Nonprofit Law Prof Blog

The Virginia Supreme Court on Charitable Corporations as Trustees

We have been following the Sweet Briar College litigation and settlement on this blog (see here and here).  I thought readers might be interested in knowing precisely what the Virginia Supreme Court stated in its order leading up to the settlement.  First, let’s be clear on the context of the Virginia Supreme Court order.  This high court was considering an order of the circuit court (a lower court) that had granted in part and denied in part a motion for a temporary injunction, filed by the Commonwealth, to restrain the college from facilitating its closure during the legal proceedings. The state supreme court characterized the lower court’s order as having been based, “at least in part, upon the legal conclusion that the law of trusts cannot apply to a corporation.”  The Virginia Supreme Court called this conclusion of the lower court “erroneous.” Said the high court:

The law of trusts can apply to a corporation. Jimenez v. Corr, 288 Va. 395, 411, 764 S.E.2d 115, 122 (2014) ("When . . . a trust exists, it is not a separate legal entity being referred to, but a fiduciary relationship between already existing parties, be they real persons or other legal entities."); Restatement (Second) of Trusts § 96(1) (1959) ("The extent of the capacity of a corporation to take and hold property in  trust is the same as that of a natural person except as limited by law."); Restatement (Third) of Trusts § 33(1) (2003) ("A corporation has capacity to take and hold property in trust except as limited by law, and to administer trust property and act as trustee to the extent of the powers conferred upon it by law."); see also, e.g., Code § 64.2-706(C) (establishing rules governing the principal place of administration for certain "corporate trustee[s]"). The charitable, non-profit, or non-stock status of a corporation does not alter this legal principle. See Dodge v. Trustees of Randolph-Macon Women’s College, 276 Va. 10, 16, 661 S.E.2d 805, 809 (2008) (holding that Randolph-Macon Woman's College was not subject to the Uniform Trust Code because the College was not a trustee of a trust to which the Uniform Trust Code applies, and not simply because the College is a non-stock charitable corporation).

 

Accordingly, the circuit court erred to the extent it exercised its discretion in acting upon the motion for a temporary injunction based upon this erroneous legal conclusion.

What the Virginia Supreme Court ruled is not that a charitable corporation is necessarily governed by the law of charitable trusts.  Rather, the Court concluded that a charitable corporation can serve as the trustee of a charitable trust under state law.  The two are very different legal propositions.

 

 

JRB

King v. Burwell Approves of Tax Credits for Purchasers of Insurance through Federal Exchanges

The Supreme Court has issued its opinion in King v. Burwell today.  In a majority opinion authored by Chief Justice John Roberts (and joined by Justices Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan), the Court interpreted the Affordable Care Act (ACA) to provide tax credits to those who enroll in an insurance plan through a federal exchange in a state that has not established its own exchange.  The decision is of interest to the nonprofit health care sector for obvious reasons.  The decision is also of interest to legal scholars because of its non-reliance on the interpretation of the ACA offered by the Internal Revenue Service, the agency charged with administering the tax credit, and its emphasis on purpose and context as tools of statutory interpretation.  The remainder of this post discusses the opinion in more detail.

 

The Supreme Court majority opinion describes the precise issue as follows:

 

The issue in this case is whether the Act’s tax credits are available in States that have a Federal Exchange rather than a State Exchange. The Act initially provides that tax credits “shall be allowed” for any “applicable taxpayer.” 26 U. S. C. §36B(a). The Act then provides that the amount of the tax credit depends in part on whether the taxpayer has enrolled in an insurance plan through “an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act [hereinafter 42 U. S. C. §18031].” 26 U. S. C. §§36B(b)–(c) (emphasis added).

 

The IRS addressed the availability of tax credits by promulgating a rule that made them available on both State and Federal Exchanges. 77 Fed. Reg. 30378 (2012). As relevant here, the IRS Rule provides that a taxpayer is eligible for a tax credit if he enrolled in an insurance plan through “an Exchange,” 26 CFR §1.36B–2 (2013), which is defined as “an Exchange serving the individual market . . . regardless of whether the Exchange is established and operated by a State . . . or by HHS,” 45 CFR §155.20 (2014).

