Nonprofit Law Prof Blog

Happy New Year and Goodbye to 2008!

HAPPY NEW YEAR AND MANY THANKS TO ALL WHO HAVE SUPPORTED THE NONPROFIT LAW PROF BLOG THIS YEAR FROM YOUR BLOG EDITORS!

WE LOOK FORWARD TO BLOGGING WITH YOU IN THE NEW YEAR!  2009 HERE WE COME!

YOUR EDITORS

AMT

Study Finds that Foundations Established by Many NBA Players are Poorly Structured and Run

Yesterday (December 30, 2008),  the Salt Lake City Tribune highlighted the pitfalls of starting a foundation or charity without proper legal guidance.  The article focuses on NBA players who, with good intentions, setup foundations and charities in their names.  Based on a study of tax records and other resources, the article concludes that many of these foundations and charities underperform in charitable giving -- meaning that 51% of every dollar raised reaches the charitable cause while the national average is 65%.  Also, many of these charities maintain poor records and experience difficulties with federal and state reporting requirements.  I teach an introduction to nonprofits law course, and one of the main motivators for teaching this course for me is to produce a cadre of lawyers who are capable of properly advising persons, athletes or just common ole' folks, who want to setup and run nonprofits, and the nonprofits themselves.  This Salt Lake City Tribune article suggests that there is plenty need.  Please see the brief excerpt below:

But an analysis by The Salt Lake Tribune of hundreds of tax documents filed by NBA player charities has found these foundations face a dizzying array of problems, especially those set up by the athletes themselves, without outside expertise.

Among the findings of The Tribune's analysis of 89 stand-alone NBA player charities:

Together, they reported revenue of at least $31 million between 2005 and 2007, but only about 44 cents of every dollar raised - or $14 million of that $31 million - actually reached needy causes.  The average NBA player foundation put just 51 cents of each dollar it spent toward charitable programs, well below the 65 cents most philanthropic watchdog groups view as acceptable.  Tax records show budgets are quickly eaten up by poor planning and administrative costs.

While a handful of player charities appear to be well-financed and tightly managed organizations that do good, a larger number are unimpressively funded and their activities poorly documented. Up to a quarter of NBA player charities analyzed lacked even basic documentation required by the Internal Revenue Service.

Few player-run charities hire full-time directors to manage daily operations, and players commonly put family members, friends and former sports associates on their boards, despite IRS rules requiring that a majority of board members be nonrelatives.

Some player charities hold lavish fundraising galas that cost tens of thousands of dollars but actually lose money.

Though shining examples of NBA charity work abound - including noteworthy efforts by the five Jazz players, all of whom run effective charities - player foundations' noble motives often go awry, as even the league acknowledges.

'We don't shy from it,' said NBA Senior Vice President Kathy Behrens, adding the league has tried with limited success to maintain a database on player foundations. 'There are horror stories . . . of guys who set them up because their agent said to or they thought it was a good idea and they had good intentions, but not a good plan. That causes trouble.'

For the full story, please click here.

AMT

Willam R. Ferris, Senior Associate Director of the Center for the Study of the American South, Calls for a Cabinet-level Position for Culture

William R. Ferris is the senior associate director of the Center for the Study of the American South at the University of North Carolina at Chapel Hill.  He is a former head of the National Endowment for the Humanities from 1997-2001.  In a recent op-ed piece (December 26, 2008), he calls for the creation of a Secretary of Culture.  He believes that the creation of this cabinet-level position would lessen conflict among national arts and culture agencies (i.e., the Corporation for Public Broadcasting, the Institute of Museum and Library Services, the Library of Congress, the National Archives, NPR, PBS, the Smithsonian Institution and the National Endowment for the Humanities), provide for cohesive leadership for the group of culture agencies, and provide for a more predictable funding and financing stream to these institutions. 

This is an interesting idea for a nation that puts a lot into cultivating and preserving its national identity.  Below is brief excerpt of this op-ed article:

But as chairman of the National Endowment for the Humanities from 1997 to 2001, I learned firsthand that these institutions, though united by a shared goal, can sometimes run into conflict with one another. There were bureaucratic tangles, overlaps and missteps that, with foresight, could have been avoided.

Which is why I believe the president should create a cabinet-level position — a secretary of culture — to provide more cohesive leadership for these impressive programs and to assure that they receive the recognition and financing they deserve.

The president should initiate another change, too. The leaders of our cultural institutions should all have renewable 10-year appointments. (Some now serve only four-year terms.) Such a change would help to provide continuity and insulate the organizations from the tumult of political change. This move would allow each agency to develop long-term agendas in coordination with the secretary of culture in each administration.

Mr. Obama has an opportunity to revitalize our national spirit by strengthening our cultural programs at every level. It’s hard to imagine what could be a more important — and enduring — legacy.

For the full story, please click here.

