonprofit charity in a way that comes "dangerously close . . . to crossing a bright line that is supposed to separate tax-exempt charitable work from both the political process and [Gingrich's] profit-making enterprises."

The charity, Renewing American Leadership, not only featured Gingrich on its website and in fundraising letters, it also paid $220,000 over two years to one of Gingrich's for-profit companies, Gingrich Communications. It purchased cases of Gingrich's books and bought up copies of DVDs produced by another of the former House speaker's entities, Gingrich Productions. 

ABC News was engaged for weeks in discussions with top Gingrich advisors about money from Gingrich's tax-exempt charity that went to his for-profit businesses -- known as related-party transactions -- which were never disclosed on the charity's tax forms. ABC News found evidence of the payments in a May 2011 audit commissioned by the West Virginia secretary of state's office. Many of ABC News's questions remained unanswered last week when Gingrich's presidential campaign team resigned en masse, citing dismay with the candidate's lackluster approach to his bid. Questions were resent to Gingrich's new team, but they still have not generated a reply.

One of those who quit the campaign, longtime Gingrich spokesman Rick Tyler, told ABC News in a series of email exchanges prior to his resignation that the charity spent no money on political activity and "did nothing to promote anyone's political career." Tyler also revealed that he personally was the beneficiary of the six-figure payments the charity made to Gingrich Communications – money he was paid to run the charity until he began helping prepare Gingrich for a presidential bid.

Boiled to its essence, the report alleges that Gingrich founded and operated charities in a manner that necessarily benefitted his private profit-making entities and, to a lesser extent, his political ambitions.  For example, the charity mentioned in the quoted text above purchased books and DVD's produced by Gingrich's for profit publishing companies and also paid for charter jets used by Gingrich to promote movies his private businesses produced.  The report notes with respect to the books and DVD's (relating to Gingrich's views on a host of social issues) that the exempt organization paid retail price (in other words, "fair market value") for the Gingrich's books and DVD's.  The report suggests that the exempt organization is violating what exempt organization experts call the "private benefit doctrine."  In another context, though, I have suggested that when a charity is operated in such a manner that it necessarily benefits an insider's private businesses, the charity violates the private inurement prohibition even if the charity can be said to receive a quid pro quo from the profit making entity.  I call this sort of relationship "joint venture private inurement."  It is the charity's grant of the franchise to an insider, I think, that makes such cases a private inurement/excess benefit violation as opposed to a private benefit issue.  Why is this distinction important?  Because the latter issue allows too much wiggle room.  In other words, the private benefit issue tolerates a certain degree of private profit.  Charities must benefit someone in order to achieve a charitable purpose.  But when that "someone" is an insider, the benefit seems less coincidental and more purposeful, as is the case when an insider "skims" profit for his own benefit.  Conventional wisdom holds that if the charity "gets what it paid for" no private inurement/excess benefit violation occurs.  The only objection is whether the charity should be engaging in the particular transaction and that requires an illegitimate second guessing of the charity's business judgement, something I don't want to condone.  But when its the insider who is the intended, not just coincidental collateral beneficiary of the charity's pursuit of its charitable goal, the rest of us are justified in questioning even a quid pro quo transaction.  In other words, the presence of the insider in a fair market value transaction makes the transaction more like a skimming than an incidental private benefit.  I don't mean to foist the private foundation rules on public charities lock stock and barrel, but cases like this -- which are also rampant amongst the megachurches where the churches typically grant what amounts to a lucrative, fair market value franchise to an insider's private benefit -- demonstrate that the deference inherent in simply asking whether the transaction was had at fair market value is wholly insufficient. 




June 14, 2011 in Current Affairs | Permalink | Comments (0) | TrackBack (0)

Monday, June 13, 2011

Catwoman Creates New Precedent for treating Unreimbursed Expenses as Charitable Contributions

LIONDOOR  An interesting Wall Street Journal article on Saturday discussed Van Dussen v. Commissioner, a case involving a cat lover who sheltered homeless cats in her own home on behalf of Fix Our Ferals, a 501(c)(3).  The issue was whether the cat lover, a family law attorney who represented herself before the Tax Court, could deduct the costs she incurred in doing so. This is one of those cases that seem easy in the abstract, but is more difficult in the implementation -- with some observers noting that the case opens the door for the deduction of costs associated with hosting a catered fund raiser in one's home, according to the article.  Those types of admittedly logical extensions are the sort that cause working stiffs to look askance at the charitable contribution deduction.  Anyway, here are the headnotes from the opinion:

P incurred unreimbursed volunteer expenses while caring for foster cats in her private residence. P’s expenses consisted primarily of payments for veterinary services, pet supplies, cleaning supplies, and household utilities. P claimed a $12,068 charitable-contribution deduction for the expenses on her 2004 tax return. R issued a notice of deficiency denying the deduction. R claims that P did not render services to a qualifying charitable organization under sec. 170(c), I.R.C., and that P failed to substantiate her expenses under sec. 170(f)(8), I.R.C., and sec. 1.170A-13, Income Tax Regs. R also asserts that P’s expenses have an indistinguishable personal component.