 

The plaintiffs in the case, residents of a state (Virginia) that did not establish its own exchange, did not want health insurance.  They argued that the federal exchange operating in Virginia failed to qualify under the ACA as “an Exchange established by the State,” and therefore they were entitled to no tax credit for the purchase of insurance.  Without the credits, now provided by Section 36B of the Internal Revenue Code, the plaintiffs’ cost of insurance would exceed eight percent of their income, and thus the ACA would exempt them from the ACA’s general mandatory coverage.  Under the IRS’s interpretation of the ACA, however, the exchange operating in Virginia was a state exchange under the ACA, and thus the plaintiffs qualified for the credit and were not exempt from mandatory coverage. As the Court observed, “[t]he IRS Rule therefore requires petitioners to either buy health insurance they do not want, or make a payment to the IRS.”

 

The Court first declined to defer to the IRS’s interpretation of the statute.  I reproduce the key language in full:

 

When analyzing an agency’s interpretation of a statute, we often apply the two-step framework announced in Chevron, 467 U. S. 837. Under that framework, we ask whether the statute is ambiguous and, if so, whether the agency’s interpretation is reasonable. Id., at 842–843. This approach “is premised on the theory that a statute’s ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps.” FDA v. Brown & Williamson Tobacco Corp., 529 U. S. 120, 159 (2000). “In extraordinary cases, however, there may be reason to hesitate before concluding that Congress has intended such an implicit delegation.” Ibid.

 

This is one of those cases. The tax credits are among the Act’s key reforms, involving billions of dollars in spending each year and affecting the price of health insurance for millions of people. Whether those credits are available on Federal Exchanges is thus a question of deep “economic and political significance” that is central to this statutory scheme; had Congress wished to assign that question to an agency, it surely would have done so expressly. Utility Air Regulatory Group v. EPA, 573 U. S. ___, ___ (2014) (slip op., at 19) (quoting Brown & Williamson, 529 U. S., at 160). It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort. See Gonzales v. Oregon, 546 U. S. 243, 266–267 (2006). This is not a case for the IRS.

 

It is instead our task to determine the correct reading of Section 36B.

 

The Court then found that the phrase, “an Exchange established by the State under [42 U. S. C. §18031],” is ambiguous.  Consequently, the Court concluded that it “must turn to the broader structure of the Act to determine the meaning of Section 36B.”  The Court rejected the plaintiffs’ statutory interpretation “because it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid.”  The Court further opined that the structure of Code section 36B supported its interpretation, for under the contrary view, “Congress made the viability of the entire Affordable Care Act turn on the ultimate ancillary provision: a sub-sub-sub section of the Tax Code.”  The concluding substantive paragraph of the majority opinion summarizes the decision as follows:

 

Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter. Section 36B can fairly be read consistent with what we see as Congress’s plan, and that is the reading we adopt.

 

JRB

How the Same-Sex Marriage Case Could Affect Religious Nonprofits

The New York Times has published a piece exploring how nonprofits could be affected by the pending Supreme Court decision in Obergefell v. Hodges, which raises the issue of whether the United States Constitution establishes a right to enter into a gay marriage.  The gist of the article is that private religious schools across the nation impose codes of sexual conduct, including prohibitions of same-sex relationships, and these schools fear that their policies could risk the loss of their federal income tax exemption.  Why?  If the Court recognizes a constitutional right to enter into gay marriage, the Internal Revenue Service could find school policies on sexual conduct to violate fundamental public policy under Bob Jones University v. United States. 

