Independent Sector Panel on the Nonprofit Sector
The Panel on the Nonprofit Sector, convened by Independent Sector, a national umbrella group in Washington, DC, has issued its “final report” to Congress on reform proposals made by the Senate Finance Committee staff in June 2004. Those proposals were voluminous—19 single spaced pages—and comprehensive, dealing with a vast number of issues relating to the operation of nonprofits of all kinds, including private foundations. The proposals produced reactions by nonprofits ranging from concern to consternation, and Independent Sector was asked by Senator Grassley, the Senate Finance Committee Chair, to convene a panel to offer a response to the proposals.
The Panel has been assisted by five “work groups” and similar entities in preparing its report. (See the Panel’s website at www.nonprofitpanel.org for the full report and for additional information about the workings of the Panel.) NPCC has been honored to have four members of its Government Relations Committee and one member of its board participating in the groups advising the Panel.
In our view, the report is a fine piece of work, even though it is unlikely that anyone will agree with all of the comments made in its 112 pages. It offers a thoughtful, specific and judicious response to the Senate Committee staff proposals. We urge you to review it and to consider “signing on,” as NPCC has done. Please note that you can sign on and offer comments and criticisms of anything you don’t like. We believe that widespread support for the report will be very helpful in focusing Congressional action along the lines recommended by the report. An absence of support inherently makes it easier for Congress to do anything it may want to do, a prospect we find disconcerting.
It is important to keep in mind that problems/issues in the nonprofit sector can be dealt with, basically, in one of three ways: (1) new legislation and regulations; (2) enforcement of existing laws and regulations; and (3) self-regulation by the nonprofit sector through various mechanisms, such as accreditation systems used by certain museums. NPCC’s general position has been that most evils identified about the nonprofit sector (and that includes donors as well as nonprofits) are already illegal and, therefore, enforcement of existing rules is the top priority. A study cited by Senator Rick Santorum noted that of 94 improper acts identified in the study, 92 were already illegal.
NPCC’s basic view is that the “bad guys” are undeterred by existing rules and so enforcement of those rules is what is called for (rather than imposing more rules that presumably the “bad guys” won’t obey anyway but that will impose significant compliance costs on the “good guys”). NPCC has also made the point that all the excitement about activities in the nonprofit sector does have the beneficial effect of raising awareness of nonprofits that are well-intentioned but ignorant as to how to function according to high standards of conduct. In addition, NPCC has been skeptical of the value on a cost/benefit basis of self-regulatory programs as applied to small nonprofits (the group making up the vast majority of nonprofits); we believe, however, that the self-examination now under way by the sector may produce some constructive proposals in this regard.
What exactly does the Report of the Nonprofit Panel say? First, it makes a major contribution by breaking down its recommendations into those directed at (a) Congress, (b) the IRS and (c) nonprofits themselves. (See pages 85-91 of the report.) Its first recommendation to Congress is to increase enforcement of existing rules and the new rules proposed by the report. Inherent in this is that enforcement of state laws be increased as well. Since improved enforcement of existing rules has been NPCC’s position from the start (i.e., provide more funds for enforcement), we warmly support this recommendation. We believe that vigorous enforcement will help strengthen public confidence in the nonprofit sector, because it will reduce the number of “bad guys” (the expectation that you will be caught is a deterrent) and therefore the public will feel more protected from the “bad guys” than is now the case.
The report also calls for a number of changes in the laws—largely technical in nature—that would help cut down on existing abuses. Although these changes would represent more rules to be complied with, NPCC basically supports them because they have been carefully selected to deal with what are inherently gaps in existing law. For example, rules regarding “donor advised” funds would be clarified and fleshed out in a constructive manner, as would rules relating to appraisals of gifts of property to nonprofits and the rules relating to participation in ”abusive” tax shelters. One such proposal that is, however, problematic in our view would impose penalties on board members who “should have known” that a transaction was improper. We don’t know at this point what “should have known” means, and we fear that individuals will be inhibited from serving on nonprofit boards for fear of liability and damage to their reputations. A recommendation we do support calls for Congress to require, in general, that “public charities” (though not “private foundations”) have at least one third of their board members be “independent,” which means, in essence, that they are not employees or otherwise sellers of goods or services to the nonprofit in question.
