LEGISLATIVE AND PUBLIC POLICY ISSUES AFFECTING NONPROFIT ORGANIZATIONS
for the Texas Association of Museums Annual Conference
College Station, Texas / March 18, 2010
Prepared by Richard W. Meyer, Attorney at Law, Austin, Texas
Nonprofit organizations, large and small, play an important role in public life and are a growing force in the economy. With the growth of the nonprofit sector, government officials, regulators and elected officials increasingly thrust the activities of nonprofits into the public arena. Leaders and stakeholders in the nonprofit sector must identify issues that affect their welfare and sustainability and be prepared to take stands as opportunities or challenges are presented.
The Texas Association of Nonprofit Organizations (TANO) draws on its board, members, staff and stakeholders to monitor, analyze and take positions on a range of issues that affect nonprofit organizations. On the national level, TANO is the state affiliate of the National Council of Nonprofits (NCN). TANO’s representative participates in a monthly telephone conference meeting with NCN Washington staff and public policy coordinators from the various state affiliates. Richard Meyer represents TANO in public policy matters. Issues resulting from these efforts appear in parts I and II below.
In Texas, TANO monitors developments before the Texas legislature and various regulatory agencies. The 81st Texas Legislature ended in June 2009, and TANO is monitoring developments during the interim period before the 2011 session begins. Watch the TANO website (www.tano.org) for notice of evolving issues being discussed in the state government. For a summary of issues and review of activity in the 2009 Texas Legislature, go to “Public Policy and Advocacy”, then “81st Legislature 2009” on the TANO website. These issues appear in part III below.
I. 111th U.S. Congress and Federal Regulatory Issues
MORE IRS OVERSIGHT, NEW IRS FORM 990, AND IRS “BEST PRACTICES”: Year 2009 will require more comprehensive reporting by nonprofit organizations (NPOs) on the Form 990, including details about board governance. Small NPOs not required to file in the past must file the Form 990-N “e-postcard” online. The IRS has proposed its own idea of board “best practices” and appears to be getting into non-financial reporting and uncharted regulatory territory. Nonprofit boards and managers must pay close attention to these new IRS requirements. More: www.irs.gov/charities
PRESIDENT’S PROPOSED ROLLBACK OF THE CHARITABLE DEDUCTION RATE: The Obama administration’s 2010 federal budget again proposes a rollback (from 35% to 28%) of the charitable deduction limit for individuals in the 35% marginal tax rate bracket. Charities, foundations, fundraisers, planned-giving specialists and other stakeholders agree this would reduce gifts to charities and foundations from the segment of taxpayers who give a disproportionate share in a time of economic stress and decline in contributions.
NONPROFIT EMPLOYERS AND HEALTH CARE REFORM PROPOSALS: Most proposals in the U.S. Congress for health care reform or jobs-creation funding have neglected to recognize the large number of workers employed by nonprofit organizations and have failed to extend federal incentives to nonprofits to provide affordable health care coverage to their employees, or otherwise be part of the solution to this difficult challenge. The National Council of Nonprofits monitors these changing and complex proposals.
NEW ADMINISTRATION CONTINUES COMMITMENT TO FAITH-BASED INITIATIVES: After some uncertainty, the Obama Administration has continued Bush-era White House support of faith-based initiatives as part of federal social action policy. Now called the White House Office of Faith-Based and Neighborhood Partnerships, the office promises policy outreach (but little program funding) and has added a 25-member religious advisory council.
U.S. SENATE FINANCE COMMITTEE CONTINUES NPO INQUIRIES: Hearings hostile to the NPO sector begun in 2004 continue under the new Democratic chair, Sen. Baucus, with Sen. Grassley still pushing new inquiries as the ranking minority member. Much negative publicity would be neutralized by cooperating with NPO stakeholders; senators promise legislative reforms with benefits for NPOs. Always looming is the prospect that NPOs will be burdened with the same management standards, reporting requirements and legal liability that public corporations must satisfy under the Sarbanes-Oxley Act reforms.