Although many legal scholars seem to doubt that schools would face this risk in the near term, the schools do have cause for concern.  As I have written and illustrated previously in two law review articles, the public policy doctrine is poorly defined and easily manipulated.  Further, the NYT article observes that, during oral argument in Obergefell, Justice Alito posed the question of how the decision would affect the tax exemption of private religious schools to Solicitor General Donald B. Verrilli Jr.  In an exchange that we previously covered on this blog, Mr. Verrilli admitted at oral argument that the exemption question “is going to be an issue.”

 

JRB

Skadden, Arps Requests Guidance on Taxation of Retirement Payments to Providers of Pro Bono Legal Services

As reported in Tax Notes Today (subscription required), Skadden, Arps has written the Assistant Secretary (Tax Policy) in Treasury and the IRS Chief Counsel to request inclusion in the 2015-2016 Priority Guidance Plan of published guidance addressing the tax treatment of retirement payments to retired law firm partners who provide pro bono legal services to the poor and to charitable organizations that serve them.  The following paragraph of the firm's letter explains the legal issue:

[T]he question is whether pro bono services provided by retired partners constitute "services with respect to [a] trade or business carried on by [the law firm] partnership," such that the retirement payments would no longer qualify for the exception to the definition of "net earnings from self-employment." Section 1402(a)(10(A) provides that if a retirement plan meets certain requirements, any payments made pursuant to that plan are excluded from a partner's net earnings from self-employment so long as, among other things, the partner "rendered no services with respect to any trade or business carried on by such partnership . . . during the taxable year of such partnership . . . in which such amounts were received." The issue raised by the Chief Judge's pro bono initiative focusing on retired partners is whether a retired partner who is currently receiving retirement payments that otherwise qualify for the Section 1402(a)(10(A) exclusion could be treated as "rendering services with respect to any trade or business" of the law firm partnership by taking on a pro bono legal representation that is connected to the law firm, whether it involves supervision of other law firm lawyers and staff, use of law firm resources (office space, computer and other equipment), and/or coverage under the law firm's malpractice insurance.

The letter argues that “uncertainty surrounding the tax treatment of the retirement payments presents a significant impediment to the retired partner's provision of pro bono services, thereby serving to discourage important pro bono work by retired law firm partners who would not otherwise be subject to self-employment tax on their retirement payments, but for their pro bono assistance to needy underserved individuals and communities.”  

Electronic Citation: 2015 TNT 121-18

 

JRB

Judge Approves Settlement in Sweet Briar College Litigation

We previously blogged about the legal challenge to the attempted closing of Sweet Briar College.  As reported in the Richmond Times-Dispatch, Bedford County Circuit Judge James Updike approved a mediated settlement to three lawsuits that had been filed to prevent the closing of the private women’s college. The story reports the following salient details: 

[Judge] Updike accepted three consent orders presented by Attorney General Mark R. Herring, whose office brokered a mediation effort that continued over nearly six weeks.

The orders, which take effect today, will allow the transfer of leadership to a new president and board of directors under a plan that requires the alumnae group Saving Sweet Briar Inc. to provide $12 million, with $2.5 million due by July 2.

Herring will release restrictions on $16 million from the college’s endowment, which he said will be a sufficient amount to operate the college for the next academic year.

 

According to the article, the new president of the school will be Phillip C. Stone Sr.

For a copy of the Memorandum of Understanding serving as the basis of the settlement agreement, click here.

 

JRB

Recent Articles on the Affordable Care Act

The Affordable Care Act (“ACA”) is in the forefront of newspaper coverage these days, with the United States Supreme Court set to decide in King v. Burwell whether enrollees in federal exchanges in states that have not established their own exchanges have subsidized insurance under the ACA.  The ACA directly and indirectly impacts a significant portion of the nonprofit sector, both its service providers (i.e., nonprofit hospitals and other health care providers) and its service recipients (i.e., health care consumers).  Several articles may interest readers.  One is an article published by the St. Louis Post-Dispatch, which discusses the consolidation of the health care industry (and its likely effect on pricing) wrought by the ACA.  Another article, this one from the Los Angeles Times, maps out the various legal arguments (e.g., textualism, administrative agency deference, and protection of states’ rights) that could sway Supreme Court justices as they decide the Burwell case.  Perhaps most interesting of all is a piece by Emily Bazelon, who, writing for the New York Times, takes a somewhat scholarly look at the role of empiricism and consequentialism in judicial decisions, and speculates how they might affect Burwell and other cases currently before the Supreme Court.

