Philanthropy Needs Its Own Federal Agency

Rules, regulations, standards, guidelines — no matter what they are called, they are the underlying basis of any organized, civilized society. Would you drive an automobile in a jurisdiction without “rules of the road”? Would you ever use anything electrical if each manufacturer used its own design for electrical plugs? Can you imagine a professional basketball game without referees?

Winning a game while playing by the rules is greatly satisfying. It is comforting to know that everyone is playing by the same rules — rules that are enforced equally and fairly on everyone.

In the nonprofit world, the need for rules is not in question. Nonprofit organizations need regulations to make their clients and donors feel secure. Honest charities and foundations need protection from those who would destroy the integrity of everyone else in philanthropy. They also need guidelines for proper behavior.

But as lawmakers have been focusing on abuses in the nonprofit world, they have missed the real questions: Who can best monitor charities and foundations, and how can they draft and enforce regulations in ways that are best for all concerned?

The Senate Finance Committee, which has spent more than a year examining nonprofit groups, has so far been looking to the Internal Revenue Service, but it is wrong to think that the IRS can reasonably regulate nonprofit organizations beyond what it does now. The IRS is little more than a collection agency, and the culture of the IRS is that of a collection agency. Its agents are judged and rightfully rewarded based on their ability to generate revenue. Why would they even be considered as compassionate guardians of nonprofit organizations? Would anyone suggest that a former Marine drill instructor has the ideal personality profile for supervisor of a hospice for terminally ill children?

Toughening the laws governing nonprofit groups and asking the revenue service to step up enforcement will not work. While that has been a key suggestion of Independent Sector and other organizations working with the Senate Finance Committee, it is a bad idea.

If that happens, honest groups will end up spending a lot more time and money to comply with new laws while the crooks will get a free ride or the IRS will start snapping at every infraction just to collect new penalty fees to add to the federal treasury. Neither scenario benefits nonprofit groups or the people they serve. We need regulation sized to fit nonprofit needs.

The best way to accomplish that goal is to create a Federal Nonprofit Administration that would oversee nonprofit groups of all types, except those that make up organized religion.

Federal regulatory agencies such as the Federal Trade Commission and the Securities and Exchange Commission hold sway over much of our economy, but none are responsible for nonprofit organizations, which are growing quickly in number, complexity, and revenue across the United States. Charitable expenditures totaled more than $895-billion in 2001, the most recent figures available.

As the chief executive officer and sole owner of a cosmetic manufacturing company, I am regulated by the Food and Drug Administration. Like others who work in regulated industries, I am not afraid of the regulators. Those of us who work under the FDA’s control are happy for many of the guidelines and encourage the agency to go after manufacturers who could destroy consumer confidence in our industry. That is not to say that regulation is perfect, but it is a basis for our operation and we learn to live with its eccentricities.

Well-run regulatory agencies set basic guidelines under which an industry operates. They set out the best practices in the industry, establish centers the public can use to complain about shoddy organizations, and develop standard definitions that can be used both to collect data that are easy to compare and to create ways to gather and analyze such data. In many cases, agencies work closely with industry trade associations, and also with regulators in the states and other countries to attempt to harmonize operating rules.

The agencies are for the most part staffed with people who have significant knowledge in the fields they regulate, and they develop a symbiotic relationship with the industry they oversee. At the upper levels, people move regularly between the industry and the agency. The commissioners who run the agency often come from industry.

Most important, those in the agency essentially realize that if the industry they regulate does not prosper, their agency will, along with their jobs, go away.

The Federal Nonprofit Administration would follow the model of other agencies.

It would be staffed by people who understand nonprofit groups and are supportive of their goals. Nonprofit groups could work closely with those staff members to develop regulations designed to curb wrongdoing while giving donors, clients, and others who care about philanthropy a place to turn for help.

Since monitoring the nonprofit world would be the sole responsibility of the agency rather than an extra duty, its officials would want to take time to carefully structure new regulations. To be sure, they would probably produce more regulations than nonprofit groups face today, but they would be focused on the issues that matter to nonprofit groups and would not take a broad-brush approach.

The federal agency would also be in a good position to eliminate the burdens of conflicting state regulations and simplify life for large charities that work in many jurisdictions. If such an agency were founded, its existence would probably eliminate calls for the creation of an organization to accredit charities. Many people fear an accrediting agency could become very powerful but would not be vulnerable to oversight when it acts inappropriately.

Collecting money for government coffers would not be the major goal of the Federal Nonprofit Administration, unlike the situation at the IRS. The agency would emphasize ways to educate nonprofit groups, and help them correct bad behaviors, instead of imposing fines and penalties.

Fines are counterproductive for government to levy on nonprofit groups in any case. By virtue of the tax-exempt status of nonprofit groups, the federal government is in effect a minority partner of every nonprofit organization. Charities are also essentially charged with picking up the pieces where the government cannot or will not. Why deprive your partner of funds to do their job?

Many government agencies, like the Agriculture Department, the Forest Service, the National Park Service, and the Department of Transportation, work closely with their constituencies for the benefit of all. In the best-case scenario, the nonprofit agency would do far more than regulate: It would help expand the good work of nonprofit organizations. A Federal Nonprofit Administration might also serve as an advocate for nonprofit groups in the government power structure and among the nation’s citizens.

Our elected officials often speak of the need for public-private partnerships in times of crisis. Given the small number of abuses in the nonprofit world, now is the perfect time to establish an agency that can provide a vital link between the government and nonprofit organizations. The government — and American society — will benefit when the highest possible percentage of nonprofit funds is going directly to serve the public, not to complying with unnecessary, poorly designed federal rules.

Robert M. Lang Jr. is executive director of the Mary Elizabeth & Gordon B. Mannweiler Foundation, in Cross River, N.Y., and chief executive officer of the cosmetics company Fabrique Cosmetique, also in Cross River.