NEW LOOK AT NONPROFIT EXECUTIVE COMPENSATION PRACTICES: Sen. Grassley believes the decade-old method of justifying nonprofits’ executive compensation procedures has not prevented abuses and needs review. The “safe harbor” presumption of reasonableness granted for following IRS rebuttable-presumption procedures may be modified, with more reporting by nonprofits. See Grassley press releases.
REPEAL OR REAUTHORIZATION OF FEDERAL ESTATE TAX: The federal estate tax expires in 2010, but returns in 2011 unless Congress enacts new tax rates or eliminates the tax. The President has indicated he supports retaining the tax at its 2009 rate with the 2009 exemption. Much NPO and foundation income depends on the estate planning environment and the tax benefits to donors and their estates. Related to this is Congressional reauthorization of the IRA charitable rollover donation option.
CONGRESSIONAL APPROPRIATION FOR NONPROFIT “CAPACITY BUILDING”: The “Serve America Act” (S. 277 / HR 1388) by Sen. Kennedy and Sen. Hatch passed in 2009 expands community service activities with a promise of federal funding to statewide and local charities. The act creates a social enterprise fund to create growth in capital markets for the social sector and possible funding for capacity-building for community and faith-based NPOs. As government looks to NPOs to meet challenging societal needs, a new generation of sustainable NPOs and their managers must be nurtured.
More: The National Council of Nonprofits has taken a lead in these discussions.
INCREASE AUTO MILEAGE RATE DEDUCTION FOR NPO ACTIVITIES: The IRS-permitted deduction for NPO-related or volunteer auto mileage is now $0.14/mile. The “GIVE Act” H.R. 524 (Rep. John Lewis) and S. 3032 (Sen. Schumer) would increase the deduction to the standard $0.55/mile and give a boost to volunteerism and NPO programs.
LEGISLATION TO GENERATE CAPITAL MARKETS FOR GROWING NPOs: Amendments to federal law would create a social investment fund network with public/private funding, permit foundations to expand program-related investment (PRI) funding to NPOs, “invest” in NPO ventures, and grow the private capital market players (banks) to better serve growing NPOs. Another proposal would permit NPOs to access the loan funds and advisory services of the Small Business Administration or similar new agency. Community Development Financial Institutions (CDFIs) are prepared to provide more investment and growth capital to NPOs.
PROPOSED CONSUMER FINANCIAL PROTECTION AGENCY AUTHORITY OVER NPOs: Consumer protections under Sen. Dodd’s proposal could affect NPO fundraising and financial literacy programs and require registration to solicit funds or conduct certain activities. Also, some think NPOs escape tough enforcement by the Federal Trade Commission when the public interest is not served and consumers are harmed. S. 2831 (Sen. Dorgan, 110th Congress) would give the FTC such investigative and prosecutorial authority.
Stakeholders in the NPO sector are concerned by these bills, which would alter the regulatory landscape of the NPO sector. The IRS is currently the enforcer of NPO misconduct along with the states’ attorney generals.
FIND A FEDERAL REGULATORY “HOME” FOR NONPROFITS: Should the IRS remain the primary home of regulatory authority over NPO activity, or should NPOs have a more appropriate place in the federal bureaucracy, like private business, the professions, educators, veterans, farmers, workers, and other groups? Alternatives proposed include a reconfigured Small Business Administration, the Corporation for National and Community Service, Commerce Department or new federal agency.
ADVOCACY RIGHTS OF NPOs AFFECTED BY LOBBY REFORM LEGISLATION AND SUPREME COURT RULING:
A barrage of lobby reform legislation and internal ethics rules enacted by the House and Senate inadvertently limit (and criminalize) traditional benign activities by NPOs in local communities and relations with elected federal officials and their staffs. Misperceptions of the permissible extent of advocacy rights of NPOs are common as they become more involved in public policy discussions. The recent decision by the U.S. Supreme Court in Citizens United v. Federal Election Commission re-opened this debate.
