Charity Leaders Debate How to Handle Increased Government Scrutiny

Concern over Congressional and Internal Revenue Service investigations of nonprofit organizations cast a shadow over the annual Independent Sector conference here, as nonprofit leaders grappled with how to respond to government scrutiny.

The first six months of next year could prove crucial in determining the future shape of the nonprofit world, many charity and foundation leaders agreed, as President Bush lays out his plans for a second term and the Senate Finance Committee considers introducing broad legislation intended to curb abuses in nonprofit organizations.

Many of the people at the meeting said they feared that the federal budget deficit will prevent President Bush from creating tax incentives for charitable giving and could cause him to make changes that could affect government subsidies to charities.

“One of the very biggest challenges facing the nonprofit sector right now is the funding crisis about to hit regarding the federal budget deficit,” said Diana Aviv, president of Independent Sector, a coalition of about 600 charities and foundations. “There is no appetite for increasing taxes in this administration, so to reduce the deficit we’re talking about cutting the funding for many nonprofit organizations.”

Protesting IRS Rule

Many nonprofit leaders said they were even more worried by changes the Internal Revenue Service appears to be making in the rules governing advocacy by charities. Last month’s announcement by the Internal Revenue Service that it planned to investigate the NAACP and about 60 other charities and churches for possibly breaking federal prohibitions on politicking sent a tremor through the halls of the conference. Many people expressed concerns that the IRS might be applying a new, more restrictive interpretation of rules covering nonprofit advocacy, perhaps covering all political speech during a campaign and not just that which directly urges people to vote for a certain party or candidate.

In response to the IRS announcement, Independent Sector drafted a letter to the tax agency that it circulated among the 800 nonprofit leaders attending the conference. The letter outlines concerns Independent Sector has with the IRS’s attempting to curtail the free-speech rights of nonprofit organizations. In the letter, Independent Sector argues that groups have a legal right to engage in activities that are not partisan but are critical of government — and that any attempt the government makes to thwart those advocacy efforts is unwarranted. Independent Sector has urged nonprofit organizations that agree with its position to sign the letter, which it plans to mail within the next week.

Legislation Expected

An underlying theme of the conference was how nonprofit organizations should deal with Congressional scrutiny of their practices. Members of the Senate Finance Committee, who have investigated abuses by charities and foundations during much of the year, are considering regulations to curtail excessive compensation, illegal tax shelters, loans that groups make to their officers, and other controversial practices in the nonprofit world.

Some legislative proposals could be floated within the next few weeks, according to Senate aides and lobbyists, while broad measures will probably be proposed next year.

Some charity and foundation officials and nonprofit lobbyists said they expected that legislation intended to spur charitable giving could be reintroduced next year, perhaps as part of a broad measure designed to clean up problems lawmakers see in nonprofit groups.

Versions of a charitable-giving bill passed the House of Representatives and the Senate earlier this year but have failed to make it into a conference between the two chambers.

Whatever the Senate Finance Committee decides to do, it continues to give nonprofit officials many opportunities to discuss ideas for new rules.

Last month, as part of its investigation into nonprofit organizations, the Finance Committee asked Independent Sector to assemble a committee of nonprofit experts to recommend legislative actions to help deter abuses at charities and foundations. Independent Sector created a 25-member panel, led by Paul Brest, president of the William and Flora Hewlett Foundation, and M. Cass Wheeler, chief executive of the American Heart Association.

The committee met for the first time at the conference to discuss guidelines for how they intend to do their work. Through next summer, Ms. Aviv said, the committee plans to meet at least monthly to discuss compensation issues, guidelines for travel expenditures, and other regulatory ideas.

Independent Sector has also invited another 150 people to join advisory groups to provide ideas, and it has hired several law firms and accounting firms to prepare background materials on issues the groups plan to discuss.

Ms. Aviv said she is grateful that the Finance Committee is giving nonprofit officials an opportunity to help shape legislation — and she is hopeful that despite the size and diversity of the nonprofit field, the people Independent Sector has enlisted to offer ideas will set aside their differences to come up with a single set of suggestions for the Finance Committee.

“If we’re able to come out with a broad consensus, we will have the makings of a much stronger sector,” Ms. Aviv said. “If folks separate out their individual issues and don’t want to be part of a larger common good, it might underscore our differences in ways that could hurt us for years to come.”

Many people at the conference agreed that abuses at charities and foundations must be punished, in part because public mistrust of charities has grown in recent years. But nonprofit leaders disagreed about how much abuse actually exists, leading to concerns that some nonprofit officials might argue for a less aggressive approach to legislation than others think is necessary.

“A lot of people still think that we only have a few bad actors in the field,” said Brian A. Gallagher, president of United Way of America and a member of the Independent Sector committee. “If we go at this process like there are only a dozen bad actors, we’ll fail.”

Before the conference opened, at a meeting held by the American Law Institute and the American Bar Association, in Washington, a Senate aide expressed disappointment with the number of nonprofit leaders who seem to think that problems with charities and foundations only involve a few organizations and can be corrected with minor legal changes.

“Some of our actions will be very targeted to correct specific problems,” said the aide, who requested that his name not be used. “But we’re seeing widespread abuses.”

‘Erosion’ of Standards

Even regulators in other government agencies with no responsibility for overseeing nonprofit organizations see big problems in nonprofit organizations. William H. Donaldson, who has investigated fraudulent activity at Enron and other large companies as chairman of the Securities and Exchange Commission, said in a speech at the meeting that he sees a “pervasive erosion of ethical standards and practices” in the nonprofit world.

He said that because many Americans lack trust in charities, nonprofit organizations need to step up their efforts to discover and punish inappropriate behavior themselves. Mr. Donaldson suggested that groups put in place a process of self-regulation similar to the one used in the securities industry, saying that nonprofit organizations could use such an effort to learn state-of-the-art approaches to board governance and other management topics. Self-regulation, he said, would offer organizations greater flexibility than “one-size-fits-all” government regulations.

Some of the people advising Independent Sector are studying different approaches nonprofit organizations might take to regulate themselves better than they do now, but the group has not come to any conclusions, Ms. Aviv said.

“Before we advocate one single national standard,” she said, “we need to look around at how self-regulation works in other industries.”

Mixed Views

The idea of regulation met with both support and opposition from people attending the conference. But some officials worried that because many groups are so concerned with finding money to support their causes, they might lose sight of the bigger need to work together as one body to consider legislative changes.

“The problem this sector has is that it’s very issue-oriented,” said Joanna Lee Lauen, a senior program officer at the Irving Harris Foundation, in Chicago. “We believe we have to fight for money for our cause, as opposed to thinking broader about an agenda that creates revenues for everyone.”

And many organizations are in denial about how deep and widespread the problems are involving ethical and accountability issues, said Tim Delaney, president of the Center for Leadership, Ethics & Public Service, in Phoenix.

He has found it increasingly difficult to talk about ethical issues with groups, he said, and is considering changing the name of his organization — and removing the word “ethics” — because it has such a negative connotation in the nonprofit field.

Trying to bring up ethics issues causes many nonprofit officials to say, “You’re going to tell us what we can’t do,” Mr. Delaney said. “I just tell them, Better me than the government.”