 

JRB

Full Text of WalMart Complaint

The Washington Post reported yesterday that a coalition of community groups filed a 22 page complaint against WalMart Foundation, essentially accusing the foundation of operating for private benefit rather than the public good:  From the Post article: 

More than a dozen community groups filed a complaint with the Internal Revenue Service Monday alleging that the Walmart Foundation violated its tax-exempt status by using charitable funds to advance the retailer’s entrance into urban markets including Washington.  The 22-page complaint, addressed to IRS Commissioner John Koskinen, details the retailer’s marketing and lobbying activities as it sought approval to open stores in New York City, Boston, Chicago, Los Angeles and other cities.  The groups allege that the foundation is completely controlled by the company and that it “appears to target its donations and influence its grantees primarily to assist WalMart to achieve those expansion goals, ultimately providing Walmart more than an incidental benefit. Walmart Foundation’s activities are impermissible under the Code.”

Forbes chimed in today with this article which includes a link to the full complaint:

Walmart has been forced to defend itself against allegations that its multi-billion dollar foundation has been using tax-exempt funds to help the retail chain expand into urban areas.  On Monday, more than a dozen community groups filed a complaint with the Internal Revenue Service alleging that the WalMart Foundation violated tax code by targeting its donations to cities where the big-box giant has faced opposition to its growth plans.  Data analysis of tax returns by these local nonprofits shows an uptick to the tune of millions in donations from the WalMart Foundation to organizations in Boston, New York, Washington D.C., and Los Angeles as WalMart pursued store openings in these cities.

What I found most curious and -- from a purist's standpoint, I suppose -- most disconcerting is the complaint's imprecise sort of casual discussion of private inurement and private benefit. Granted, I have only skimmed the complaint thus far but it seems the complainers are really just sorta casting a wide net and hoping to catch violations that might be lurking rather than making a strong case to suggest any real violations they know to exists.  Sometimes premature accusations made for the purpose of attention or sensationalism do more harm than good.  I can't help but wonder if this is a case in point. 

dkj

It’s a Trust! It’s a Corporation! It’s Sweet Briar College! (Part I)

One of my least favorite days in Nonprofits class is the day that we discuss the difference between trust and corporate fiduciary duties (Sibley Hospital, anyone?).  Lest one think that the distinction is purely academic, along comes the sad case of Sweet Briar College to reaffirm that this area of law remains completely and utterly confusing.

If you’ve not been following the story, Sweet Briar College’s operating entity is a “non-profit corporation” (Complaint, Para. 6) which was created by the Virginia General Assembly “to administer the trust created by the will” of its primary funder, Indiana Fletcher Williams.  The Complaint also asserts that SBC is a charitable organization under the Virginia Charitable Solicitation laws and is a “trustee” under Virginia’s version of the Uniform Trust Code.   (So I’m confused already….)

According to the Complaint, the provisions of Mr. Williams’ will place his residuary estate in a trust.  The trustees of that trust were instructed to create a corporation to run a women’s college in perpetuity.   It would appear that in 1901 in Virginia, a nonprofit corporate charter could only be obtained by act of the General Assembly, and so it was.   (Complaint, p. 17).   The corporate charter incorporated the terms and conditions of Mr. Williams’ will, which required the assets to be held in perpetuity for the women’s college and directed that the assets not be sold.

Fast forward to March, 2015, when the current Board of Directors of the college announced that it would close the doors of the college, and liquidate its assets, including its endowment (Complaint, p. 26)  due to the college’s poor financial condition.   Litigation, of course, ensued.

