Oregon Now Requires 30% Program Spending

Thanks to Lloyd Mayer for pointing me to new legislation in Oregon that will disqualify state charitable contributions to organizations that spend less than 30% of their functional expenses on charitable programs.

H.B. 2060 was signed into law by Governor Kitzhaber on June 4, 2013 and goes into effect 91 days after the 2013 regular session of the Oregon Legislative Assembly ends. Specifically, the Oregon Attorney General can disqualify an organization from receiving state income tax deductible contributions if

the organization has failed to expend at least 30 percent of the organization's total annual functional expenses on program services when those expenses are averaged over the most recent three fiscal years for which the Attorney General has reports containing expense information. The calculation of program services expenses and total functional expenses shall be based on the amounts of program services expenses and total functional expenses identified by the organization in the organization's Internal Revenue Service Form 990 return or other Internal Revenue Service return required to be filed as part of the organization's report to the Attorney General.

Oregon H.B. 2060, Section 2(1) (emphasis added).  There is an appeal procedure that would allow the charity to show that payments were made to affiliates, were being accumulated for capital campaigns, or  "such other mitigating circumstances as may be identified by the Attorney General by rule."  Section 2(2)(c).  A disqualified charity is required to notify its donors that donations to it are not deductible.  Interestingly, a disqualification order may not be issued to "an organization that receives less than 50 percent of the organization's total annual revenues from contributions or grants identified in accordance with Internal Revenue Service Form 990 or an equivalent form" (fee for service charities, rejoice!)  Section 2(4)(g).  The legislation can be found here.

There are a number of issues that first came to mind when I read this legislation.  

• The first, of course, is the fallacy that a certain level of  "program service" expenditures  is an appropriate indicator of a charity's effectiveness.  Even if it were an appropriate measure, why set it at 30%?  Why exempt fee-for-service charities?  Why exempt small charities?  (On this topic, see GuideStar, BBB Wise Giving Alliance, and Charity Navigator on the “Overhead Myth”).
• At least in the short term, this legislation punishes the wrong party - a charity's donors - by disallowing the state income tax charitable deduction.   It does appear to also take away the ability of the charity to be tax exempt and, of course, in the long term, the charity's donor base could essentially disappear. 
• Along those same lines, I am concerned that you could have a charity that is disqualified due to a temporary blip in financials and is then required to send a donor notice.  Even if that charity is subsequently rehabilitated, it is permanently damaged.  The state has now devalued one of the charity's most valuable assets: its donor list.   The Oregon Attorney General's press release talks about targetting bogus charities - I'm not convinced initially that its scope will be so limited.
• Finally, as is pointed out in this commentary by Nonprofit Quarterly, the error rate on preparing the Form 990 is ridiculously high.  I am somewhat troubled by the assertion by the Nonprofit Association of Oregon that organizations that make a reasonable attempt to allocate expenses won't get caught in this trap.  In my experience, even sophisticated clients with paid accountants regularly misstate program service expenditures.  (I note that the Nonprofit Association takes the position that only full Form 990 filers (not N or EZ filers) would be affected by the legislation.)

Thoughts, especially from our Oregon friends?  EWW