February 01, 2011
Draft Protection of Charitable Assets Act, with Comments
Thanks to Mark Fitzgibbons for passing along to us the Draft Protection of Charitable Assets Act prepared by the National Conference of Commissioners on Uniform State Law. Fitzgibbons discusses the predecessor draft in the January 13, 2011 edition of the Chronicle of Philanthropy (subscription required). He was kind enough, though to share his critical thoughts on the current draft, which we reprint below. By the way, our co-editor Susan Gary served on the drafting committee:
Comments on the Protection of Charitable Assets Act, formerly the
Oversight of Charitable Assets Act
Mark J. Fitzgibbons
I thank NCCUSL and the Drafting Committee on the Protection of Charitable Assets Act, formerly the Oversight of Charitable Assets Act (the “Act”), for allowing me to express concerns about the January 10, 2011 draft of the Act. My comments do not express all objections I would make, but focus on changes to Section 4 of the Act, and I also make certain comments about the underlying premise of the Act.
The Prefatory Note to the Act states, “the committee has not seen evidence of overreaching by charitable regulators.” I am not aware, on the other hand, whether the committee has seen evidence of a need for the Act.
History, however, is filled with examples of government abuse of charitable assets and charities, especially for political purposes and even perhaps before private miscreants ever abused charitable assets themselves. For example, “Shortly after the reign of [Roman emperor] Marcus Aurelius . . . thirty barrack emperors in their struggle to rule Rome between 192 and 324 A.D. ‘borrowed’ funds belonging to charities from the municipal treasuries.” Using the excuse of fiduciary abuses by trustees, King Henry VIII dissolved the monasteries in the 1530s.
My own files of just one agency are filled with examples of not merely overreaching, but abuse and unlawful conduct by state charity regulators. Charities are reluctant to publicize or even fight such abuses for two principal reasons: (1) state regulators control their licenses to solicit contributions, and charities fear officious retaliation, and (2) charities fear that publicizing adversarial actions by states scares donors, and charities tend to enter into agreements with states regardless of whether state regulators engaged in abusive conduct.
My friends the state charity regulators consistently turn a blind eye to their own violations of law, and when such violations are brought to their attention, their reaction tends to be, “So sue us.” The Constitution is the law that governs government, but in addition to constitutional violations, state regulators often abuse, misapply and violate the state laws they purport to enforce. State regulators are in fact the biggest violators of the laws that govern nonprofits, and any effort by this Committee must protect against abuses and unlawful actions by state officials.
Edits to the Act Fail to Cure Constitutional Defects, and Have Even Added More
The changes to Section 4 of the Act are not only woefully anemic with respect to preventing government abuse of charities, many are actually a step backwards. Changes to Section 4 include feigned but failed constitutional fixes that will only foster litigation.
While the changes provide a thin veil to address 14th Amendment objections I raised in my first set of comments, they fail to abide by all of the requirements of the 4th Amendment. Respondents are not protected against 4th Amendment violations caused by the Act, and would need to expend valuable, often scarce and overstretched resources in courts for the purpose of protecting their rights.
Instead of including protections against 4th and even 1st Amendment violations and abuses at the outset, the Act creates the need for charities to litigate. Any statute that creates the need to litigate to protect rights is unworthy of consideration.
The Act gives attorneys general the unilateral power to commence investigations, which is a violation of the separation of powers and the principle of checks and balances. To comply with all of the requirements of the 4th Amendment, including the need for oath and affirmation, the Act should only authorize investigations after oath and affirmation before a court or tribunal truly independent from the attorneys general, and only for actual cause (not upon mere “belief,” which is ripe for abuse). The Act fails to provide such checks on abusive, unlawful or unconstitutional investigations.
The Comment to Section 4 includes a poor attempt to explain its evasion of the 4th Amendment: “Information often comes to the attorney general in a form much less formal that a sworn complaint; for example, information about abuses and misdeeds is often brought to light in newspaper stories.”
There is, of course, no “newspaper story” exception to, nor attorney general or state charity regulator exemption from, the 4th Amendment. This Comment to Section 4, however, is typical of the approach by state regulators to cut corners, evade the law, and often use information less reliable than the higher standard of cause to initiate their investigations (or, for their political cronies, to ignore the need to investigate. See, “ACORN and the AGs,” included in the exhibits to my comments).
Revised Section 4 also includes a new provision that is a remarkably brazen violation of the 5th Amendment, which reads, “An individual may not refuse to answer a material question, produce documentary material, or testify in an investigation pursuant to this section on the ground that the testimony or documentary material may tend to incriminate the individual or subject the individual to a penalty.”
That is not only an open and notorious violation of the 5th Amendment, it wasn’t allowed even under English common law. In The King v. Dr. Purnell, 96 Eng. Rep. 20 K.B. (1748), for example, the Attorney General was denied visitation access to documents from Oxford University, which university was not “private” because it was established by the Crown, on grounds equivalent to the 5th Amendment right against self-incrimination.
The Act’s Foundations Are Wrong
Besides the open and notorious violations of the Constitution proposed in the Act, and those it would foster such as violations of the 1st Amendment, the underlying premises of the Act are materially flawed.
