A Lukewarm Effort to Curb Abuses by Nonprofit Groups

Last fall Independent Sector, a coalition of more than 500 charities and foundations, assembled a committee of 24 nonprofit leaders to recommend to the Senate Finance Committee how best to curb abuses and increase the public accountability of nonprofit organizations. It also appointed five groups composed of an additional 175 nonprofit representatives to assist the main committee by delving at greater depth into topics such as board governance and financial management.

The deliberations of the nonprofit leaders have produced a timid, uninspired report, long on mild, safe suggestions for changes in federal regulations and proposals for self-reform, but very short on tough measures needed to stop the abuses and restore public confidence.

Perhaps the next phase of Independent Sector’s process, scheduled to produce a second report in June, will come up with a greater number of appropriate recommendations. But it shouldn’t take long to produce a stronger report, since solutions to most of the nonprofit world’s problems have long been under discussion.

The report released this month is more concerned with not increasing the administrative burdens on nonprofit groups and foundations than with assuring that those organizations fulfill their responsibilities to the public.

The report bends backward not to deal forthrightly with foundations, which have been a major source of the scandals that prompted the Senate Finance Committee to start investigating nonprofit groups and consider imposing tougher regulations on them.

For example, the report suggests cracking down on “self dealing” at foundations by increasing penalties that the Internal Revenue Service could impose on foundation officials, trustees, and others found guilty of using their positions to reap undue financial gains for themselves or their friends, relatives, or other associates.

The report ignores the only effective way to deal with the problem: closing the loophole in federal regulations that permits self-dealing and severely limiting the amount of compensation that trustees and executives can receive for services they provide to foundations.

Independent Sector’s report also ignores other steps that are essential to eliminating financial abuses among both foundations and nonprofit groups: placing strict limits on trustee fees; prohibiting or penalizing groups that pay for first-class travel for employees or trustees; imposing reasonable limits on spending on hotels, board meetings, and other foundation activities; and barring the purchase of airplanes and luxury cars.

In addition, while the report recommends that Congress tackle some of the problems that have led to abuses of donor-advised funds — which allow donors to put money into a charitable account and then direct it to their favorite causes — it fails to take a necessary step. It should have recommended that the funds be required to distribute at least the same 5 percent of assets, on average, that foundations must give, a recommendation strongly supported by the Senate Finance Committee.

The report also is too timid in its approach to conflict-of-interest policies. It does not require groups to adopt such policies; it simply suggests that nonprofit groups that have such policies be urged to say they have such policies on the informational tax returns they submit to the IRS.

The report also notes that the committee members had considered urging the IRS to disclose audit information and agreements made in cases where it had negotiated a settlement about tax liabilities with a nonprofit organization. But the report says the committee decided such disclosures could be overly damaging to charities and should remain confidential — a decision that undermines the public’s right to know.

Bowing to pressure from nonprofit groups that do not want to be overly burdened by regulations, the Independent Sector report recommends that only nonprofit groups with budgets of more than $2-million be required to undergo an annual financial audit, even though many states require nonprofit groups with budgets of at least $500,000 to commission annual audits, and sometimes even smaller groups are required to do so. Requiring all groups with at least $500,000 or $1-million would do far more to assure the public that nonprofit groups are financially accountable.

What is not in the report is almost as important as what is in it. The report fails to deal with the issue of excessive compensation at charities and foundations, as well as with such matters as improper fund-raising solicitations, questionable tax deductions for donations of property, conservation easements, and other noncash items and improvements to the Form 990 reports.

It does not weigh in on whether the IRS should periodically review the tax status of nonprofit groups, as the Senate Finance Committee’s staff members have suggested, nor does it discuss the lack of requirements for corporations to publicly disclose their contributions to charities. It says some of those matters will take more time and will be discussed in its next report.

The continuing news-media exposés of abuses by foundations and nonprofit groups call for more effective regulations and stricter oversight by federal and state regulators. No one can reasonably say any more that the problem is merely “a few bad apples.” The preliminary recommendations by Independent Sector are, unfortunately, grossly inadequate to meet the challenge of cleaning up nonprofit groups.

The process Independent Sector used to assemble the report may partially explain its lackluster quality. The 24 people appointed to the main committee that developed the report are not from a broad spectrum of charities and foundations, even though that is how Independent Sector has described them in its public statements.

Fourteen of the 24 represent grant-making institutions. None of the committee members represent a watchdog group or a local or grass-roots organization. By comparison, the Commission on Private Philanthropy and Public Needs, which was established in 1973 by John D. Rockefeller III and made many important recommendations to Congress and the public, was far more representative — even though many people at the time complained that the members of that panel did not adequately represent the concerns of grant seekers.

The five groups that are contributing their ideas to the 24-member committee are also not representative of the nonprofit world or of its critics; they are composed primarily of well-known lawyers and nonprofit and foundation executives.

Over the past four months, those groups met several times by phone, not the most effective way to hold serious discussions among 20 or more people. As a result, the meetings were largely driven by Independent Sector’s staff members, who offered little opportunity for the advisory groups to hear the views of people in favor of tougher regulations and enforcement.

The process will presumably end in June with a final report by the Independent Sector committee, by which time the Senate Finance Committee will probably have taken legislative action to crack down on nonprofit organizations.

For the process of producing a report that could be futile by the time it is released, Independent Sector has been seeking more than $3-million from grant makers. That is a lot of money, especially at a time when nonprofit groups are hurting financially and some have had to shut down.

For $3-million, it should be possible to produce more than a mouse of a report. The public deserves better.

Pablo Eisenberg, a regular contributor to these pages, is senior fellow at the Georgetown University Public Policy Institute and the author of Challenges for Nonprofits and Philanthropy: The Courage to Change, which was published in December by Tufts University Press. His e-mail address is pseisenberg@erols.com.