A popular condition imposed on federal grants is to prohibit funding to any NPO that engages directly or indirectly in any voter registration, education or mobilization activities, even with non-public funds.
FORMALIZE ROLE OF NPOs IN DISASTER-RESPONSE PLANNING AND PROGRAMS: High marks received by locally-based NPOs and faith-based groups have not eliminated the ad hoc nature of their relationship to government agencies, such as FEMA, in disaster scenarios. California and Louisiana have created cabinet-level agencies to institutionalize NPO roles and strengthen ties for future emergencies; beneficial funding may be available to NPOs through Homeland Security programs.
“L3C” – THE NEW LEGAL ENTITY FOR SOCIAL BENEFIT ENTERPRISES: Federal law may need to be amended to permit innovative business-type operations and investments by nonprofit social enterprises organized under state law as low-profit limited liability companies, or L3Cs. The Obama administration has promised a White House-based office of social innovation to encourage creative enterprises.
Definition of a SOCIAL ENTERPRISE—An innovative NPO that invests its resources to engage market opportunities, generate earned income, and become self-sustaining to fulfill its mission. More: see next item.
II. State Government Issues Affecting Nonprofits
STATES AUTHORIZE CREATION OF “L3C” CORPORATIONS: After much discussion on the national level, Vermont became to the first state to authorize doing business as a low-profit limited liability company (11 Vermont Statutes Annotated, §3001(23) and §3005(a)), and Michigan, North Dakota, Wyoming and Utah followed (with Maine and Illinois to be added in 2010). Called a “L3C”, the new kind of corporation preserves its nonprofit status despite its ability to generate limited profits from mission-related programs and operations, engage investors, share “profits” with investors or foundation PRI funders, and compete in the marketplace.
The L3C permits expansion of investment capital available from foundation-funded program related investments (PRIs) under IRC Secs. 4943, 4944, and 4945.
PRESSURE ON NPO EXEMPTIONS FROM STATE AND LOCAL TAXES: With tight budgets, state and local government taxing authorities everywhere are aggressively challenging traditional and unquestioned exemptions from state and local property taxes, sales taxes, and other laws that benefit NPOs. Tax agencies are finding creative ways to end tax exemptions or tax NPOs indirectly by requiring annual renewal of all exemptions, collecting a fee for exemption applications, enacting periodic “sunset” of all tax exemptions, monitoring of NPOs’ operations and use of their property or facilities and imposing user fees. State tax exemptions often vary from long-accepted IRS definitions of exempt charitable activity and assets. Legislatures in Kansas and Hawaii have considered eliminating nonprofits’ exemption from state sales taxes.
A recent Minnesota Supreme Court decision is shocking but typical: the court held that a nonprofit day-care center should lose its longstanding tax-exempt status because its rates charged to working families for child care were in line with those of similar commercial services in the community, despite its charitable mission to serve. (Rainbow Child Care Center v. County of Goodhue)
MULTI-STATE REGISTRATION AND REGULATION OF CHARITIES: Operations of NPOs that drift across state lines, or solicitation of charitable contributions on the Internet from citizens of other states, are the subjects of the current reciprocal multi-state regulatory alliance that some enforcers say is not working, primarily because a score of states have no central licensing or registration of charities that solicit funds from the public. Unless every state buys into a viable interstate enforcement scheme, charity regulators and state attorney generals maysuggest a nationalized (federal) solution to this issue.
The “Charleston Principles” provide guidance to NPOs concerned about enforcement actions from other states.
DISASTER RESPONSE PLANNING TO FORMALLY INCLUDE NPOs: State officials in California, Louisiana and elsewhere acknowledge the central role played by NPOs, volunteers and faith-based organizations in recent disaster relief efforts. NPOs will be recognized with cabinet-level agencies in state government, formalized roles in response planning, and possibly rewarded with funding for their participation.