State regulators claim they seek to clarify the common law, but they exaggerate the authority of the attorneys general even at common law, bypass common law procedural protections that prevented abuses the Act would authorize, and, under American jurisprudence and principles, attorneys general are bound by a written Constitution.
The attorney general was not initially given power over charities even by the 1601 Statute of Charitable Uses. Investigations of fiduciary abuses could be brought by parties other than the attorney general, but only after information had been presented to a tribunal of commissioners. After evidence of malfeasance, a warrant could be issued for the sheriff to gather a jury. In other words, even at common law, there were distinct procedures, separation of powers, and checks on abusive use of government authority.
Decades after passage of the 1601 Statute the attorney general was given authority to act, but even then only as a relator. The Act gives attorneys general more powers, both in terms of quantity and substance, than were given attorneys general in old English law.
Also, when a person brought a frivolous charge of fiduciary abuse against a charity, English law provided that a charity could recover damages. I highly recommend that the Act provide such a remedy both against attorneys general and private plaintiffs who use attorneys general as intervenors or relators in their frivolous suits.
American jurisprudence, beginning with Trustees of Dartmouth College v. Woodward, also made the important distinction of the “private” nonprofit corporation that may be “public” in its uses. Corporations of England were usually established by the Crown or the Church, which accounts for why at common law the attorney general had visitation authority. The doctrine of visitation in America changed to reflect private property rights on which the government could not trespass without due process, or engage in takings or other breaches of private property rights.
American jurisprudence also recognizes the distinction between the privately created charitable corporation, where law applies, versus the charitable trust, where the principles of equity may apply. The Act fails to make this important, even if misunderstood, distinction. Indeed,
The new nation vehemently condemned anything reminiscent of English sovereign power or of an aristocratic society as unfit for a democracy. Not only did some states repeal all English statutes including the Statute of Charitable Uses, but some jurisdictions rejected the doctrine of cy pres because it was mistakenly regarded as being exercisable only by the prerogative power of the king and hence contrary to the spirit of our democratic institutions and in conflict with the doctrine of separation of powers.
Not all states recognize that the attorney general has common law authority with respect to charities. That may be for the reason that not all states initially recognized cy pres, where the state could step in at equity where a charitable bequest was vague. Attorneys general did have common law authority under cy pres, which isn’t universally recognized. But even that is far, far different than the mighty powers the Act would grant attorneys general over the assets of privately created nonprofits.
The Act confuses principles and doctrine of private property versus civic charities, corporations versus trusts, law versus equity, and compounds these errors in a massive, unconstitutional power grab. The Act’s power grab, however, is actually built on sand.
For example, the California Supervision of Trustees and Fundraisers for Charitable Purposes Act, Government Code 12580 – 12599.7 (the “CA Act”) fails to distinguish between a charitable trust and a charitable corporation. California case law recognizes a common law authority of attorneys general, but the antecedent case on which all other cases ultimately rely is People ex rel. Ellert v. Cogswell, 45 P. 270 (1896).
Mrs. Cogswell and her husband created a trust giving their real property to create a school for Californians pursuant to a California act specifically created to encourage such gifts. Mrs. Cogswell attempted to block the gift on grounds that due to ailments she never understood the scope and breadth of it. The mayor of San Francisco acted as relator, and the state sought to enforce the trust over Mrs. Cogwell’s objections and efforts to obtain remedy.
California is just one example of a state that has taken minimalist principles in equity and only applicable to trusts or gifts to state institutions, and contorted, expanded and compounded them to aggrandize the authority of the state over privately created charitable corporations. That approach was rejected in Trustees of Dartmouth College v. Woodward.
If a uniform law were needed, the Act unfortunately takes the worst elements most favorable to aggrandizing government power and harmful to nonprofits, while serving no apparent benefit to the public, especially given the excessive regulation already in place.
My friends the state regulators sadly seek to create yet another inept system adding expense for both states and charities, ultimately financed by taxpayers and donors, where information goes into yet another bureaucratic black hole. They have already demonstrated inadequate and unlawful administration of current laws, yet they seek to compound the misery through the Act.
A better uniform law would be the online disclosure system I have proposed to state regulators. It would provide information to even more state regulators than the current charitable solicitation laws and the Act combined would provide. It would also provide donors more information than current law and the Act combined, which are bureaucratic black holes. Lastly, the online disclosure system would save both states and charities money, which money is currently diverted from taxpayers and donors’ intended purposes for their contributions and gifts.
The changes to the Act shown in the January 10 draft are not a serious effort. There are other problems with the Act that I do not address. After reading the January 10 draft and based on my nearly two decades of dealing with state charity regulators, I am not convinced the Act is a worthy project.
 President of Corporate and Legal Affairs, American Target Advertising, Inc. (ATA), Manassas, Virginia
 E. FISCH, D. FREED, E. SCHACHTER, CHARITIES AND CHARITABLE FOUNDATIONS Sec. 18, at 10 (1974).
 I attach as exhibits several published accounts. There is not a single state with which I deal that hasn’t engaged in abusive or unlawful conduct, and my letters are too voluminous to include as an attachment to these comments.