AMT

A Conservative Philanthropist View of the Times Ahead

In a recent Wall Street Journal Opinion Editorial, dated December 27, 2008, reporter Naomi Schaefer Riley interviews Mr. William (Bill) Simon, the son of the late William E. Simon who was a treasury secretary under Richard Nixon and Gerald Ford, and who made his fortune in investment banking.  Ms. Riley reports that "the senior Simon spent almost a quarter century as president of The John M. Olin Foundation, where he worked tirelessly on behalf of the idea of donor intent, making sure that those funds were going only to causes Mr. Olin would have approved of."  The younger Simon, Mr. Bill Simon, credits his father with ushering in a conservative renaissance while running the Olin Foundation, which he says was the intent of John M. Olin, the foundation's founder.  Mr. Bill Simon, the younger Simon, today runs The William E. Simon Foundation, a foundation established by his late father in his late father's name.  For me, the article begins one way and ends another.  It further concerns me that Mr. Simon has political aspirations.  He intends to run for governor or lieutenant governor of California in 2010.  He worked in the presidential campaign of Rudy Giuliani, and he unsuccessfully ran for California governor in 2000 and 2003. 

Mr. Simon begins the interview discussing the importance of donor intent.  He applauds the A&P heirs who recently prevailed against Princeton University, insisting that the University more closely adhere to the donor's wishes that the monies be used for promoting public service.  Ms. Riley reports:

Respecting "donor intent" is a deeply significant issue, since it gets to the heart of why individuals are even willing to establish philanthropic foundations.  And Bill Simon's take on the Princeton dispute is unequivocal.  "I give kudos to the Robertsons for fighting the battle as long as they did.  It took a lot of guts and a lot of courage," he tells me.

As the article progresses, Mr. Simon discusses his father's approach to maintaining strict adherence to donor intent -- simply have the foundation cease to exist (i.e., sunset) after a certain number of years.  This sunsetting of the foundation prevents, in his opinion (and the opinion of his father), the foundation from drifting away from the donor's intent.  It is his belief that keeping the foundation alive for too long permits the donor's intent to be forgotten.  He says that the Ford Foundation is an example of a foundation that has existed so long that it has moved away from Henry Ford's intent (and will).  He further states that, "'As I get a little bit older I can see the wisdom of Dad's advice,' he says, noting that 'people's behaviors change.  . . . You have to be targeted in your focus and it's harder to do that as you . . . get further away from the donor.'"

As I read on, it occurred to me that Mr. Simon and I see the roles of foundation giving and charities through different eyes.  He speaks of the important conservative policy agendas ushered in by foundations like the Olin Foundation who he says "usher[ed] in a renaissance in conservative ideas over the past generation."  He also makes the claim that the Olin Foundation, under his father's leadership, "donated to institutions such as the American Enterprise Institute, the Hoover Institution and the Manhattan Institute .  And it supported the work of scholars like Allan Bloom, Samuel Huntington [(just died, Dec. 24, 2008)] and Irving Kristol." [ed. - Links added by AMT]  I began to wonder if this was such a good thing for "me," an African American woman who grew up in a small low-income community in middle America. 

Mr. Simon went on to share his views in the wake of President-elect Obama's election, which he clearly sees as a sidelining (temporarily) of the conservative renaissance.  He suggests that this is a time for retooling the conservative agenda.  He lambaste Iowa Sen. Charles Grassley  for calling for increased spending of endowment funds or face more regulation, and efforts in the California legislature to achieve "increased racial  and gender diversity among the state's foundation boards, staffs and grantees."  He views these calls as unnecessary attempts to needlessly regulate charities.  I, on the other hand, welcome more diversity and less conservative viewpoints, and have, at times, felt "harmed" by the conservative policies advocated by the  think tanks he positively identifies with. 

In the end, I had an unsettled feeling that the war went underground.  I am unsettled because I am not quite convinced of the battleground and why we are fighting.  I saw the election of Barack Obama as a major step forward in race and class politics in America.  The America I have hoped for all of my life.  Upon reading Mr. Simon's views, it reminded me not to go to sleep.  The dream spoken of by Dr. Martin Luther King, Jr., is still not at hand.  Surprise! Surprise!  We all don't think alike, nor should we.

I encourage you to click here to read the full article for yourself.  How did it make you feel?  Any thoughts?

AMT

UK Philanthropists Step into the Gap

The Independent, a major UK newspaper, reported on December 27, 2008, that many of the top UK philanthropists have pledged to maintain or increase their giving to the many charities feeling the pinch of the economic crisis being experienced by all sectors -- public, private and nonprofit.  Below is a brief excerpt of the story:

Britain's leading philanthropists have pledged to bail out charities whose services have been hit by dramatic falls in public donations triggered by the recession.

Today The Independent reveals Britain's top philanthropists, a list of 30 industrialists, financiers, entrepreneurs and celebrities who have made a habit of giving their wealth away. We canvassed the charity sector and philanthropic organisations to find out who were this year's biggest givers.

Homeless projects, international aid, medical research and educational trusts will all benefit from more cash and greater support from this group of wealthy donors whose combined giving amounted to £2.3bn this year.

The pledge comes as charities call for more money to stop job losses and further cuts in their services.