The Complaint alleges violations of the Uniform Trust Code, which it asserts is applicable not only the original funding of the College occurred through the trust under Mr. Williams’ will, but also because “the Act of the Assembly creating the College requires that the College be administered in the manner of an express or charitable trust” (Complaint, p. 55).  It then states, “Because the College is a charitable corporation, the assets held by Defendants are deemed to be held in trust for the public.” (Complaint, p. 56).  Among other things, the original Complaint requested a temporary restraining order and a preliminary injunction restraining actions in furtherance of closing the school.

So the question then becomes, Sweet Briar College a trust?  Is it a corporation?  Does it matter? Should it?  

More on this Nonprofit Law Prof Blog Cliffhanger next time….

EWW

Nothing But Sheet Metal to See Here... For Now.

You may have been following the FOIA lawsuit by Public.Resource.org, (a Section 501(c)(3) organization headed by Carl Malamud that is dedicated to open government) against the IRS. Public.Resource.org filed a FOIA request for information on the Sheet Metal and Air Conditional National Association (SMACNA) and its affiliated entities (the original complaint is here), but demanded that the IRS turn over the information in electronic format (not paper copy).  The IRS resisted, arguing that it was administratively burdensome and that the paper copies were sufficient.  In January of this year, however, the District Court ordered the IRS to turn over the electronic files of the requested Forms 990 within sixty days.

Sixty days came and went.  Appeals happened.  According to The Chronicle of Philanthropy, however, it looks like the IRS apparently finally released the SMACNA documents this week (the documents are here).   Of greater interest (not that sheet metal isn’t interesting, … I guess… ) is the article’s report that the IRS is dropping its appeal.  Given that Malamud wants the IRS to create a fully searchable database of all electronically filed Forms 990, I wonder what comes next?  Will the IRS voluntarily comply with electronic file FOIA requests?  In the process of responding to this law suit, did the IRS set up a procedure that could be replicated easily?  Are they going the full database route – according to the article, it appears that discussions are underway.  In the grand scheme of things, such a database would be very useful, but so would a great number of things administratively at the IRS.   After all, the IRS has so many spare folks sitting around with nothing to do…

As an aside, I wondered why the sheet metal folks drew the ire of Public.Resource.org – the backstory appears to be that Public.Resource.org investigated and sued the SMACNA with regard to the association’s efforts to have its standards incorporated into state and local safety codes.  

EWW

The Social Justice Role of Nonprofit Organizations in Capitalist Societies

Neoclassic thinkers describe nonprofit organizations in terms of "nondistribution constraint" and "market failure."  I beg to differ; nonprofits are better described in terms of distributive justice.  In various other places, I have tried to develop the idea that profit-seekers are amoral, at best, in the sense that profit seekers indulge the highest bidder without regard to anything else.  Profit cares nothing for social welfare, only exploitation.  Capitalist reject the label and resulting assertion.  They even more vigorously defend against being labeled "immoral" by arguing that "greed is good" essentially; that the search for profit makes life better for everybody who participates.  It is only the lazy -- defined as those who will not get up in the morning and go hunting for profit; in other words those who do not participate -- who get hurt in a capitalist system. 

There is no amorality or immorality in that because the lazy have only themselves to blame. But capitalism necessarily presupposes winners.  There can be no winners without losers.  There is something immoral, or at least amoral, about a system that demands that someone loses.  That's what underlies Rawlsian theory regarding optimal laws, which are laws we would adopt if we knew we would be losers in an ostensibly fair game.  If we economic actors knew ahead of time we were going to lose in a fair game, we would probably insist upon marxism over capitalism even if we also knew that societies would be worse off in the aggregate. 