 The Act applies to many more organizations than just charities, such as 501(c)(4) organizations. These comments use the term “charity” to apply to all nonprofits covered by the Act, and even the entities that are not nonprofits covered by the Act.
 Please, as Thomas Jefferson once wrote to James Madison, pardon my freedom.
 “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”
 As the Supreme Court has stated, “Officious examination can be expensive, so much so that it eats up men’s substance. It can be time-consuming, clogging the process of business. It can become prosecution when carried beyond reason.” Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 213 (1946).
 The sentences following the violation of the 5th Amendment feign immunity, but such immunity would not be recognized in jurisdictions other than the state issuing the demand, or by the federal government.
 Justice McKenna’s dissent in Wilson v. United States, 221 U.S. 361 (1911), citing to an abundance of common law decisions, explains why the majority opinion misconstrued the common law and Hale v. Henkel, 201 U.S. 43 (1906) in deciding that an individual may not invoke the 5th Amendment when a corporation’s records are sought. Hale v. Henkel, at 76, recognized, among other things, that corporations are protected by the 4th Amendment, and “an order for the production of books and papers may constitute an unreasonable search and seizure within the Fourth Amendment.” The Act’s violation of the 5th Amendment doesn’t even confine itself to the limited doctrine espoused in Wilson v. United States.
 Fishman, at 31.
 My article “State Regulators Make a Misguided Push to Tighten Control Over Charities” in the January 13, 2011 Chronicle of Philanthropy provides a brief summary.
 FISCH, Sec. 22, at 21.
January 13, 2011
"Spending and Management of Endowments under UPMIFA"
The Association of Governing Boards of Universities and Colleges, in conjunction with the Commonfund Institute has issued a very informative report regarding the effects of the Uniform Prudent Management of Institutional Funds Act on college, university and institutionally related foundations. Key findings include:
On average, underwater funds accounted for 22.4 percent of the total value of endowment funds held by colleges and universities at the end of the 2009 fiscal year ending June 30, 2009 (NCSE data). Under UPMIFA, institutions and affiliated foundations have adopted new spending practices yielding greater ongoing distributions from underwater endowments as well as adopting a variety of more flexible methods for determining distributions from underwater endowments. AGB’s survey findings include (as seen in Table 4):
• 46.9 percent are continuing distributions in keeping with their normal spending rule, an increase of 8.7 percentage points over practice prior to the enactment of UPMIFA;
• 25.1 percent are discontinuing all distributions from underwater funds, a decrease of 16.4 percentage points from practice prior to UPMIFA;
• 9.7 percent are distributing only interest and dividends, a decrease of 7.2 percentage points from practice prior to UPMIFA;
• 12.5 percent employ a threshold or tiered approach to spending or some other flexible methodology; and
• 6.8 percent of institutions described a flexible process for determining distributions from underwater funds that was used in lieu of or in conjunction with the spending practices listed above.
After the enactment of UPMIFA, 47.1 percent of institutions and foundations which previously discontinued all distributions or distributed only interest and dividends from underwater endowments adopted a new spending approach likely to yield grater ongoing distributions supporting endowment purposes.
College, university, and affiliated foundation boards are actively involved in making decisions about spending from underwater funds. Survey findings include:
• 75.8 percent of boards approve decisions regarding spending from underwater funds;
• 68.2 percent of institutions have some formal policy addressing spending from underwater funds; and
• 48.3 percent of boards document decisions regarding underwater funds in their minutes.
Only 14.5 percent of institutions and foundations have made use of provisions in UPMIFA allowing charities to modify restrictions on smaller and older funds that have become impracticable or wasteful.
Institutions and foundations have also made changes to endowment-management practices not immediately related to spending from underwater funds but in keeping with UPMIFA’s updated prudence standard for investment and management of charitable funds. Nearly one-third (28.5 percent) of institutions have changed their approach to portfolio construction to focus on factors such as risk reduction, inflation protection, and liquidity; 11.6 percent have made changes in their due diligence and risk management procedures; and 19.3 percent have made changes in investment management staffing and support.
AGB’s recent Statement on Conflict of Interest has advocated heightened conflict-of-interest standards for board members involved in investment decision making. While 97 percent of boards have some type of conflict-of-interest policy, only 60.9 percent of institutions and foundations have conflict-of-interest policies that apply to all volunteers responsible for investment decision making; 15.9 percent have policies which include especially rigorous provisions applicable to investment decision makers; and 13.5 percent have policies addressing board members’ parallel or “side-by-side” investments.
January 10, 2011
Does Unrelated Business Activity Detract from the Charitable Goal?
One would think that in an age of severely restricted donations and government funding, nonprofits would logically step up their unrelated business activities in an effort to generate funds for their charitable goals. Now, though, one researcher finds that doing so only exacerbates the problem. According to a recent report authored by Rebecca Tekula of the Wilson Center for Social Entrepreneurship at Pace University, nonprofits that engage in unrelated business activity do so at the expense of their charitable goal.
By pursuing income-related activities such as selling donors' contact information to third-party marketers and running online shops, nonprofits have diverted income away from service activities, says Rebecca Tekula, the report's author.