In a bleak assessment of the situation, charity leaders have told the Government that they are facing a "double whammy", with funding being reduced at the very moment they are being asked for greater help by victims of the recession.

Corporate donations have fallen by 20 per cent, while legacies have been badly hit by the crashing property market. And as tax revenues are further reduced, charities expect government funding to the charity sector to be affected.

But Philanthropy UK, which advisers [sic] wealthy donors, says that many industrialists, financiers, entrepreneurs and celebrities intend to come to the aid of the charity sector by maintaining or increasing their funding. The London-based organisation says that "pledged gifts remain firm", with many philanthropists recognising that it is during this time of financial crisis that charities need their support most.

For the full story, please The Independent.

AMT

Antipoverty Activist Calls for Nonprofit Leaders to Push for Stimulus Dollars to Benefit the Poor

The Chronicle of Philanthropy, Government and Politics Watch, reported on December 26, 2008, about Angela Glover Blackwell, an anti-poverty activist, who recently, in a Huffington Post article, called for nonprofit leaders to push for federal, state and local governments to spend some of the multibillion-dollar stimulus funds to be received under President-elect Obama's multibillion-dollar stimulus plan to pay for projects that help the poor.  Below is an excerpt of the Chronicle report, with a link to the Huffington Post.

As President-elect Barack Obama develops his multibillion-dollar plan to stimulate the economy, nonprofit leaders should push federal, state, and local governments to use the money to pay for construction projects that help the poor, writes Angela Glover Blackwell, an anti-poverty activist.

Mr. Obama has proposed spending upwards of $300-billion to improve American roads and infrastructure; he says his proposal would create jobs and fight the country’s economic recession.

Ms. Blackwell, chief executive and founder of PolicyLink, a nonprofit group in Oakland, Calif., writes that the plan — if put together wisely — “could be one of the most successful anti-poverty programs the nation has ever seen.”

'First off, we must stop building more and wider roads out to far-flung exurbs. Instead, we need to fix the bridges, transit systems and roads we already have — especially those in low-income communities that have long been ignored in infrastructure spending,' she writes on The Huffington Post.

For the full story, please click here - Chronicle of Philanthropy.

In the Huffington Post article, Ms. Blackwell makes the following suggestions about how the monies can be better targeted to help the poor:

First off, we must stop building more and wider roads out to far-flung exurbs. Instead, we need to fix the bridges, transit systems and roads we already have -- especially those in low-income communities that have long been ignored in infrastructure spending.

We need smarter, more targeted spending. We must invest in the people, places and projects that will spread the most opportunity to communities that need it. These projects will create good-paying construction, technical and service jobs in the short-term -- but, more importantly, lay a foundation for more competitive, more inclusive, more opportunity-rich communities for generations to come.

Each investment in this massive recovery package should serve the long-term interests of America. If we improve and expand public transit, for instance, we can give working families a way to get to the good jobs they need. If we install new broadband lines in low-income communities, we can connect a new wave of entrepreneurs and small-business to the digital revolution. If we build new grocery stores in poor neighborhoods now reliant on junk-food laden convenience stores, we can improve healthy eating, cut down on obesity and diabetes, and create a source of permanent, good-paying jobs in these communities.

For the full story, please click here - Huffington Post.

I think that Ms. Blackwell is rightly focused on the strategic focus nonprofits, which focus on eradicating centuries-old racial and class disparities in this country, need to have to significantly change for the better and improve upon the quality of life poor Americans live.  What do you think?

AMT

Distressed Homeowners Should Stick with Mortgage Assistance Nonprofits

On December 26, 2008, the Washington Post reported that for profit mortgage assistance companies are charging upwards of $2,500 (and sometimes, more) to assist distressed homeowners during this mortgage crisis, where nonprofits do it for a lot less and with better results.  Below is a brief excerpt of the article:

A growing industry has emerged to take advantage of the unprecedented wave of foreclosures, charging distressed homeowners for help negotiating better loan terms -- a service provided for free or for a nominal fee by many nonprofits.

Such companies charge $500 to $2,500 or more and are drawing the ire of consumer advocates, regulators and lenders, who say many are just the latest version of foreclosure rescue scams and can make it more difficult for homeowners to get help.

"You don't need to go out and hire someone to help you," said Michael Gross, managing director of mortgage servicing for Bank of America.  "It is very, at times, frustrating to find a homeowner who has paid a for-profit company $3,000 to $5,000 in an upfront fee, when they could have gotten the same or better assistance free."

Loan modification firms say they are taking up the slack left by unresponsive lenders and overwhelmed nonprofit groups. "Nonprofits are not as efficient as the regular market," said Moose M. Scheib, the head of Michigan-based LoanMod.com, a loan modification firm that charges homeowners $1,500 to help renegotiate their mortgages. "I think the difference is probably more attention you get from us."

. .  .

"We are extremely concerned about the huge proliferation of for-profit companies making a buck on these people," said Laurie Maggiano, senior policy adviser at HUD's Office of Housing. The department has certified 2,300 nonprofit housing counseling agencies across the country, which are required have at least one year of experience administering a housing counseling program, Maggiano said.