“GREENLINING”–DIVERSITY AND TRANSPARENCY REPORTING: The California State Assembly (house) passed a bill (A.B. 624) in 2008 to require larger foundations to provide the state with diversity reporting (race, ethnicity, national origin, gender orientation) of foundation boards and staffs, and also similar data on the boards and staffs of the charities it supports or funds. Called “greenlining” by its advocates, the process met strong opposition and led to a compromise with the foundation community in which the state’s largest grant makers agreed to a set of multiyear grants “in the multimillion-dollar range” to help minority-led and grass roots groups and to provide leadership training to a “diverse pipeline” of nonprofit executives, employees and board members.
III. Issues in the 81st Texas Legislature, 2009 Regular Session
With every session of the Texas Legislature, numerous bills are presented that directly or indirectly affect the interests of nonprofit organizations. The following summary lists bills of interest and concern to leaders in the nonprofit sector in Texas during the 2009 regular session and takes into account the following factors:
Whether a proposed bill strengthens nonprofit organization viability under Texas law or unduly burdens or threatens their status; whether the legal liability of nonprofit board members, officers, staff or volunteers is increased; whether current “charitable immunity” and “good faith” legal protections remain in place; whether laws governing nonprofits are necessary, understandable and based on reasonable public policy concerns; whether nonprofit advocacy is protected; whether ongoing nonprofit organization operations and finances are complicated by new governmental regulations; and whether nonprofit organization disclosure and accountability requirements remain reasonable and balanced.
Bills in the 2009 legislature affected nonprofits in the following areas:*
• Amendments to the Texas Non-Profit Corporation Law, Chapter 22, Bus. Org. Code:
SB 2185 – HB 4515**: Section 501 (c)(3) nonprofits with annual gross revenues exceeding $50 million would have to purchase services using the state agency request for proposals purchasing methods in Subtitle D, Title 10, Govt. Code
SB 2186: Section 501 (c)(3) nonprofits with annual gross revenues exceeding $50 million that award college scholarships would have to provide detailed reporting to the Secretary of State regarding amounts, geographic distribution of awards, and personal information on recipients
SB 1196 – HB 1955: Requires certain nonprofit organizations in Harris County to comply with the state open records laws, have a board that reflects the diversity of the communities they serve, and make efforts to award its contracts in accordance with the historically-underutilized business (HUB) laws. See also SB 931, below, and HB 4512.
HB 4103 PASSED: Clarifies that a board management committee of a religious institution could be comprised of non-directors if the certificate of formation or bylaws so provide
Important note regarding Chapter 22, Business Organizations Code: Several years ago, the legislature revised the state’s corporations laws, including the Texas Nonprofit Corporation Act (formerly Article 1396, Texas Revised Civil Statutes). A four-year transition period ends on January 1, 2010, when all corporations must comply with the new Business Organizations Code (BOC). The Texas Nonprofit Corporation Law is now found in Chapter 22 of the BOC. Nonprofits established before 2006 or during the transition period may, in the normal course of business, have to revise certain official corporate documents (such as filings with the Secretary of State) to comply with the code references and terminology of the BOC. See www.sos.state.tx.us/corp/bocfaqs
• Amendments to charitable immunity statutes in Chapter 84, Civil Practices and Remedies Code:
HB 2787: Removes the immunity given to charitable organizations under Chapter 84 when the nonprofit is accused of negligent hiring, supervision or retention of an employee or agent that results in a sexual offense being committed against a person 18 years or younger who receives benefits or services from the organization
SB 1211: An audiologist or speech pathologist volunteering services would be protected from lawsuits, along with other types of volunteers now listed in Sec. 84.003(5) of the Civil Practices and Remedies Code. HB 3985 adds social workers to the list of exempted volunteer professionals. HB 1995 (PASSED) is similar but does not amend Chapter 84. Bills of this type add to a long list of professionals and volunteers who receive immunity from suit for acts related to their volunteer work.