"Organizations that spend money and divert resources to other activities do so at the detriment of the homeless, domestic violence victims and people who need these services," says Ms. Tekula, executive director at the Wilson Center for Social Entrepreneurship at Pace University. "Social enterprise may be an innovation," she says, but it is one that can tempt nonprofits into a substantial "mission distraction."
The Wall Street Journal wrote about the report (subscription required) in its November 4, 2010 issue. If the report is correct, engaging in unrelated business activities not only jeopardizes tax exempt status (if the activity is substantial enough) but it also accomplishes exactly the opposite of what is intended. Rather than funneling money into charitable causes, unrelated business activities divert funding from charitable causes. The UBIT has always been justified as a tool to level the playing field between for-profit and tax exempt entities. Now, it seems the UBIT might also be effective in ensuring the more effective accomplishment of the chartiable goal.
January 03, 2011
IF PILOTS ARE NORMATIVE IS PROPERTY TAX EXEMPTION NON-NORMATIVE?
The Georgia Alliance of Community Hospitals recently issued a report attempting to head off any efforts by the Georgia legislature to tamper with or even repeal the property and or sales tax exemption provided to large nonprofits. The report takes the bait, as it were, with regard to PILOTS and property tax exemption. The bait, I think, is the notion that nonprofits should quantify the benefit they provide in exchange for property tax exemption. Its bait because nonprofits can't possibly win in a cost/benefit contest. The Chattanooga Times Free Press reports on a growing trend that is hardly good news for large, commercialized nonprofits:
All Georgia tax credits and exemptions are in the spotlight this year.The Georgia Legislature created the Special Council on Tax Reform last year and charged it with examining the tax credits and exemptions, said Sarah Beth Gehl, with the Georgia Budget and Policy Institute. The state has hundreds of tax exemptions on the books, some decades old, that haven't been evaluated recently for effectiveness, she said. "Often we put these credits and exemptions in place and we never look at them again," she said. "We need to go back and evaluate and examine these and make sure we're getting the return on investment. ... That doesn't mean we're going to cut all of them, but it means we're going to really hold them accountable." Perdue spokesman Bert Brantley said the attention to exemptions represents a new level of budgetary scrutiny.
Right before Christmas, Professor Mayer authored an interesting post concerning Boston's task force on Payments in Lieu of Taxes (PILOTS). The task force had recently issued a 130 page report. I have not read the report yet but I am in the midst of asking myself why and whether states should exempt large land-owning nonprofits (i.e., hospitals and universities) from property taxes at all. The question was slightly different when it first occured to me. Why should large commercialized nonprofits be exempt from any taxes, income, property or otherwise? I am sludging my way through a paper on the topic and have at least determined that the justification for property and income tax exemption are not necessarily the same. The initial question was too broad because justifications for income tax exemption do not necessarily work for other exemptions and yet if the question is accurate one can comfortably stop once the case for income tax exemption is made.
Comfortable but probably wrong. The cost/benefit analysis relating to income and property tax exemption give dissimilar results. And as a result, we might easily and more accurately conclude that income tax exemption is justifiable but property taxation is not. That is where my paper is stuck. So far I have spent a lot of time wondering whether property tax exemption is defensible using the mindset of federal income tax exemption. For one, though, the cost of income tax exemption is so much lower. Hence, the benefit necessary to justify income tax exemption need not be so readily apparent or quantifiable. As costs increase, and perhaps there is a tipping point at which property taxation can no longer be justified, the benefits must increase too. Stereotypically, nonprofit stakeholders disdain cost/benefit analysis not because they can never win but because it is difficult to quantify the intangible benefits provided by nonprofits and therefore nonprofit stakeholders who fall into the trap of cost/benefit, law and economics analysis . . . well, can never win. Unlike me, they should not take the cost/benefit bait, thinking they can win and thereby justify property tax exemption. The battle may be won with respect to income tax exemption and even then the losers are not satisfied that the battle should be over.
If you take a look at the Boston PILOT task force websight you will find presentations such as this one, wherein the task force is provided with cost/benefit data regarding nonprofit hospitals and universities within their midst. Its fair to say, probably, that the train has left the station with regard to PILOTS, a fact which worries me because once PILOTS become normative, it does not take much more to conclude that property tax exemption is no longer justifiable, at least once a nonprofit reaches a certain level of ownership or wealth. Once PILOTS are normative, aren't property tax exemptions "non-normative?" My problem is that I have been resisting this notion by reference to income tax exemption and the rationale usually offered to support that exemption. Doesn't work with regard to property taxation though. My real point, though, is that is probably too late to stop the PILOT train and so now colleges and universities have to deal with the 800 pound gorilla in the room. Why should you be exempt from property taxes at all, especially if you meekly comply when chastised and made to pay back that which you have "stolen" from the cookie jar. The Boston PILOT task force website is essentially a record of the sophisticated ways large cities have been able to chastise large commercialized nonprofits for their apparently unjustified tax exemption. Brief nods are given to efforts to quantify the benefits generated by colleges and universities but one is only fooling oneself to think that nonprofits can ever win in a cost/benefit, law and economics playing field. Make no mistake, though, the cost/benefit analysis will never cut the mustard. Large, commercialized nonprofits have already wasted too much time thinking PILOTS would remain limited to larger northeastern cities and even if they don't, nonprofits can always be show enough benefit to justify the cost of property tax exemption. The Georgia Alliance's report is evidence of how Utopian the former notion (that PILOTS will largely be confined to big cities in the northeast); more importantly, it is an effort that cannot save property tax exemption anywhere. The lesson to be learned from law and economics is we better think again or soon admit that property tax exemption -- once the "tipping point" arrives -- is unjustifiable.