Americans are taught that the Marxist creed -- "from each according to his ability, to each according to his need"-- embodies the real immorality since communism and socialism invariably stifle the human instinct for the responsible individual pursuit of "mo' better" (more and better) upon which the aggregate is dependent for advancement towards Utopia.  In the Capitalists' moral view, nonprofits' Marxists/Socialists tendencies are indulged only to ameliorate whatever lesser immorality (relative to the immorality in Marxists Socialists societies) exists in the capitalists "winner take all" societies requiring the presence of losers.  Remember, nobody can be rich unless someone is poor.  We create the poor by indulging the rich.  We offer riches to stimulate the individual pursuit of profit upon which the aggregate benefits.  Capitalists admit, in other words, that not only are the lazy hurt in a capitalist society; because of flaws (inherited wealth, fraud, cheating, discrimination, for example) which belie the idea of perfect competition, good faith participants are often wronged just like the lazy in a capitalists system.    Nonprofits exist to ameliorate the lesser moral failures inherent in a capitalists system operated by fallible human beings.  By providing "to each according to his need' but not demanding "from each according to his ability" nonprofits ignore but do not override the profit motive as the dominate driver of our existence.  They serve as recognition that the profit motive is morally superior to the sharing motive only to the extent that flaws in human behavior upon which the capitalist system operate can be eliminated.  Those flaws cannot be eliminated.  They can be punished or regulated by laws, but not eliminated. 

Three German economist are about to publish an article entitled "Nonprofit Organizations, Instutitional Economics, and Systems Thinking" in the journal, Economic Systems.  Here is part of the argument which seems to support the foregoing discussion: 

The relation between the societal effects of corporate power and the role of nonprofit organizations requires more elaboration, and indeed presents the key theme of this paper. The inspiration for this argument stems from both Galbraith's work and Kenneth Boulding's (1984) inquiry into “the ethics of economic organization”. Galbraith (1967) provided a rich and nuanced analysis of the degrading effects of corporate domination of society. In addition to undermining consumer sovereignty, these effects include neglect of the higher dimensions of life, such as social welfare, aesthetics and freedom. Stanfield and Stanfield (2011, p. 141) explain “the social predicament of the new industrial state” as follows: “industrial society embodies core tendencies that chronically undermine the quality of human life and threaten to acutely diminish it in a flash of military or ecological bedlam”. The contribution of Boulding lies in calling attention to a further important effect, namely the tendency of corporations to lower the relative status of certain social groups, most prominently workers and farmers. Boulding noted that the role of some nonprofits, such as labor unions and farmer organizations, is to improve the status of precisely these social groups. Put together, the arguments of Galbraith and Boulding suggest that the role of nonprofits can be more generally seen in compensating for the degrading effects of corporate domination of society. This view of nonprofits clearly differs from the neoclassical market failure approach and is free from the latter's limitations identified by Steinberg (2006, p. 129). The justification of this view will be the main aim of the present paper.

 

The paper's strategy is to embed the suggested institutional economics perspective on nonprofit organizations into a recent strand of the general systems theory associated with the voluminous work of the German sociologist Niklas Luhmann. Analyzing the regime of functional differentiation as a key attribute of modernity, Luhmann pointed out that the functional systems, such as the economy, law, and politics, tend to develop so much internal complexity that their continued self-reproduction (i.e., autopoiesis) in their respective environment becomes precarious. The present paper will show that Luhmann's ideas about the precarious relation between complexity and sustainability of social systems shed considerable light on the complementary societal effects of profit-seeking corporations and nonprofit organizations. In Luhmannian terms, the degrading effects of corporate domination of society exemplify the tendency of the functional system of the economy to overstrain the carrying capacity of the societal environment; the role of nonprofits is to improve the societal sustainability of this system. The following section summarizes the main thrust of the Luhmannian vision of complexity and sustainability of social systems. The rest of the paper builds on the institutional economics literature, particularly on Galbraith and Boulding, in order to apply the Luhmannian argument to the relation between profit-seeking corporations and nonprofit organizations.