For the full story, please click here.

The article also includes a discussion of local Virginia, Maryland and District of Columbia laws and the extent to which these for profit companies and their practices are regulated.  The article also demonstrates the important role nonprofit legal service providers are playing in helping homeowners to resolve unfair practices by these for profit companies, and also the role that nonprofit legal service providers and other nonprofits are playing in helping homeowners restructure their mortgages avoiding foreclosure.

AMT

The word, "Earmark," is the new Boogie Man!

Following on the heels of an "emotionally word-charged" political campaign season, an opinion column published in the Wall Street Journal on December 24, 2008, raises the word, earmark, once again. The writers of an op-ed column entitled, Congress Targets Philanthropy, take a swipe at California Democratic Congressman Xavier Becerra's characterization of the tax-exempt benefits received by tax-exempt foundations as "a 32 billion earmark." Capitalizing on the Congressman's unfortunate word choice, i.e., earmark, the writers of the op-ed column attempt to marginalize the congressman's calls for greater racial diversity in grantmaking (in earlier blogs, we have referenced the congressman's calls for greater racial diversity on the boards of nonprofits and in grantmaking).

The tax exemption foundations enjoy, says Mr. Becerra, is a '$32 billion earmark.' As he explains: 'I have an obligation to make sure that those $32 billion that would have gone to the federal government are used for a . . . public good.'

The writers state that Congressman Becerra and others now see private and community foundations as "political treasure." The writers claim that Congressman Becerra is inflaming (i.e., by using the boogie man word, earmark) the debate over the tax-exemption of foundations so that he can "direct" foundation's resources to suit his own preferences (again, in earlier blogs, we have referenced the congressman's calls for greater racial diversity on the boards of nonprofits and in grantmaking).

The column further makes reference to remarks Congressman Becerra allegedly made at an annual meeting of the Council on Foundations where he is to have "complained about the lack of grants to racial minorities[, and that he further stated that,] '[w]e're not trying to mandate something,' he told the audience about his colleagues' foundation plans in Congress, but 'we will, if you don't act.'"  (For an earlier article capturing the views of the congressman, see the Cohen Report in the Nonprofit Quarterly, January 2008)

The writers of the op-ed column urge Congress to back-off of foundations and the supposed earmark strategy, arguing that a study has found that $1 dollar of foundation spending accounts for $9 dollars of direct economic benefits received by communities across the United States.  The study, funded in part by the Philanthropic Collaborative (a newly-formed coalition of charities, foundations and elected officials) found that, "[for the $43 billion that foundations spent on grants in 2007, they created direct economic benefits of $368 billion." The study also found that these "nonprofits . . . consistently outperform government programs, . . . saving taxpayers a bundle."

The writers opine that their preference for resolving the issue of taxation of tax-exempt foundations would be:

to eliminate most charitable deductions in return for a simpler, flatter tax system. Also eliminate the estate tax, a primary source of distorted tax behavior, and surely charitable giving would continue even with fewer foundations. Americans gave money to charity before the tax deduction existed, and we're confident they'd continue to do so. We also wish foundations had to give away all of their money over a fixed period of time, so they couldn't be captured by interests that don't agree with a donor's intent.

The debate over the charitable tax deduction and philanthropy will continue for the foreseeable future on Capitol Hill and the opinion pages of the Wall Street Journal.

Just in case you are wondering, I am in favor of retaining the charitable tax deduction, but enhancing the deduction for targeted types of giving that more closely track need-based, rather than aesthetic, charitable giving.

AMT

Jewish Charities and Foundations Disproportionately Affected by Madoff's Ponzi Scheme

In a recent AP story, Jennifer Peltz, reporting for the Associated Press, makes the observation that Madoff's Ponzi Scheme disproportionately affected Jewish Charities and Foundations.  Mr. Madoff has been identified as a member of the Jewish faith. This tendency to disproportionately target members of one's own affinity group is called "affinity fraud."  The excerpt below highlights some of the Jewish charities and foundations negatively affected by Madoff's Ponzi scheme, and raises the additional concern that Madoff's actions have unfortunately resulted in a rise in religious stereotyping and an increase in anti-semitic comments.  See excerpt below:

There's nothing new about con artists targeting their own kind. There's even a word for it — affinity fraud — and it has struck numerous religious, ethnic and professional groups.

But the allegations against Madoff are particularly wrenching for some in the Jewish community, who fear that the sensational case is fanning vicious stereotypes about Jews that go back to the Middle Ages.

The Anti-Defamation League cites a spike in anti-Semitic comments online after Madoff's Dec. 11 arrest. A columnist for the Israeli newspaper Haaretz lamented the case as "the answer to every Jew-hater's wish list."

And the American Jewish Committee's executive director, David A. Harris, wrote a letter to The New York Times criticizing what he saw as "a striking emphasis" on Madoff's faith in one of the paper's many stories about the scandal.

The case is "fodder for the bigots," Abraham H. Foxman, the ADL's national director, said in an interview this week with The Associated Press. "It's both embarrassing and it's painful."

.  . .