December 23, 2010
Boston Issues Report Detailing Expected "Contributions" from Charities
A Payment In Lieu of Taxes (PILOT) task force created by Boston Mayor Thomas M. Menino just issued a report making numerous recommendations regarding the city's existing PILOT program. According to the related press release, the task force's main recommendations are:
- The PILOT program should remain voluntary.
- The PILOT program should be applied to all nonprofit groups except for smaller nonprofits, suggesting a threshold of $15 million in property value.
- The PILOT contributions should be based on the value of real estate owned by a nonprofit, with a suggested amount of 25% of the tax otherwise owed (approximately equal to the portion of the city's budget that goes to police, fire, snow removal, and other essential services). This formula should be in phased in over a period of not less than 5 years.
- The credit for "Community Benefits" should be limited to 50% of the full PILOT payment. Such benefits include public health initiatives, scholarships for Boston public school students, and summer jobs.
The report now goes to the Mayor for his consideration and possible implementation.
November 11, 2010
Obama's Debt Panel and Tax Benefits for Charities
The National Commission on Fiscal Responsibility and Reform released its draft CoChairs' Proposal in the form a 50-slide PowerPoint presentation and a 24-page illustrative savings list totaling $200 billion in 2015. With tax reform as one of the five basic recommendations made, and no apparent sacred cows, it is not surprising that the current tax benefits enjoyed by charities are among the many targeted tax provisions. Here is how the three proposed tax reform options would affect those benefits:
- Option 1 (The "Zero Plan"): Would eliminate all tax expenditures or, alternatively, preserve only a few such tax benefits in exchange for higher marginal rates. Using the most recent Joint Committee on Taxation Tax Expenditures List (from January of this year), eliminated provisions would include not only the charitable contribution deduction but also tax-exempt bonds, low-income housing credits, and other tax benefits that charities commonly use to advance their mission, such as the exclusion of scholarship and fellowship income, numerous other education-related tax benefits, the credit for rehabilitation of historic structures, the exclusion of certain foster care payments, and similar benefits. With respect to other types of nonprofits, the list also includes tax exemption for credit union income. And this summary does not include those benefits not unique to nonprofits that are nevertheless utilized by them, such as the exclusion from gross income of employer-provided health insurance.
- Option 2 ("Wyden-Gregg Style Reform"): Would modify the charitable contribution deduction by establishing a 2 percent AGI floor.
- Option 3 ("Tax Reform Trigger"): Would create an across-the-board "haircut" for all itemized deductions as well as certain other tax benefits if reform not enacted as of 2013. The size of the haircut would be set at a level sufficient to reduce the deficit by $80 billion in 2015, which roughly translates in about a 15% reduction in such deductions, including the charitable contribution deduction. This proposal would also require the haircut to increase over time in the absence of comprehensive tax reform.
The list of illustrative savings also has some items of interest to nonprofits, including the proposals to have the Smithsonian start charging fees and to eliminate Corporation for Public Broadcasting funding.
These proposals only represent the views of the co-chairs, former Senator Alan Simpson and former Clinton Chief of Staff Erskine Bowles. The final Commission report is due to be released no later than December 1, 2010, but it must receive the approval of at least 14 of the Commission's 18 members.
November 10, 2010
Mixed Picture for Nonprofit Donations and Endowments
Studies of financial support for nonprofits have become a growing industry, as evidenced by the following slew of reports:
- The Chronicle of Philanthropy reported last month that donations to the nation's 400 largest charities by private funding dropped 11 percent in 2009 from the previous year. As for 2010, of the more than 25 percent of groups that provided a prediction, the median estimate was an increase of only 1.4 percent over 2009 amounts.
- Not all charities have been hit equally, however. The Evangelical Counsel for Financial Accountability issued its 2010 Annual State of Giving Report yesterday, which found that among ECFA members giving declined only by 0.7 percent in 2009 as compared to 2008. At the same time, the report found significant differences depending on activity type, with, for example, members involved in child sponsorship seeing a significant increase in giving while members involved in education seeing a substantial decline.
- Focusing on high net worth individuals, Bank of America Merrill Lynch issued its 2010 Study of High Net Worth Individuals in cooperation with Indiana University's Center on Philanthropy. That study found that while such individuals continued to give at high rates, the amounts given declined from 2007, with overal average gift amounts falling by 35 percent after adjusting for inflation. As a percentage of income, giving declined to 9 percent from 11 percent in 2007. For additional coverage of this study, see the Los Angeles Times.