The article is a fascinating read, I think.  It argues that profit-seekers simultaneously depend upon and destroy the dignity of [wo]man for the exact successes that lead to a better aggregate society.   Nonprofits help redeem that dignity and by doing so support the tracks upon which rats race to the betterment of society -- if one believes that profit may not be entirely "good" but is at least better than wholesale sharing; that is if one believes that capitalism is morally superior to Marxism. 

dkj

The Effect of Medicaid Expansion on Charity Care Costs

Let me just be honest about my biases.  I think it is absolutely shameful that 19 states, including Florida, have refused to participate in Medicaid expansion.  It's free money, for Christ's sake, you idiots! But I digress and I am supposed to be a scholar and speak in cold unemotional logic.  So let me restate my opinion in the language of a scholar:  Ahem . . . .  It's free money, for Christ's sake, you idiots!  Anyway, we have previously blogged about the early impact of the affordable care act on hospital charity care costs.  A more recent report by the Kaiser Family Foundation confirms the early trend:

Looking at particular cost items, charity care costs decreased 40.1 percent among hospitals in Medicaid expansion states compared to 6.2 percent in non-expansion states. However, another component of cost of care to the poor, Medicaid shortfalls – the difference between what Medicaid pays and the costs of treating Medicaid patients – increased 31.9 percent between 2013 and 2014. Shortfalls increased for hospitals in expansion states but were more than offset by increases in Medicaid revenue. Shortfalls increased more among hospitals in non-expansion states than expansion states and were not offset by increases in Medicaid revenue, possibly due to state cuts in provider reimbursement. Combining the decrease in charity care costs with the increase in Medicaid shortfalls, the net cost of caring for low income patients decreased among hospitals in expansion states, while these costs increased among hospitals in non-expansion states.

So let me get this straight.  The feds, using our tax dollars, will pay 90% of the costs of Medicaid expansion -- 100% until 2020.  Charitable costs will likely increase without medicaid expansion anyway, meaning we will pay for indigent care one way or the other.  But the nefarious nineteen (as I will call them from now on) don't want any of "Obama's stinking money."  Yeah, that'll teach us, alright!  We should remind the knuckleheads that Obamacare was based entirely on Romneycare!

dkj

 

Bright Lines Project Issue Political Activity Draft Regulations

We previously blogged on the efforts of the Bright Lines Project to come up with draft political activity regulations here and here.  Bright Lines continues the work with these draft regulations.  The latest draft, by the way is dated November 11, 2014.  Recent reports suggest the real draft regulations may issue sometime this month.   

dkj

China's "Foreign NGO Management Law" Continues to Spark Criticism

China's draft "Foreign NGO Management Law" continues to spark criticism that it is actually an effort to silence criticism of the central government.  The Wall Street Journal has run two recent articles, one of which states:

A Chinese draft law treats the entire sector of foreign nonprofits as potential enemies of the state, placing them under the management of the Ministry of Public Security.  To drive home the point, the law is being readied as part of a package of legislation that also includes a national-security law and an anti-terrorism law—and it contains similar language, according to Western legal experts who have studied the texts . . . Undoubtedly, the undercover operations of a few politically motivated nonprofits in China have complicated life for the vast majority offering philanthropic assistance.  Foreign nonprofits are widely viewed as a bridgehead for subversion. Intensely suspicious of any networked activity it doesn’t directly control, the government is especially wary of the grants they scatter that have allowed the domestic NGO sector to flourish. In a preamble, the draft law says its aim is to protect the “rights and interests” of foreign NGOs while “promoting exchange and cooperation.” But it piles on new layers of bureaucracy. Nonprofits will have to pay tax and hire Chinese accountants to conduct regular audits. They will have to go through approved agencies to hire staff and recruit volunteers. To enforce compliance, police will have unchallenged rights to enter offices, seize documents and inspect bank accounts.