• Exemptions from state taxes now extended to nonprofit entities:
HB 1402: A state select commission and a joint legislative tax review committee would each make periodic reviews of all state tax laws, including exemptions from taxes, and recommend changes to the legislature; the nonprofit sector would have to be prepared to defend all current exemptions from various state taxes
SB 2305 – HB 2319: Clarifies the sales tax exemption and definition of “occasional” sales or delivery for fundraising activity sales of qualified nonprofits that receive delivery of products from manufacturers or distributors and re-sell them to the public, regardless of the sequence of handling of the product(s)
HB 507: Sales at charitable fundraising events at a state school are exempt from state sales and use tax
SB 475: Property tax exemptions for a Sec. 501(c)(2) nonprofit (that holds property for the benefit of another qualified charitable corporation) are clarified
HB 831 – SB 564: Property used by nonprofit community business development organizations would be exempt from ad valorem taxation
HB 589: A charitable organization owning and operating a public radio station has its property and equipment exempt from property tax
There are numerous other bills pending that address various specific exceptions to property taxes, based on local situations or circumstances faced by nonprofit entities.
• Nonprofit board, officer, employee, volunteer and fundraising issues:
HB 1162 – SB 776 PASSED: Public collection boxes placed to accept donated goods would have to be clearly marked as to the nonprofit organization, if any, benefiting from the proceeds of the sales of collected items, or state that the goods will be sold for profit; door-to-door or mail solicitation of donated goods would require specific notices to the public. See Sec. 17.921 et seq., TEXAS BUS. & COMMERCE CODE, effective September 1. 2009.
HB 3525: Adds additional restrictions on telephone solicitations by law enforcement-related charitable organizations and mandates specific disclosures to the public that the donor will not receive any preferential treatment by any law enforcement officer if a contribution is made
HB 226: Requiring or compelling an employee to make a charitable contribution would constitute an illegal labor practice by the employer; written authorization required to withhold wages or otherwise require the contribution. HB 4014 would prevent public school teachers from being required or pressured to make a charitable contribution or attend a school-related fundraising event.
HB 4533: Would permit charitable poker runs as fundraisers by qualified charitable organizations and the award of cash prizes for the winning poker hand played at the end of the “run”
SB 918 PASSED – HB 2416: Clarifies that the Attorney General may be awarded its attorney’s fees and court costs in a suit brought alleging a breach of a fiduciary duty by a charitable entity. See Sec. 123.006, TEXAS PROPERTY CODE, effective Sept. 1, 2009.
• Public advocacy / Ethics Commission (lobbying) issues:
HB 723 – SB 1215: Former legislators would be forbidden from lobbying for two years, except if lobbying for nonprofit organizations, disabilities, and low-income advocacy groups, without being compensated. See also HB 2430 and HB 2089.
HB 2410: Increases the exceptions to the lobby regulation and reporting laws by defining numerous circumstances involving contacts with state officials that would not constitute lobbying
Important note regarding lobbying or advocacy activities before the Texas Legislature or state agencies: Understand the point at which lobbying or advocacy activities might require registration as a lobbyist with the Texas Ethics Commission: A person must register if that person either:
- Receives compensation or reimbursement of more than $1000 in a calendar quarter, not including reimbursement for the person’s own travel, food, lodging or membership dues, to lobby, or
- Makes expenditures of a specified type of more than $500 in a calendar quarter, not including expenditures for the person’s own travel, food, lodging or membership dues, to lobby.
“To lobby” means to communicate directly with any officer or employee of the legislative or executive branch of state government to influence legislation or administrative action. There is a special simplified registration category for persons representing IRS tax-exempt organizations. See www.ethics.state.tx.us or call (800)325-8506 for assistance and information.