- College and university endowments have also been the subject of a recent report. The Commonfund Institute reports that based on data from 80 such institutions, the July 1, 2009 to June 30, 2010 fiscal year saw an average return of 12.6 percent. Interestingly and contrary to some past trends, the smaller endowments showed on average higher returns. The Institute relied on preliminary data for the 2010 NACUBO-Commonfund Study of Endowments, which will be released in late January.
November 08, 2010
Dueling Reports on Electoral Effect of Nonprofit Spending
The Campaign Finance Institute issued a report last week titled Non-Party Spending Doubled in 2010 But Did Not Dictate the Results. At the same time, Public Citizen issued a report titled Outside Job: Winning Candidates Enjoyed Advantange in Unregulated Third-Party Spending in 58 of 74 Party-Shifting Contests.
What accounts for the difference in these early views of non-party, nonprofit spending in the 2010 election? Both reports relied on independent expenditure and electioneering communications reports filed with the Federal Election Commission, although the Campaign Finance Institute used data through November 4th while Public Citizen used data through October 31st, and Public Citizen excluded expenditures by political committees that did not accept contributions of more than $5,000 from any given donor. The big difference between the reports is that while Public Citizen focused solely on non-party (i.e., nonprofit) spending, the Campaign Finance Institute also considered candidate receipts and party spending. This larger perspective led the Campaign Finance Institute to conclude that in many races differences in non-party spending were relatively small when compared to overall financial resources devoted to each candidate from all sources. Indeed, the Campaign Finance Institute went so far as to conclude:
"It appears as if the one set of candidates most helped by a balance non-party spending favoring their side were the Republican candidates who lost with 45% of the vote or more. Based on their own receipts ($931,000), these could well have been candidates who would have lost by much more in a normal election year. However, the Republican non-party groups had said they were interested in helping to 'expand the playing field,' and these figures (along with the nine undecided races) suggest that they did."
November 04, 2010
Urban institute: Human Service Nonprofits and Goverment Collaboration
Last month the Urban Institute's Center on Nonprofits and Philanthropy issued the 2010 National Survey of Nonprofit Government Contracting and Grants, written by Elizabeth T. Boris, Erwin de Leon, Katie L. Roeger, and Milena Nikolova. The survey "aims to provide a comprehensive look at the scope of governments’ contracts and grants with human service organizations in the United States and document the problems that arise." It found that government agencies have approximately 200,000 formal agreements with about 33,000 human service nonprofit organizations, accounting for over 65 percent of the revenue for such organizations. It also discovered widespread instances of late and less-than-full payments, as well problems with administrative complexity and government changes to agreements, but with significant variation between states with respect to the incidence of such issues.
September 03, 2010
DMA-Funded Studies Criticize Watchdog Groups
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.
August 26, 2010
Is IRS Unable to Effectively Oversee Reporting by 527s?
The Treasury Inspector General for Tax Administration issued a report titled "Improvements Have Been Made, but Additional Actions Could Ensure That Section 527 Political Organizations More Fully Disclose Financial Information." While the title is relatively mild, the criticisms are not. TIGTA found that :
- "[O]ne out of every four Political Organization Report of Contributions and Expenditures (Form 8872) that we reviewed had incomplete or missing contributor or recipient information."
- "[T]he IRS is not reviewing these filings [Forms 8872] to determine if they are complete or if penalties should be assessed."
- "[T]he IRS is not always issuing notices at the appropriate time that include all information needed by political organizations to become compliant."
- "[T]he IRS is not following up on information it has requested form political organizations to verify compliance."
To be fair to the IRS, it had to design a system to process these highly time-sensitive filings from the ground up, and its Exempt Organizations Division is hindered by its broad mandate - of which reviewing such filings is only a small part - and limited resources (shameless self-promotion: a point I made in a 2007 article). Nevertheless, these failings are troubling as even more and more oversight of political activity appears to be moving to the IRS (see previous blog posting on this point).
July 29, 2010
Borchard Foundation Center on Law and Aging Invites Applications for Grant Program
Philanthropy News Digest today reported that the Borchard Foundation Center on Law and Aging is inviting applications for its 2010-2011 Academic Research Grant Program. According to the Digest, the program "is intended to further scholarship about new or improved public policies, laws, and/or programs that will enhance the quality of life for the elderly (including those who are poor or otherwise isolated by lack of education, language, culture, disability, or other barriers)."
The Digest continues:
The center expects grantees to meet the objectives of the grant program through individual or collaborative research projects that analyze and recommend changes in one or more important existing public policies, laws, and/or programs relating to the elderly; or anticipate the need for and recommend new public policies, laws, and/or programs for the elderly necessitated by changes in the number and demographics of the country's and the world's elderly populations, by advances in science and technology, by changes in the healthcare system, or by other developments. Each grant recipient is required to publish an article on the subject of their research in a first-rate journal.
[In the past,] scholars in the fields of health, law, medicine, and sociology have been awarded grants. The program is open to all interested and qualified legal, health sciences, social sciences, and gerontology scholars and professionals. Two or more individuals in the same institution or different institutions may submit a collaborative proposal. Grant recipients must be U.S. citizens or legal residents of the U.S. and must be affiliated with a U.S.-based institution or organization.
The grant program annually awards up to four one-year grants of $20,000 each.