The International Center for Not for Profit has a very use primer on Chinese NGO laws.  

dkj

The Wall Street Takeover of Nonprofit Boards

Garry Jenkins has an interesting piece in the Stanford Social Innovation Review regarding the growing presence of capitalist minded people, particularly those from the Wall Street Finance sector, on Nonprofit Boards.  I have, in the past, argued that the Service should allow exempt organizations greater flexibility to use profit-seeking approaches in the pursuit of the charitable goal.  The danger has been that the more an exempt organization looks and acts like a for-profit, the more vulnerable it is to the argument that it ought to lose its tax exemption, perhaps under the commerciality doctrine.  But lately, I have had to rethink my belief that for profit and non-profit motives can actually live as happy neighbors in the same charitable neighborhood.  That rethinking was prompted mostly by the absolute mess at the Charleston School of Law, (I want to use that for context in a later post about the interplay between for profit and nonprofit motives in a social enterprise) where apparent profit-seeking influences have all but destroyed what originated from altruistic motives.  Jenkins explores the longstanding pressures on nonprofits to "get that money" by adoption of for-profit processes.  Here are the first few interesting paragraphs:

Over the past twenty-five years the composition of the boards at some of America’s most important nonprofit organizations has dramatically changed. Without much notice, a legion of Wall Street executives (investment bankers, hedge fund managers, and others) has taken a growing number of seats in nonprofit boardrooms. Not only that, they hold a disproportionate share of the leadership positions on these boards.

 

One of the obvious reasons for this shift is undoubtedly the pressure that nonprofit organizations are under to raise more private funds. After all, given the significant growth in personal wealth generated by those working in high finance, it shouldn’t be too surprising to find more of them on nonprofit boards. A more subtle reason for the growth of financiers on nonprofit boards is likely the growing popularity of using business approaches (and talent) to run nonprofit organizations.

 

Since 2008, when Matthew Bishop and Michael Green popularized the term “philanthrocapitalism” to describe a new trend of donors seeking to conflate business aims with charitable endeavors, the nonprofit sector has engaged in active interrogation and discussion about the trend and its effect on public charities. Scholars and practitioners have documented various pressures placed on nonprofit organizations by donors and private foundations to adopt business approaches.

 

Although some of the pressure to adopt business approaches has come from external forces, it may also be true that the concepts and norms of philanthrocapitalism are also now carried into nonprofit organizations by the directors of public charities themselves. Perhaps a new fault line to consider is the very makeup of the governing boards of nonprofit institutions.

 

To understand the ways in which the composition of nonprofit boards has evolved in recent years, my research team and I examined the biographies of governing directors in 1989 and 2014 of three sets of nonprofit organizations: major private research universities, elite small liberal arts colleges, and prominent New York City cultural and health institutions. The most striking finding was the sizable presence and growth on charitable boards of those whose primary professional background and skill set were drawn from the financial services industry. The tally indicates that the percentage of people from finance on the boards virtually doubled at all three types of nonprofits between 1989 and 2014.

 

More striking, the data reveal that finance professionals hold an even greater percentage of nonprofit board leadership positions (i.e., board chair, vice chair, or their equivalent). In the case of liberal arts colleges and New York City nonprofits, financiers make up 44 percent of board leadership positions, and in the case of private universities they hold 56 percent of leadership slots.

 

Of course the social sector, especially the largest and most powerful nonprofit organizations such as those represented by the three types of institutions studied, has long populated its boards with men and women of wealth and professional backgrounds tied to the corporate world. Indeed, it is not unusual for many (although not all) of such members to have the capacity to contribute substantial resources, especially those from business and industry. What’s new is the increased concentration of directors drawn from one narrow sector of business and industry: finance.

 

This quiet yet dramatic self-transformation of the nonprofit boardroom has come about with little notice and discussion. To understand fully these trends and the impact, the nonprofit sector should ask itself some tough questions: What is sparking these changes in board composition? What values are being represented and promoted? What are the consequences for organizations and the people they serve? How might they affect the quality of board governance? How might the sector respond?

 

This article begins to shed light on the increasing influence of the finance industry on nonprofit boards. In addition to examining the data, it explores some of the explanations and consequences of these prevailing governance composition choices—and they are choices—that deserve attention and reflection from nonprofit leaders, trustees, and constituents.

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