Held: P’s foster-cat expenses qualify as unreimbursed expenditures incident to the rendition of services to a charitable organization. See sec. 1.170A-1(g), Income Tax Regs. P’s services were directed by a charitable organization. P thus rendered services to a sec. 170(c), I.R.C., organization when she cared for foster cats in her home. Some of P’s expenses are disallowed because they are insufficiently related to foster-cat care or cannot be determined with precision.

Held, further, the recordkeeping requirements of sec. 1.170A-13(a), Income Tax Regs. (for contributions of money), govern unreimbursed volunteer expenses of less than $250.

Held, further, P’s records meet the requirements of sec. 1.170A-13(a), Income Tax Regs., because they are acceptable substitutes for canceled checks under the substantial compliance doctrine. See Bond v. Commissioner, 100 T.C. 32 (1993). P can deduct fostercat expenses of less than $250.

Held, further, P cannot deduct foster-cat expenses of $250 or more. P did not obtain the contemporaneous written acknowledgment from the charitable organization required under sec. 1.170A-13(f)(10), Income Tax Regs.

Held, further, P can deduct a $100 check donation made to a separate charitable organization.


June 13, 2011 in Federal – Judicial | Permalink | Comments (0) | TrackBack (0)

National Association of State Charity Officials Submits Comments re IRS Information Sharing

  In comments submitted to the IRS today, the National Association of State Charity Officials expressed disappointment in the manner in which IRC 6104(c) has been implemented to date, as well as proposed regulations issued earlier this year.  Enacted as part of the 2006 Pension Protection Act, IRC 6104(c), allows the Service to notify state officials of certain adverse actions regarding (c)(3) organizations.  NASCO's primary concern relates to the administrative burdens imposed on state officials necessary to receive information from the Service.  In the interest of full disclosure, I should mention that the proposed regulations were drafted primarily by my former University of Pittsburgh Law Student, Casey Lothamer. Of course, he could not comment on NASCO's specific complaints.  NASCO believes that the net effect of the proposed regulations is that information sharing between the Service and the states will actually decrease under the proposed regulations.

NASCO members were hopeful that enactment of the PPA would enhance their ability to exercise their state law responsibilities by working more cooperatively with the IRS to overseetax-exempt entities and ensure the proper administration of charitable assets. It was anticipated that greater ability to work jointly and share information would allow for enhanced enforcement by the IRS and ASOs. As discussed below, however, the limitations placed on both the IRS and the states by the Code have, in fact, significantly reduced those possibilities. . . . There are important synergies among the IRS and state charity officials that can only be fully realized through robust information sharing and coordinated enforcement efforts. At present, however, neither the PPA nor the subject regulations advance that cause in any appreciable way.  It is toward that end that NASCO welcomes the opportunity to meet with staff of the Department of the Treasury, the IRS and members of Congress to discuss further amendments to the disclosure provisions at issue.

The regulation and supervision of charities is, as everyone knows, notoriously lax on both the state and federal level.  Its ironic then, that a statute designed to facilitate the enforcement of both federal and state laws designed to protect the charitable sector would be applied and interpreted to actually decrease enforcement.  We know too that charitable scandals have the most negative effects on legitimate, law-abiding charities, who have to work even harder to avoid the taint left behind by the outliers.  Scandals and legal violations in the charitable sector typically follow the "one bad apple" rule, at least in the minds of the donating public.  So let's hope the feds heed the comments coming from the state officials and, in the words of NASCO come up with a means to facilitate "robust' information sharing for the benefit of the entire sector. 


June 13, 2011 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Carnegie Corporation at 100: Thinking About Philanthropy

There have two "big picture" articles relating to philanthropy recently, triggered by the centennial of the Carnegie Corporation of New York.  One article appeared in Fortune and is titled "What Does It Take for Philantropy to Deliver Results?"  The other appeared in the Economist and compared the now 100-year old IBM with the Carnegie Corporation, asking "Has the Multinational Business or Universal Philanthropy Done More for Society?"  Both articles raise interesting questions about what "success" means for philanthropists and the organizations they support, as well how best to benefit society.  They therefore provide ample food for thought, especially as debates rage in numerous arenas regarding what "charitable" organizations should qualify for societal support in an age of government budget deficits and fee-for-service charities.


June 13, 2011 in In the News | Permalink | Comments (0) | TrackBack (0)