Application materials are available at the Borchard Foundation Web site.
July 08, 2010
Taxpayer Advocate: Tax-Exempt Organizations Subject to Onerous Reporting Requirements under the Health Care Act
In her mid-year report to Congress, Taxpayer Advocate Nina E. Olson raises concerns about new reporting requirements imposed on businesses and tax-exempt organizations beginning in 2012 by the Patient Protection and Affordable Care Act of 2010. Specifically, she questions the compliance benefits of the new requirements to the IRS in relation to the potentially onerous burdens imposed on small business and tax-exempts. The relevant portion of her report, as summarized on the IRS website, follows (emphasis added):
2. New Business and Tax-Exempt Organization Reporting Requirements.
The report expresses concern that a new reporting requirement contained in the Patient Protection and Affordable Care Act may impose significant compliance burdens on businesses, charities, and government agencies. Beginning in 2012, all businesses, tax-exempt organizations, and federal, state and local government entities will be required to issue Forms 1099 to vendors from whom they purchase goods totaling $600 or more during a calendar year. To meet this requirement, these businesses and entities will have to keep track of all purchases they make by vendor. For example, if a self-employed individual makes numerous small purchases from an office supply store during a calendar year that total at least $600, the individual must issue a Form 1099 to the vendor and the IRS showing the exact amount of total purchases. The provision will have broad reach. According to a TAS analysis of 2009 IRS data, about 40 million businesses and other entities will be subject to the new requirement, including roughly 26 million non-farm sole proprietorships, four million S corporations, two million C corporations, three million partnerships, two million farming businesses, one million charities and other tax-exempt organizations, and more than 100,000 government entities. All of these nearly 40 million businesses and other entities are subject to the new reporting requirement.
TAS has not yet reached any conclusions regarding the benefits and burdens of the requirement, but the report expresses concern that the burdens “may turn out to be disproportionate as compared with any resulting improvement in tax compliance.” During FY 2011, TAS will study the impact of the new reporting requirement more closely and, depending on what its study finds, may propose administrative or legislative recommendations to modify the provision or suggest that Congress consider less burdensome tax gap proposals, including a TAS proposal to require reporting of non-interest bearing bank accounts, to replace it.
June 28, 2010
The Common Denominator between Voluntary Taxes and Charitable Giving
An interesting story in the Boston Globe discusses the potential viability of raising governmental revenues through voluntary taxes. The article, which quotes Yale law professor Ian Ayres and U.S.C. law professor Edward McCaffery, begins with the following fascinating statistics:
In tax year 2008, the Massachusetts Natural Heritage and Endangered Species Fund received $216,544 in taxpayer money to protect threatened species, such as the bald eagle and the marbled salamander. The state's Organ Transplant Fund received $117,654 to help patients who need new kidneys and hearts pay for medical care. And the Massachusetts AIDS Fund got $112,939 for research and education relating to the disease. The functions of these programs differ widely, but they all share one remarkable feature. The taxpayer dollars were not wrenched from the pockets of the Commonwealth's residents.
The gist of the article is that those who object to higher taxes would not necessarily decline to pay more taxes when asked to do so. According to the story, research conducted by economists at the University of Texas at Dallas suggests that many people would in fact voluntarily raise their tax bills if they are given the opportunity to do something that donors to charity have long done – direct the use of their transfers to some degree. When tax revenues are sought to support specific governmental projects, research reportedly shows that people are almost as likely to pay additional taxes to support such projects as they are to donate sums to charity. The research suggests that people do not necessarily object to paying more to government. Rather, they want some assurance that taxes will be spent for purposes that the taxpayers value. The obvious potential benefit of facilitating voluntary tax payments is enhanced funding of worthy public projects. The article also notes the possible negative effects of relying on voluntary taxes, such as enhancing the political influence of the wealthy and shifting responsibility for making allocations of public resources from governmental decision makers to private hands.
These concerns are, of course, familiar to scholars of tax law and charity law, because analogous points figure prominently in debates surrounding the charitable contributions deduction and tax expenditures.
June 23, 2010
Corporate Philanthropy Trends, Predictions, and Recommendations Report
The Committee Encouraging Corporate Philanthropy (CECP) has issued a report titled Shaping the Future: Solving Social Problems through Business Strategy. The report seeks to answer two questions:
1. What will the next decade look like, and what are the implications for corporate involvement in solving social issues.
2. How can corporations position themselves now to maximize their profitability and societal impact?
CECP created the report in collaboration with McKinsey & Company, which interviewed CEOs and thought leaders as well as polling CEOs who attended CECP's annual conference. Report highlights include:
- Global Forces. McKinsey has identified five game-changing trends that will affect the future of the global economy: talent shortages, shifting centers of economic activity, a new era of government action, increased scarcity of natural resources, and new levels of technological interconnectivity.
- Key Uncertainties. At the same time, business leaders face two key uncertainties about the future: the level of proactive action on behalf of companies and the expectations that are placed upon the private sector.