• Nonprofit social service organization issues:
HB 492 PASSED: Requires a group of state agencies to designate a liaison official to improve partnerships with community and faith-based nonprofit organizations and strengthen state government initiatives with local nonprofits; sets up a task force under the Health and Human Services commissioner to advise the state on possible funding of nonprofit undertakings and capacity-building; and creates a state fund account to receive legislative appropriations. See Secs. 535.001 – 535.108, TEXAS GOV. CODE, effective May 30, 2009. The first task force hearings began in March 2010.
SB 159: Permits cities and counties to increase the minimum wage beyond the state and federal minimum wage. There are other bills to permit the increase of the state minimum wage.
HB 931: An applicant for a grant from a state agency would have to submit a minority impact statement on an approved form about the effect of the grant on minority and disabled individuals. See also SB 1196, SB 2186, above.
HB 671 PASSED: Adds nonprofits as a protected class under the Penal Code by permitting an enhancement (increase) in punishment ranges for a person convicted for theft from an IRS Sec. 501(c)(3) organization. See Secs. 31.03(f)(3)(B) and 31.03(h)(3), TEXAS PENAL CODE, effective Sept. 1. 2009.
HB 3704: Would require state agency purchasing agents to give preference in state purchases to buy “fair trade certified” goods to the extent they are available
HB 547: A person sued because of a complaint or report given to a government agency is entitled to have the proceedings abated until the outcome of the complaint is resolved by the government agency
HB 1338: Persons involved in filing a good-faith complaint with a government agency would be protected from groundless or harassing lawsuits by a party adversely affected by the complaint; a court could grant an expedited hearing on the case and dismiss it if the complaint had been brought in good faith
**Many bills have an identical “companion” bill in the other house, bearing a different bill number. Access bills, background information, and current status at Texas Legislature Online, www.capitol.state.tx.us
Ever-Growing “Best Practices”
“Best practices” are models for conduct and management prevalent in a field that others look to in evaluating an organization’s status. These include internal policies, voluntarily-adopted standards, professional practice and ethical standards, conditions in funding grants (government and private), accounting standards, trade association standards, insurers’ and lenders’ underwriting standards, media perceptions of right and wrong, and other commonly-recognized guidelines. Not always clear or binding, best practices when ignored can have the same negative impact on a NPO as a violation of law, negligent act, or other culpable conduct. When a government investigator, critic, “whistleblower” or investigative reporter examines the conduct of a nonprofit organization, they look first for any violation of law or government regulation. Finding none, they look next to non-compliance with the organization’s own internal governance documents (charter, bylaws, board resolutions). Finding none, they pore over the organization’s financial records and audits for irregularities. Finding none, they look next among perceived “best practices” that can easily be found, for any subject or issue, from numerous sources. No organization can have acted in compliance with the myriad of best practices floating about. Finally, there is an accusation to toss: the organization has failed to observe best practices!
*Many legislative and regulatory proposals have unintended consequences for nonprofit organizations. Legislators and their staffs are generally uninformed about the real operations of nonprofits.
*Most “reform” proposals mean more reporting, compliance and governance time and administrative expense for nonprofits. Nonprofits are judged harshly if administrative/operations expenses consume too large a percentage of their total budget.
*Volunteer board members and other good people must not be discouraged by lengthy, confusing or threatening governmental regulations that make service risky. Criminal penalties attached to reform legislation scare away informed and qualified leaders who otherwise might have served on a board.
* One size does not fit all – many “reform” proposals are intended to cure mis-steps by large nonprofits or national associations…but reforms often land hard on good people doing good work in local communities across America.
*The burgeoning social enterprise sector is composed of innovators and risk-takers who are investing in new ideas, new markets, and new forms of nonprofit operations based on a business model. These leaders should be given breathing room by government regulators.
*Complex governmental regulations will discourage start-ups and the efforts of good people with good ideas. True, there may be redundancies and duplications of nonprofit efforts in any community, but every successful and acclaimed nonprofit organization probably started with one person with one idea…and it grew and grew…and now serves the common good. All our efforts should be to that end.
© 2010 Richard W. Meyer, All Rights Reserved.