October 14, 2004 | Read Time: 4 minutes
California’s governor, Arnold Schwarzenegger, has signed a controversial bill that will change the way many
nonprofit organizations manage their finances and how they seek contributions within the state.
The new law takes effect on January 1, 2005.
The law, which was based on recommendations by California Attorney General Bill Lockyer, was designed to tighten financial management and governance of charities and prevent fund-raising abuses by nonprofit organizations.
The California Association of Nonprofits, a group that represents more than 1,700 organizations, and others had opposed the proposal, saying the measure would make unnecessarily extensive and complicated changes to current law and be especially burdensome for small charities (The Chronicle, September 16).
The law will apply to nonprofit groups that must register with the California attorney general’s Registry of Charitable Trusts, but it will not affect groups that are exempt from registration, such as schools, colleges, universities, hospitals, and some others.
Financial Management
The law has provisions on accountability that are similar to requirements in the federal Sarbanes-Oxley law, which governs publicly traded companies. The California statute will require charities with annual gross revenue of $2-million or more to prepare financial statements audited by independent certified public accountants. Charities of that size will be required to have audit committees appointed by their boards of directors. Subject to the supervision of boards, audit committees will be responsible for recommending the hiring and firing of auditors.
Boards (or board committees) of charitable organizations of all sizes will have to review and approve the compensation, including benefits, of their top officials “to assure that it is just and reasonable,” the law says.
The California statute will also require that charities and their commercial fund raisers follow new procedures. For example, charities will have to register with the state within 30 days of first acquiring assets, rather than the six months allowed under the old law. Commercial fund raisers will have to keep records from solicitation campaigns (including the date and amount of each contribution received) for at least 10 years. Commercial fund raisers will be required to turn over control of donated money to charities within five working days of receiving it.
Concerns About Measure
In a statement to lawmakers provided at the time he signed the legislation, Governor Schwarzenegger made clear that he had concerns about the package of provisions.
“I am signing Senate Bill 1262 with the understanding that while I support transparency, accountability, and curbing unscrupulous activities, I encourage the Legislature to ensure the nonprofit community is not subjected to needless bureaucracy, thereby potentially hampering the work and contributions made by nonprofits who are serving California communities in need,” the governor wrote. “If this bill results in unnecessary expense to the nonprofit community, I encourage the Legislature to revisit this issue.”
In a statement, the California Association of Nonprofits said that it was disappointed that Mr. Schwarzenegger signed the bill.
“Nevertheless, we are pleased that the governor in his signing message encouraged the Legislature to take a careful look at the costs of this bill,” the association said. “We hope this evaluation will be the first step toward more careful analysis of the outcomes and impact of the laws governing nonprofit behavior.”
The association added: “In addition to the fiscal burdens highlighted in the governor’s message, we remain concerned that Senate Bill 1262 sets a dangerous precedent, detailing the composition and operations of nonprofit boards of directors, dictating the contents of contracts, and establishing government mandates for practices that are best left to the discretion of individual organizations.”
Changes Made
Mr. Lockyer, the California attorney general, proposed the legislation in February. “Our own investigations and developments across the country show that bad actors are giving nonprofits a black eye,” he said at the time. “These reforms aim to help charities and the people they serve, and shore up donor confidence in charitable giving.”
As the measure made its way through the Legislature, lawmakers softened its original provisions in an attempt to ease the concerns of charities.
To read Mr. Schwarzenegger’s complete statement, go to the governor’s Web site at http://www.governor.ca.gov/govsite/pdf/press_release/SB_1262_sign.pdf.
To read the provisions of the new law, and obtain more information about it, go to the Legislative Counsel of California’s Web site at http://www.leginfo.ca.gov.