Yeshiva University, one of the nation's foremost Jewish institutions of higher education, lost $110 million; Hadassah, the Women's Zionist Organization of America, lost $90 million; director Steven Spielberg's Wunderkinder Foundation acknowledged unspecified losses; and a $15 million foundation established by Holocaust survivor and writer Elie Wiesel was wiped out. Jewish federations and hospitals have lost millions and some foundations have had to close.

For the full story, please click here.

AMT

IRS Finalizes Forms 990 and 990-EZ

The December 24 EO Update from the IRS notes that Form 990 and Form 990-EZ have now been finalized for filing in 2009.

JDC

Christmas Generosity

No posts today on tax policy or critiques of our nonprofit/tax-exempt sector.

Instead, I thought I'd list a few stories reminding us of the vast generosity in our society. Like this story about PriceWaterhouseCoopers eliminating holiday parties and giving $1.5 million to charity instead and local Microsoft offices replacing parties with gatherings to support local charities. Or this story, about retailers giving more to charity even as they face incredibly difficult economic times themselves (and for a similar story about individuals doing the same, look here). Or this story, about Cedar Point amusement park (if you like roller-coasters, this place has to be on your must-visit list!) donating $6500 in "found" money (cash dropped by park visitors) to charity. Or this story about local realtors "adopting" families in the local Head Start program and providing them with some Christmas gifts for the children.

If you wake up this morning feeling beleaguered, wondering if there are any sane people left in this crazy world, do a web search on "charity" - I think you might find a goodly number of "hope restoratives" there. I sure did.

JDC

Who Gives More: Liberals or Conservatives?

An op-ed piece by Nicholas Kristoff in the NY Times created a bit of a stir by citing evidence that conservatives give more to charity than liberals. As usual, however, there are lies, damned lies and statistics (or as my colleague Tom Ulen - an economist - once remarked, "give me the data and I'll take it to the basement and torture it until it tells the truth.") Yes, some surveys show that self-identified conservatives give more to charity than self-identified liberals (Kristoff's article cites his sources). But if you exclude giving to churches, it turns out that liberals give more.

Which prompted Ezra Klein to opine that so-called donations to churches are really nothing more than membership fees and hence should not be counted as charity. Well, maybe so - in fact, most donations to churches end up serving the church population - they largely are used to support services and capital expenditures for the congregation. But this is an argument that probably proves too much. I regularly donate to the Krannert Center for the Performing Arts at the University of Illinois. Why? Well, partly its to make sure that Krannert keeps bringing in the superb performers that I like to hear and buy tickets to. So is my donation to Krannert really "charity" or simply a self-serving, self-imposed fee to make sure that I continue to get services that I value? Is the $20 "suggested" donation to the Metropolitan Museum of Art really a donation or an admission fee?

This argument is not new, of course. One of the central questions that bedevils tax policy and nonprofit governance is what, exactly, constitutes "charity." Some would say that the only thing that should count as charity is redistribution: giving money to help the poor. But Western civilization has long recognized the arts as part of the charitable basket: museums, symphony orchestras, etc. So it seems to me that if you want to start picking on churches, you've got a lot of 'splaining to do when it comes to other kinds of charities . . . I don't think you can call donations to churches "membership fees" without recognizing that a lot of what we classify as philanthropy is self-serving in some way.

JDC

Connecticut Attorney General to Investigate Charities in Madoff Scandal

As if losing billions in the Madoff investment scandal wasn't enough, Forbes reports that Richard Blumenthal, attorney general for the state of Connecticut, may investigate whether trustees of the charities that invested with Madoff violated their fiduciary duty.

"If they failed recklessly to do the necessary due diligence, we would certainly investigate and take action," Blumenthal told Forbes.com. "If the claim is that a trustee or a board member or that the board itself failed in its fiduciary responsibilities, there would be legal action and they could be held personally and financially responsible."

JDC

Hospital Debt Collection Practices

One of the major points of friction in tax-exemption for nonprofit hospitals over the past decade has been the hospitals' use of aggressive debt collection techniques. Aggressive debt collection is what first brought Provena-Covenant hospital in Urbana, IL to the attention of the local property tax board, and ultimately played a significant role in the decision of that board to recommend revocation of Provena's state property tax exemption. Then there's the tale of Quentin White, who had paid Yale-New Haven Hospital for over 20 years for the debt from his late wife’s medical care. Despite paying almost $16,000 on a $19,000 bill over the years, the debt ballooned to nearly $39,000 after the payments because of the compound interest charges (over 10%) by the hospital. At one point, the hospital placed a lien on the White’s home and nearly cleaned out his bank account.

Now comes an in-depth examination of the debt collection practices of Maryland hospitals by the Baltimore Sun. In an article released over the weekend, the Sun found

• Hospitals filed more than 132,000 debt collection suits in the past five years, winning at least $100 million in judgments.

• Hospitals sometimes added annual interest at twice the rate allowed for other types of debts.

• Hospitals placed liens on houses 8,000 times in the past five years.

• Maryland lacks uniform standards to determine who qualifies for reduced-price or free hospital care.

