Nonprofit Law Prof Blog

Where Did the Billions in Federal COVID-19 Funds to Schools Go?

In prior scholarship, I have addressed how the specific metrics used in the impact investing sector may be used to measure and report social good in the charitable sector to increase transparency and accountability about how donated funds are used.  The issue of incomplete reporting in the nonprofit sector is highlighted in a recent ProPublica article about the shortcomings of reports by state school districts on how they have used federal aid funds disbursed to remedy educational fallout from the pandemic.  Specifically, the ProPublica article addresses the gap between federal governmental aid to schools during the pandemic and measurable results from state school districts.  According to the article, the federal government gave around $190 billion in aid to help schools reopen and to address the effects of the pandemic.  In the year and a half since school doors were closed to millions of children, the Education Department has done only limited tracking to determine how the funds were used.  As a result, Washington, D.C. is in the dark about the effectiveness of the aid, especially in terms of those communities that have struggled the most during the pandemic.  

State education agencies were required to submit provisional annual reports to the federal government.  However, their reports only utilized six very broad categories, including technology and sanitation, to disclose how funds were used.  ProPublica analyzed more than 16,000 of such reports for the period March 2020 to September 2020 and found that billions of dollars were categorized as funding “Other.”  For example, some of the largest school districts in the country categorized all of their aid under the “Other” category, including Los Angeles Unified, which spent $49.5 million, and New York City’s schools, which spent $111.5 million.

ProPublica points out that since there is not a centralized and detailed federal tracking system, monitoring of how the relief funds given to over 13,000 school districts has been up to individual states.  Some school districts have expended the funds in a way that it is not at all consistent with the federal aid program, such as by using the funds for track and field facilities and bleachers.  The article cited both a school district in Iowa (Creston Community School District) and one in Pulaski County, Kentucky as engaging in such spending.

Importantly, the federal aid program delineated at least one very clear goal.  The funds were to be used to re-open schools to maximize in-person learning.  Broadly speaking, the funds were to be used to address the impact of the pandemic.  There have been numerous articles that have detailed the educational and emotional fallout from remote learning.  It is surprising to learn that there have not been directed efforts to help students make a smooth transition back to in-person learning and to recover from any lapses in their educational and/or social, emotional development as a result of the pandemic.  Instead, for example, in Texas, the McAllen Independent School District spent $4 million of its relief funds to build a 5-acre outdoor learning environment associated with a local nature and birding center owned by the city.  Although the concept may be a good one in theory, it fails to address  “the urgent learning needs of children who have been directly impacted by the pandemic.”  Critics have pointed out that the outdoor area will not even be completed before 2024, so half of the children there will not benefit from the outdoor center at all. 

Perhaps it is not too late for school districts to make the right choices in terms of spending federal aid.  Although most of the aid was dispensed from March 2020 to March 2021, the school districts have until 2024 to budget how the funds will be utilized.  Given the federal government has started to request basic information from states about how their school districts have used their funds, hopefully, the school districts will re-calibrate their spending and set forth goals consistent with the overall aim of the relief program. 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law, Tulane Law School

Requiring Private Schools to Have More Diverse Boards

In prior posts, I have examined the problem of racial discrimination in private schools and how tax-exempt law might address this systemic problem.  Today, I wanted to explore race issues that are present in tax-exempt law more broadly.  Ideally, examining the issue from a broader perspective will produce creative ways of addressing racial discrimination in private schools.

A great primer on race issues and tax-exempt law is the 2004 article entitled Race and Equality Across the Law School Curriculum: The Law of Tax Exemption by David A. Brennen.  As Brennen observes, race bias in terms of tax-exempt law is focused on the justice or injustice in regard to blacks of the statutory requirements to gain and keep tax-exemption.  One of the main advantages of pursuing an activity through a tax-exempt organization is that such activity may be funded through public and governmental financial support, namely through tax expenditures.  In other words, tax-exempt organizations receive a financial subsidy or financial benefit from the government by virtue of their tax-exempt status.  Brennen asks a poignant question: “How should the government allow tax-exempt organizations to use this indirect, but admittedly financial government/public benefit?”  Accordingly, he next turns directly to an examination of the Bob Jones University public policy doctrine and its implications for racial preferences of tax-exempt charities. 