Importantly, the report specifically rejects the Senate Finance Committee staff proposal that nonprofits be required to file a special report every five years in order to retain their tax-exempt status. As many pointed out, current reporting already gives the IRS the information it needs to determine whether continued exempt status is warranted. Also, the report rejects the proposal that the IRS be authorized to require nonprofits to “report more detailed statements of program evaluations or performance measures.” This proposal has generated considerable angst/irritation in the nonprofit sector because it seemed likely to foster self-serving and thus not useful (but costly to prepare) material tending to show that the nonprofit was, to quote Lawrence Welk, simply “wonderful, wonderful.” Nonetheless, as there will be more and more public scrutiny of nonprofits’ Form 990s (especially via www.guidestar.org), it is important for nonprofits to put their best feet forward in preparing their 990s.
The report calls on the IRS to revise Form 990 to have it provide more information, to make that information easier to understand, and to increase penalties for failing to file complete and accurate returns. Among the recommendations is one calling on organizations that compensate their board members to “indicate the method used to determine the reasonableness of the compensation.” Another recommendation calls for a full breakdown showing compensation paid to officers and for disclosure of whether the “rebuttable presumption” procedures were followed in determining the reasonableness of the compensation. A key trend in these recommendations is to require disclosure of issues of concern rather than to mandate specific steps to be taken; for example, the report calls for nonprofits to indicate on Form 990 whether they have a conflict of interest policy and a travel policy, instead of simply requiring nonprofits to have such policies. Of course the effect on many nonprofits will be the same—they will feel that they are effectively required to have such policies. NPCC has a sample conflict of interest policy on its site (at www.npccny.org/members_only/goi44.htm) and will soon post a sample travel policy.
Finally, the Panel offers recommendations for nonprofits themselves to take to strengthen the sector. It calls for greater board oversight—e.g., annual review of Form 990 or Form 990PF (for private foundations) and “a full review” of “organizational and governing instruments, key financial transactions, and compensation policies and practices at least once every five years.” It calls for having individuals with some “financial literacy” on nonprofit boards. (NPCC has already begun a program with the New York State Society of CPAs to help nonprofits find such individuals.) The Panel makes other recommendations for oversight of financial matters that reflect the press’s near fixation on questionable compensation of staff and board members. NPCC does not disagree with this focus, as it is responsive to public concerns; it simply notes its view that the much more prevalent “abuse” in the nonprofit sector tends to be under-compensation, not over-compensation.
As part of its recommendations directed at the nonprofit sector, the Panel suggests sector-wide efforts to educate nonprofits about “abusive tax shelters,” the roles and responsibilities of board members, the importance of the auditing function and the need to address possible conflicts of interest.
For those interested in learning more, please see the full report at www.nonprofitpanel.org or review the full summary of its recommendations at pages 85-91.
Please note that the title of the Panel’s report as “final” is not quite right, as the Panel will be working in the coming months on possible recommendations regarding financial reporting and transparency, the legal framework for nonprofits, accreditation and standard setting, and improving governance and compliance. So, please stand by for further word.
The Panel’s look at the nonprofit sector is part of the biggest and most comprehensive review of the sector to occur since the 1960s. It is important to follow developments and to try to shape them to the extent possible as the outcome of this review is likely to be with us for decades to come. NPCC’s Government Relations Committee will continue to follow and report on developments and will try to shape those recommendations so that they are truly constructive for the sector and those it serves.
We welcome your suggestions to help us in that effort. Please send them to Jon Small at jsmall@npccny.org.
This article originally appeared in the August 2005 issue of NPCC's newsletter, New York Nonprofits. www.npccny.org