• The state doesn't closely monitor hospitals' debt collection practices.

• A majority of Maryland's hospitals have received surpluses from free and unpaid care in recent years, though they are supposed to break even in the long run.

It is surely the case that hospitals have some cases that call for debt collection; some people can afford to pay their bills and choose not to. But as the Sun story found, debt collection practices by nonprofit hospitals are often poorly supervised and lack sufficient internal controls. The Provena case in Illinois and the Quentin White case in Connecticut led to state legislation regulating hospital collection practices. In 2006, California passed similar legislation, and attorney generals across the country have opened investigations into hospital billing practices. The wave of bad publicity and legislative and regulatory efforts has led some (maybe many) nonprofit hospitals to re-examine their debt collection practices - but perhaps self regulation is simply not enough. Will Maryland be next on the legislation list? Will Senator Grassley pursue federal standards on debt collection as a limit on 501(c)(3) status for nonprofit hospitals? Stay tuned . . .

JDC

Rating the Raters

The Wall Street Journal has two interesting pieces (one here and one here) on the efforts to rate the effectiveness of charities. Charity Navigator is probably the best known of these efforts, but as the first of the WSJ articles points out, charity ratings can vary widely by the methodology used. And like the U.S. News rankings of law schools, the mere existence of the rankings cause some charities to behave in ways that are targeted solely at improving their ranking under the criteria used, rather than targeted at their mission. The story also reports that just like law schools and U.S. News, some charities apparently engage in

"accounting chicanery aimed at achieving a higher ranking. For example, groups report lower fund-raising costs, and lower costs per dollar raised, by reassigning fund-raising costs to program expenses. This can be accomplished by including some sort of advocacy message in fund-raising materials: A veterans group sending out fund-raising letters might encourage the flying of American flags in the same missive."

Frankly, I don't know what to think of rating systems. My own view is that the U.S. News ranking of law schools has done far more harm than good; aside from the wacky incentives created by the rankings, they often make consumers (potential law students) lazy: instead of researching and thinking through the law school application and selection process, too many of the students I meet today base their selection on a single number in U.S. News. The WSJ articles on charity rankings indicate that we're not close to that situation -- yet -- with donors and charities, and certainly some of the information is extremely useful (the overall ratio of administrative overhead to program expenditures, for example). But I wonder . . .

JDC

More Credit Woes for Nonprofit Hospitals

Another day, another story about how the credit crisis is affecting nonprofit hospitals. This time, the WSJ (subscription required) focuses on Loyola University Health System in Chicago, which was "recently put on notice by a leading bond ratings firm that it faces a downgrade of its already below-average Baa1 credit ranking." Loyola "is being squeezed by unpaid Medicaid bills, significant operating losses, and the cost of financial derivatives that are draining it of much needed cash."

JDC

A Tale of Two Hospitals

Darryl's post last week on Grassley's efforts to move legislation to require minimum charity care standards for tax-exempt hospitals reiterated a warning from an even earlier post about "one size fits all" solutions to tax-exemption for health care providers.

I agree. And so I present "A Tale of Two Hospitals" - or maybe that should be a tale of one giant health care conglomerate and a stand-alone community hospital to highlight the point. Today's Boston Globe has a very in-depth story on Partners Health Care, formed in 1993 by a consolidation of Massachusetts General Hospital and Brigham and Women's Hospital. This article details how Partners (a nonprofit) is aggressively expanding with new high-profile outpatient facilities, new hospitals in potential profit centers, and an ever-increasing war chest of earnings. And arguably pushing out less well-funded community hospitals in the process.

The second story is the tale of Mt. Sinai Hospital in Chicago, which serves a population made up largely of the poor and uninsured. Darryl blogged about Mt. Sinai, too, but it is a particularly poignant comparison to Partners and hence worth repeating. The story notes

Seventy-two percent of its patients are either uninsured or covered by Medicaid. Only 10% have commercial health insurance -- the only type that gives the hospital a profit margin.
The incidence of heart disease, infant mortality, asthma and HIV in the area surrounding the hospital far outpaces the rates in greater Chicago and the rest of the country. The life expectancy of local residents is a full decade less than the U.S. average. Poverty is rampant.

And as a result, Mt. Sinai's finances are precarious: over the past five years, it has moved between an annual a small net income and losses as high as $15 million. All this while Advocate Health, one of the most profitable health conglomerates in the country, closed a nearby hospital (actually, it turned it into a long-term care facility) in favor of pumping $500 million into facilities in Chicago's suburbs.

Now let's get this straight. I'm not against free-market success. In fact, I'm generally a supporter of market-based solutions, and my theories regarding the proper application of tax-exemption are market based. I have no ill-will toward Partners' success in its market, which obviously reflects excellent management and a focused business plan. But Partners doesn't deserve tax exemption. Whatever the history of its constituent hospitals, today Partners is simply a big business pursuing its market opportunities. Mt. Sinai, on the other hand, is what we should be focused on in developing a sensible policy for tax exemption for health care providers: an organization that serves a population that every other provider is running away from like another sequel in the Friday the 13th series.