At the same time, Brennen raises at least two distinct issues aside from the public policy doctrine that are relevant to tax-exempt private schools.  First, he queries whether a charity (such as a private school) should be required to have a racially diverse board of directors if indeed it is to represent the broad community that it claims it serves.  This makes sense because one of the conditions for receiving tax-exempt status is to show that the organization will benefit the public broadly, rather than a group of pre-selected individuals.  Second, Brennen considers whether the prohibition on tax-exempt social clubs’ engaging in racial discrimination should be expanded or revised.   (As an aside, a third interesting point that Brennen raises is how restrictions on political activity might affect tax-exempt charities that have historically served as a meeting ground and voice for the black community, such as black churches).   One must conclude as Brennen does that it is important to examine how certain laws are affecting different racial groups with an eye to possible correction.   His solution of requiring board diversity in the context of tax-exempt private schools is one worth noting.

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law, Tulane Law School

Study: Attendance Hemorrhaging at Small and Midsize US Congregations

An article in today's Religion News Service reports that the most recent round of the Faith Communities Today survey (FACT), found a median decline in worship attendance of 7% between 2015 and 2020. What is also quite interesting is that the survey period ended before the onset of the COVID-19 pandemic.

The new survey of 15,278 religious congregations across the United States confirms trends sociologists have documented for several decades: Congregational life across the country is shrinking.

According to RNS, 

The survey, fielded just before the coronavirus lockdown, finds that half of the country’s estimated 350,000 religious congregations had 65 or fewer people in attendance on any given weekend. That’s a drop of more than half from a median attendance level of 137 people in 2000, the first year the FACT survey gathered data.

Scott Thurman, director of the Hartford Institute for Religion Research and the survey’s author, had this to say: “The dramatically increasing number of congregations below 65 attendees with a continued rate of decline should be cause for concern among religious communities.”

Produced by the Hartford Institute for Religion Research, the FACT survey consists of self-reported questionnaires sent out to congregational leaders every five years since 2000 — mostly through 20 collaborating denominations and faith traditions. According to RNS, the most recent survey found that mainline Protestants suffered the greatest decline over the past five years (12.5%), with a median of 50 people attending worship in 2020. Evangelical congregations declined at a slower rate (5.4%) over the same five-year period and had a median attendance of 65 people at worship. Catholic and Orthodox Christian churches declined by 9%. The only groups to boost attendance over the past five years were non-Christian congregations: Muslim, Baha’i and Jewish. 

The survey found that half of the nation’s congregations were in the South, even though only 38% of the U.S. population lives there. It also suggested that small congregations in rural areas and small towns may be unsustainable. Nearly half of the country’s congregations are in rural areas (25%) or small towns (22%), while the 2020 census found that only 6% of Americans live in rural areas and 8% in small towns.

One bright spot in the study is this: Congregations are becoming more racially diverse. In 2000 only 12% of congregations were multiracial. In the latest survey, the figure climbed to 25%.

The survey defined multiracial congregations as those where 20% or more of participants are not part of the dominant racial group.

Many researchers are now investigating if racial diversity also equals integration in relationships — or if people are simply attending church together. Previous research has also found increased diversity is one-directional.

“It’s still in the direction of predominantly white churches becoming less predominantly white, said Chaves. “It’s very little in the other direction. There’s not a big increase in diversity in predominantly Black churches.”

Professor Vaughn E. James, Texas Tech University School of Law

 

Nonprofits Struggling to Meet Service and Organizational Demands During Pandemic

A special report published in yesterday's NonProfit Times revealed that more than half (53%) of nonprofits have had greater demand for their services during the COVID-19 pandemic, and one-third are experiencing higher operating costs. Indeed, four in 10 nonprofits have cut operating costs, and one-third have pared back programs or services. 

The Times' report cites to the 2021 Nonprofit Leadership Survey Report from Grassi Advisors & Accountants. According to the report, cutbacks hit smaller nonprofits harder than larger ones, with 48% of those having costs less than $5 million experiencing cutbacks, compared with 37% of those with expenses in the $5 to $25 million range and 36% with costs greater than $25 million.

Nonprofits have explored a variety of cost-cutting and revenue-supplementing activities. Slightly fewer than one-quarter (23%) have renegotiated leases and other contractual financial obligations. Some 7% have terminated automatic payments and 15% have increased their draws on their endowments. And, 5% merged with another nonprofit during the past year.

