Why Charities Think They Can Regulate Themselves

The decline in the popularity and prestige of government has had an unexpected result: It seems to have emboldened non-profit organizations to assert their right to regulate themselves — a trend with potentially ominous implications.

It is not surprising that charities and foundations are feeling their oats. After all, the non-profit world is larger, richer, more diverse, and more influential than ever. Its role has been championed by conservatives intent on diminishing the size and reach of government and by liberals concerned about providing social services and an advocacy voice to the poor. Foundation assets have far surpassed the $300-billion mark and promise even more astounding growth during the next 20 years. Employing over 10 million people and producing more than 7 percent of the gross national product, non-profit organizations have become a major economic force.

Unfortunately, this new status has not had the effect one would have hoped. More and more, non-profit organizations self-righteously argue that because they provide good works, they need not be accountable to anybody — including the donors who support their work. Confidence has given way to cockiness. That arrogant attitude has been allowed to thrive largely because the federal government has lost its ability to keep charities in line. The Internal Revenue Service is too weak to enforce non-profit laws. And even if it could do a better job of oversight, it is charged with enforcing laws that Congress has failed to update and clarify to keep in step with the times.

In this atmosphere, non-profit groups feel there is no risk in arguing that they need only be accountable to one another. A reflection of that attitude can be found in the position recently taken by Independent Sector — an umbrella organization with more than 750 member groups — in its recent comments on a Congressional proposal to require non-profit organizations to disclose much more financial information than they do now.

The Congressional Joint Committee on Taxation, which has been pushing for more-stringent requirements, argues that because charities receive substantial tax benefits, they should be forced to make public much information that is now private. Independent Sector, while agreeing with some of the recommendations and disagreeing with others, rejected the conceptual basis for the committee’s position. It said that the obligation of charities to disclose information is derived solely from their unique social role and their responsibility for maintaining the public trust. It is not tied to any favorable tax treatment or to the federal government’s duty to assure the public that charitable funds are accountable and spent for lawful purposes.

The implication of such an argument is that non-profit organizations have the right to set their own disclosure standards and are not accountable to a higher authority. That is somewhat of a stretch in a democracy with representative government.

No doubt Independent Sector’s position has been influenced by its understandable fear of right-wing efforts to undermine the advocacy voice and integrity of non-profit organizations. It is therefore convenient for Independent Sector to argue that neither the tax exemptions that non-profit groups receive nor the charitable-tax deductions available to their donors are subsidies that involve federal strings or obligations. That would mean that non-profit groups cannot be considered quasi-government organizations and, in theory at least, should be out of the reach of legislators who want to take away the right of charities to speak out on any issue.

But the anxiety over restrictions on advocacy should not be allowed to obfuscate a fundamental matter. Whatever we want to call the tax benefits enjoyed by non-profit groups, they are dollars that the federal government makes available for charities to carry out their missions. To pretend they are not may be a fine legal point, but that position cannot gainsay the fact that donors to charities escape paying taxes on those gifts. As such, the federal government has a fiduciary responsibility to the public to make certain that charities and foundations disclose information about their operations and finances to the public.

As Independent Sector points out, such requirements for disclosure should be reasonable and not overly intrusive. But that doesn’t negate the fact that government must take a primary role in ensuring accountability. As non-profit groups grow larger and become more involved in for-profit activities, the need for government regulation and oversight will become even more important. Independent Sector would have stood on more reasonable ground if it had been willing to acknowledge the roles of both government and non-profit organizations in assuring that charities and foundations remain accountable.

Another example of the growing presumptuousness of non-profit groups can be seen in the courtroom where the New York Community Trust is battling the Community Service Society. The society sued the trust, claiming that many years before the trust — the nation’s largest community foundation — had capriciously and unfairly denied the social-services group money that had been earmarked for it in bequests.

New York’s Surrogate Court ruled in the society’s favor, declaring that the trust had overstepped its authority in unfairly withholding the society’s funds. The trust is appealing the case, supported by a friend-of-the-court brief filed by the Council on Foundations and by seven major community foundations. In its appeal, the trust and its supporters argue that the trust’s decision should be subject only to narrowly circumscribed judicial review. To be sure, community foundations need to have the discretion to redirect bequests when circumstances change well beyond what a donor anticipated, but the New York Community Trust and its supporters have overstepped those boundaries. They seem to think that they should be largely accountable only to themselves. Such arrogance is stunning.

It is just such arrogance — plus the lack of strict disclosure laws — that has led to many of the major scandals that have harmed non-profit groups, most notably the United Way of America debacle, where William Aramony was embezzling millions of dollars.

The need for disclosure and for charities to be accountable to the public is particularly acute in the rapidly growing commercial activities of charitable organizations. Many universities, for instance, are not divulging financial information about corporate sponsors of scientific research, including potential conflicts of interest and confidentiality agreements between professors and corporations.

The public should have a much clearer idea of the transfers of funds to and from charitable groups and their for-profit subsidiaries. But many charities are reluctant to divulge such information, believing it to be in the private domain. Minnesota Public Radio, for instance, argued that it did not have to disclose the salaries of the officers who ran its for-profit subsidiary because that would place the unit at a disadvantage with its competitors. In response, the Minnesota Legislature said that was going too far and required the radio station to make the information public. That is the kind of action citizens need to demand of government.

The public has a right to know about charitable behavior and to demand a high degree of accountability. Only the federal government, aided by state and local governments, has the authority and power to enforce such accountability. All the non-profit bluster about self-regulation and the need for privacy cannot wipe away this fundamental obligation of government to ensure that the public’s interest is protected.

What many non-profit groups really need is a heavy dose of humility.

Pablo Eisenberg is senior fellow at the Georgetown University Public Policy Institute and vice-chair of the National Committee for Responsive Philanthropy. He is a regular contributor to these pages.