Unlike Senator Grassley, I wouldn't tie tax-exemption strictly to charity care, though that certainly would be part of the equation. What I would do is require a hospital or health-care provider seeking exemption to detail what populations it serves, or services it provides, that for-profit health care systems do not provide, and how much it spends on these services. In other words, to get exemption, a health care provider will have to provide explicit detail regarding what it does that is not provided by the market. Let the market do its work and give Partners a pat on the back for its market success - just like we give Microsoft or Intel or Apple a similar pat. And give Mt. Sinai tax-exemption and government funding to help it continue its mission to serve a population no one else cares about.

JDC

Nonprofit vs. For-Profit Nursing Home Quality

One of the perennial arguments regarding tax-exemption for nonprofit health care providers has centered on whether nonprofits provide "better" services in some way than for-profit providers. This question has been the subject of countless empirical studies which have provided largely mixed results depending on what exactly is being studied, by whom, and how. I have discussed some of the conflicting evidence in an article published in the Journal of Health Poliitics, Policy and Law (JHPPL, as it is widely known) in 2006 (Vol. 31, pages 623-642, available here, subscription required).

Now a new government rating of nursing homes is sure to add fuel to the fire. On Thursday, the Centers for Medicare and Medicaid Services released their first "star" ratings (from one to five stars) of nursing homes based on health inspection surveys, staffing information and quality-of-care measures. Individuals can view these ratings and the measures used in the rating system via the Medicare web site here.

As this report in today's Buffalo News indicates, the is no systematic difference in these ratings among nonprofit, for-profit and public facilities. The Buffalo News article notes that among the 81 nursing homes in western New York, the one-star (lowest-ranked) facilities included seven for-profit, four nonprofit and three public institutions, while the five-star (highest-ranked) facilities included seven for-profit, four nonprofit and one public operation.

As with all ranking systems, one can argue over the methodology, and some of those arguments are detailed in the Buffalo News story. Nevertheless, the fact that this first comprehensive rating of nursing homes found little to distinguish nonprofit facilities from for-profit ones is another data point in the debate over tax-exemption for nonprofit health care providers (although admittedly nursing homes provide many other services than just health care). If we're not getting better services from exempt nonprofits or more help for the poor (an issue of much debate with respect to hospitals, as the prior blog entry on Grassley's proposed legislation indicates), then just what ARE we getting?

JDC

What's The [Legal] Deal with the Clinton Foundation?

What is the legal deal with the news regarding foreign donors to the Clinton Foundation?  I am, of course, fully aware of the political hash being made by the media.  The insinuation is that the donors, foreign and domestic, but foreign especially, are buying influence not making charitable contributions. 

The potential for foreign donors to the Clinton foundation to create the appearance of conflicts of interest for Mrs. Clinton as she handles foreign policy matters was illustrated by Amar Singh, listed as giving between $1 million and $5 million. Mr. Singh is apparently a prominent Indian politician of that same name.  In September, Mr. Singh visited Washington to lobby Congress to support a deal allowing India to obtain civilian nuclear fuel and technology from the United States. The deal was controversial because India has developed nuclear weapons but is not a party to the Nuclear Non-Proliferation Treaty. Mr. Singh met and posed for photographs with Mrs. Clinton, afterwards telling Indian reporters that Mrs. Clinton had assured him that Democrats would not block the deal. Congress approved the nuclear cooperation deal with India a few days later. Several other donors have connections to India — a potential foreign policy flashpoint because of tensions with Pakistan.Among them was Lakshmi Mittal, an Indian businessman — the fourth richest person in the world, according to Forbes — who made billions in the steel industry. Although he has long lived in London, Mr. Mittal, who donated from $1 million to $5 million, is also a board member of India’s second largest bank. In 2002, Mr. Mittal was involved in a British scandal when, shortly after making a large donation to the Labour Party, he gained the help of Prime Minister Tony Blair in his bid to convince Romania to sell him its state steel company.

All well and good for a couple of news cycles, I supposse.  But most large donors to charities do it for some kind of quid pro quo anyway, even if we chose to think otherwise.  In a few weeks, if not sooner, we will all sit down to watch "nonprofit" football bowl games sponsored by "nonadvertisers" who expect nothing in return (wink, wink!)  The obvious speculative answer to the title question is that the foundation may be selling influence or access, not accepting donations.  I suppose, then, that the foundation would be operating for a noncharitable purpose (selling lobbying services, for example) or conveying an improper private benefit.  That is, if it could be proven that Bill and Hillary somehow do the bidding of the Saudi government, for example, in return for the huge donations that the Clinton Foundation is so adept at reeling in.  Ah, so there is the rub.  What, pray tell, does private benefit really mean.  And when does a successful charity cross the line from charity to commercialism.  Our intrepid co-editor, John C. has penned more than a few articles delving into these questions and why, if at all, we should be concerned.  Alas, the deep structure of tax exempt law is still greek to most of us (except the people of Greece, to them it is American).  It would be a shame, though, if all the good work the Clinton Foundation does (like making AIDS drugs affordable in third world countries) were to be somehow besmirched over a fake media generated controversy.

dkj

More Excise Tax Fodder From Madoff Scandal

Seems pretty clear, at least by one case, that the Bernie Madoff (pictured below) ponzi scheme ought to generate some excise tax scrutiny.  According to Bloomberg.com, Yeshiva University lost about $110 million in investments:

Most of the lost money was invested through hedge funds controlled by J. Ezra Merkin (pictured at top, second from left), who was a Yeshiva trustee and chairman of the investment committee, the spokesman, Bill Anderson, said today in a telephone interview. The losses left Yeshiva, a 122-year-old private school that combines academic and religious education, with an endowment of about $1.2 billion.