Human capital is also being affected. Nearly one-third of nonprofits had layoffs and furloughs, while 12% reduced employee benefits. Two in 10 are operating under a hiring freeze.

Nonprofits are experiencing great difficulty in locating volunteers to make up for their lost employee time. According to the report, 22% report challenges recruiting and managing volunteers. Given COVID concerns, this is not surprising. More than two-thirds (68%) of nonprofits have at least some staff that work in close physical contact with the populations they serve. Officials at nearly that many (63%) said the outbreaks had been at least somewhat of a problem for them.

In more bad news, notwithstanding their cost cutbacks, nonprofits are not on steady financial footing: A mere 2% report having at least 12 months of liquidity, with officials at roughly one-third indicating they have fewer than three months, between four and six months or between seven and twelve months of liquidity.

The Times continues:

[W]hile fewer than half (47%) report drops in funding, that level is likely due to Paycheck Protection Program loans and other federal relief programs. Another quarter said their funding had remained steady, while only 26% reported funding increases.

Working capital lines of credit offer only finite hope for nonprofits. Overall, 63% have access to this resource while one-third do not. And of those with this resource, 27% have availed themselves of it during the past 12 months.

Nonprofits aren’t being static in the face of COVID-related challenges. More than seven in 10 (71%) implemented new technologies during the past year, although many of these likely were in support of remote or home-based staff. Another 42% created new programs and services, while 36% launched new collaborations with other organizations.

Nonprofit managers also used the pandemic as a time for organizational self-reflection: 22% began to target and serve new client populations, 22% renewed their mission statements and 12% changed their mission.

Looking to the future, The Times -- and the report from Grassi Advisors & Accountants -- opine that to be successful, nonprofits will need

Funding, funding, funding. While 60% said their top priority was attracting [and] retaining qualified people, the next three priorities bunched revenue concerns, with 56% seeking improved fundraising, 55% indicating a pressing need for more funding for overhead costs, and 54% citing the need to stabilized revenue and cash flow.

For many, however, the future will look different. Currently 43% are considering working collaborations with other organizations to deliver their services, and 21% are mulling a merger. Two percent say closure is a possibility, and barely over half – 54% – indicated none of these options are on the table.

Things certainly look different for the future.

Prof. Vaughn E. James, Texas Tech University School of Law

 

  

 

 

New Paper: Information Acquisition, Inventory Levels, and Tax Incentives for Charitable Giving

A new paper entitled Information Acquisition, Inventory Levels, and Tax Incentives for Charitable Giving by Anil Arya, Tyler Atanasov, Brian Mittendorf, and Dae Hee Yoon looks at benefits enhanced inventory charitable giving incentives provides to firms. Bottom line: enhanced deductions for donating inventory ensure corporate giving is about much more than publicity and can help facilitate more economic efficiency, for consumers & charities alike.

The Abstract reads as follows: "Many of America’s top corporate donors share a common feature: the bulk of their giving is in the form of in-kind products, not cash. This phenomenon is not a coincidence but rather a result of the tax code creating such a preference due to an “enhanced” deduction for inventory donations. In this paper, we utilize a parsimonious model of inventory choice under uncertainty to demonstrate that enhanced tax deductions not only promote giving, they also promote better learning of consumer demand for products in the retail market. An inventory stockout curtails a firm’s learning of precise consumer demand since the firm’s sales volume only reveals that the underlying consumer demand exceeded the inventory level. Tax incentives for donations of excess inventory encourage a firm to boost its inventory stocks which, in turn, boosts the firm’s learning of consumer preferences. Accounting for this informational role of tax incentives, the paper derives charitable giving patterns, socially-beneficial tax policy, and firms’ information acquisition choices."

Philip Hackney

WBEZ and the Chicago Sun-Times

WBEZ, Chicago's NPR station, is reporting that its board of directors approved a "non-binding letter of intent" to pursue the acquisition of the Chicago Sun-Times, one of two large legacy newspapers in Chicago.

The Sun-Times has, like many newspapers, been facing financial difficulties over the last couple decades. It filed for bankruptcy about a dozen years and has changed hands a few times since then.

As best I can tell from the article, the Sun-Times would continue as an independent organization, but would join WBEZ as a nonprofit, tax-exempt organization.

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