- Scenarios for the Future. These certainties and uncertainties combine to create four possible scenarios for 2020: the optimal being “Sustainable Value Creation” and the worst being the “Vicious Circle”. Sustainable Value Creation is a self-reinforcing state of trustworthy, pro-social corporate behavior that simultaneously delivers bottom-line results, provides competitive advantage, and leads to community benefits. The consequences for inaction are severe for both business and society.
- Capturing the Opportunities. Both business and society have responsibility for which scenario ultimately is realized; both have ownership over the future. Sustainable Value Creation requires new forms of collaboration across sectors to achieve results. This report shows how corporations are shifting their view on globalization and economic development – they will work in partnership with nonprofits and government in the future, taking a leadership role on ethical and moral issues for positive business and societal outcomes.
According to CECP's website, Paul Newman and others helped found the now the ten-year old organization, its Board of Directors include numerous CEOs of well-known companies, and its initial funders included a number of major private foundations.
June 18, 2010
Feds Report Volunteering Surge in 2009 as Well as Other Volunteering Data
The federal Corporation for National & Community Service issued its annual Volunteering in America reportthis week, finding that 63.4 million Americans volunteered in 2009 by contributing 8.1 billion hours of service. These figures represented an increase of 1.6 million volunteers over 2008, the largest single-year increase since 2003, and repesenting an increase in the volunteer rate from 26.4 to 26.8 percent. For purposes of the report, volunteers are defined as "adults ages 16 or older who performed unpaid volunteer activities for or through an organization." The report provides either directly or through its website a wealth of information regarding volunteer demographics, geographic locations, and organizations served, including the ability to download the available data in multiple formats.
June 17, 2010
Reports Present Differing Views of Foundation Grantmaking in Response to the Great Recession
Two recent reports present sharply divergent views regarding whether and to what extent grantmaking foundations have stepped up to the plate in response to the recent economic downturn.
The Philanthropic Collaborative, a new coalition of charities, foundations, and elected officials, released Responding in Crisis: An Early Analysis of Foundations' Grantmaking During the Economic Crisis. Based on a non-representative sample of approximately 2,700 grants totaling $472 million, this report concludes that foundations have "quietly, expertly, and quickly . . . supported American individuals, families, and communities in need," including by sending more grants to states experiencing relatively more severe mortgage delinquency problems and an increasing proportion of grants and overall grant amounts to states with high unemployment.
In contrast, the Center for Philanthropy released A Time of Need: Nonprofits Report Poor Communication and Little Help from Foundations During the Economic Downturn. This report on 6,000 grantees of 37 foundations from across the country concluded that the grantees both "do not perceive funders to have communicated their responses to the economic downturn clearly, if at all" and "report that funders have offered them little useful help in responding to the challenges of the downturn."
Given the different study methods and subjects, not to mention their limited data, the studies are not necessarily inconsistent but instead may reflect two very different perspectives, that of grantors versus that of existing grantees, on what is broadly the same issue. The key questions are therefore which perspective is the better one, and is their an even better, third perspective from which to look at this issue
Hudson Institute Releases 2010 Index of Global Philanthropy and Remittances
The Hudson Institute's Center for Global Prosperity released the 2010 version of its annual Index of Global Philanthropy and Remittances (executive summary (4+ MB); full report (13+ MB)). The report reviews financial support from the United States and other countries to developing countries in 2008, including government aid, private aid, and remittances, as well as investment. Among its findings, the report notes that U.S. private philanthropic support held steady in 2008 at $37.3 billion, as compared to $36.9 billion in 2007, and was $10 billion more than U.S. government official development assistance. Both figures were dwarfed by remittances from people in the U.S. to relatives and friends in the developing countries, which reached its highest level ever in 2008 at $96.8 billion.
June 16, 2010
Giving USA 2010 Report Shows First Decline Since 1987
USA Today reports that the annual report on charitable contributions in the United States shows such giving declined by 3.6 percent in 2009 to $304 billion. The decline is the first reported since 1987 and only the second since the report began in 1956. The report is available for purchase from the GivingUSA Foundation and from the Center on Philanthropy at Indiana University.
UPDATE: A Wall Street Journal blog entry notes that besides showing a decline in giving, the report also shows a number of shifts in giving, most notably away from public-society benefit organizations and toward international aid. Whether these shifts reflect long-term trends, however, is not discussed.
June 15, 2010
Study of Donors Reveals Relative Performance Has Little ImpactHope Consulting of San Francisco, supported by the Aspen Network of Development Entrepreneurs, the Metanoia Fund of Boston, the Rockefeller Foundation, and the William and Flora Hewlett Foundation, recently issued a report on charitable giving. Titled Money for Good: The US Market for Impact Investments and Charitable Gifts from Individual Donors and Investors, the report explored three key questions through a study of donors with incomes over $80,000:
1. How can nonprofits more effectively obtain donations from individuals?
2. How can a greater share of donations go to the highest performing nonprofits?
3. What is the market potential for impact investing and how can it be realized?
As noted in a Chronicle of Philanthropy article about the report, one of the more interesting findings is that while these donors say they want to support more effective charities, they are rarely willing to to either research or base their giving decisions on performance. These results suggest that simply requiring more disclosure of information about nonprofits is not enough to better inform donors; instead, it is also important to determine how such information can be delivered to donors such that they receive and use it.