So let's see here.  An influential member of the board of directors -- who serves as a member of the 501(c)(3)'s investment committee -- causes the charity to invest more than $100 million in that member's own investment firm.  Let's just assume that the obviously lucrative fees paid by Yeshiva to its own board member's firms were reasonable.  Still, I have argued elsewhere that tax law ought to recognize something called "joint venture private inurement." 

One might legitimately conclude that the universe of private inurement violations is divided solely between strict accounting and incorporated pocketbook private inurement. Strict accounting private inurement, representing the literal form, is closest to the statutory language, and even incorporated pocketbook private inurement can be made to fit within the literal prohibition if one thinks of unrelated transactions benefiting insiders as distributions of earnings in kind, rather than of cash. Those two forms of private inurement seem to exhaust the means by which an insider might violate the prohibition. The universe, though, includes a third form of private inurement not contingent upon an unfair or unnecessary transaction. This final category, which I call "joint venture private inurement," can occur even though the entity pays or charges an appropriate amount and even though the transactions are entirely appropriate and necessary to the accomplishment of the tax-exempt purpose. Instead, the violation occurs because the operations of the tax-exempt entity and an insider-controlled taxable entity are so closely related that the insider, by virtue of his interest in the taxable entity, financially benefits from the exempt entity's invariable consumer power. The taxable and tax-exempt entities are engaged in an implicit joint venture. As such, the exempt entity purchases all of its necessary commodities solely from the insider's for-profit entities or otherwise conducts its affairs through an insider's profit-making apparatus. Although serving an exempt purpose, the entity necessarily subsidizes individual profit making. Through the use of his taxable entity as an intermediary, the insider manifests himself as a parasite draining a portion of the entity's tax-exempt lifeblood whenever the entity receives a tax-free infusion. There occurs a synonymity of wealth such that private inurement is justifiably found even in the absence of a bad quantitative transaction or a systematic looting of the entity's assets.

The Scintilla of Individual Profit:  In Search of Private Inurement and Excess Benefit, 19 Va. Tax Rev. 620 - 622 2000).  Here we have not just a member of a public charity's board, but the dadgum chair of the investment committee, investing a large portion of the tax exempt monies in his own investment firm!  I am aware, of course, that traditional analysis prevents the occurrence of a private inurement or excess benefit transaction unless an insider is "skimming profits" and that the reasonableness of a payment logically precludes that conclusion.  I am also aware of the argument that the private benefit doctrine might be the better rationale to apply in this case.  The problem, of course, is that nobody knows what "private benefit" means.  The historical articulation requires that the benefit to a noncharitable person be so large relative to the organization's benefit to charitable beneficiaries that we can conclude that the charity is not really achieving a charitable purpose at all.  But that understanding is sufficient only when we are dealing with a contract between the organization and a stranger.  When we are dealing with an organization and one of its fiduciaries, the doctrine is insufficient.  When the organization deals with a stranger, the natural order of things means that there is little chance that some of the organization's funds will be skimmed off -- there is an opposing force (the charity itself) that limits the possibility.  When the organization is engaged with its own fiduciary, the idea that a little private benefit is ok morphs into an almost inevitability.  The insider who deals with himself on behalf of the organization ought to take a cut for himself (even if it is in the form of preferential award of an otherwise reasonable vendor or service contract) because the private benefit doctrine (as articulated above) allows it.  What is to stop the insider from investing in his own investment firm at fair market rates? 

The private inurement doctrine -- joint venture private inurement -- is better because it recognizes the inevitability of the conflict and eliminates the idea that we should balance the relatively insignificant harm to charitable beneficiaries (in this case $110 million) with the greater benefit to the charitable beneficiaries (however many billions Yeshiva spends on education and research).  It also recognizes that the insider has ultimately skimmed just like any other vendor who might have more blatantly overcharged the organization.  In this case, for example, an investment firm unrelated to the chairperson of the organization's investment comittee might very well have divested a long time ago when people started asking questions about the Madoff firm.  We need a legal doctrine that prevents (or at least imposes certain process on) even fair market value transactions between a public charity and its own insider.  I don't think the Exces Benefit Excise tax presently applies, but as we get out of the financial mess we are in, no doubt a whole host of regulaltions (or de-regulations) will be reconsidered.  We ought to more precisely define private inurement and excess benefit to take into account this sort of self dealing in the public charity sector.

dkj