Regulation Or Revenue?

December 1, 2009       Paul Clolery      

Just about every state has a budget deficit and now seeks new revenue streams. Charities are in the revenue crosshairs. Fundraisers are looking over their shoulders at regulators who are often little more than tax collectors.

In Washington, D.C., legislators are looking to plug the budget hole with funding from changes in the charitable deduction that donors receive in exchange for a gift.

It’s dangerous times for the financial health of the charitable sector.  The issues were hashed about during a recent Executive Session roundtable discussion at the Washington, D.C., offices of The Direct Marketing Association’s Nonprofit Federation. Involved in the discussion were: Mary M. Arnold, director of marketing, ChildFund International, Richmond, Va.; Paul Clolery, vice president and editorial director of The NonProfit Times; Karin Kirchoff, vice president, membership, Defenders of Wildlife, Washington, D.C.; Christopher Quinn, executive director, Direct Marketing Association Nonprofit Federation; and, Robert S. Tigner, general counsel, The Association of Direct Response Fundraising Counsel, Washington, D.C.

Paul Clolery: Regulation has become a major element of what nonprofit executives do every day. It’s forcing charities to hire people and to engage lawyers to handle state and federal regulation. It seems so often that there’s this flurry then nothing ever happens. For example, 15 years ago a uniform registration form was developed. Bob, whatever happened to that?

Robert Tigner: It still lives. Of the 40 states that require registration for nonprofits I’m thinking give or take one, 36 accept the common form. The only reason there is not universal acceptance is that the project has never been well enough funded to do the incremental politics necessary to get everybody else to accept them. The project was funded by nonprofits that had a stake in the outcome. They put together enough money to run the project for three or four years. Since then the project has been run on an all-volunteer effort and the residue left over from the initial war chest. Who would be a funder? A foundation or some others with an interest could fund it. But the problem, like any fundraising effort, it takes money to raise money. There is no staff, and so there is no one there to make the concerted effort necessary to raise funds, hire staff and so forth. It’s a cycle.

Clolery: On a state level, what are you seeing as the two or three major issues charities face?

Tigner: One issue is the states don’t have money. If not for the fact that, for the most part, registration fees professionals and nonprofits have to pay to the states are statutory and not that easy to change. If they were a little easier to change, we’d have seen widespread increases in fees. An illustration would be Hawaii, which is one of the most recent enactments of the registration statute. Their fees are, overall, just about the highest in the country. For the simple reason that the office had no money to operate itself, it was creating a new program. It did the math, and charged fees high enough to pay for itself.

Clolery: That’s not unusual for Hawaii. It has always had regulation with regard to the charitable sector that’s over and above what the rest of the country does. For example, when it comes to selling charitable annuities, their escrow requirements are way more than anywhere else. Hawaii has been tough on charities. Why is that?

Tigner: I don’t know if that’s a pattern. My own experience with the states is that it’s more whimsy than design. You might find the opposite true in another state, where the registration function is simple and inexpensive and the charitable gift annuity function is heavily regulated and expensive to register and file. I don’t think there’s a single ethic driving it. I think it’s happen stance as much as anything. There are certainly some states that are zealous regulators. But I think that’s an office-by-office thing, more than a statewide ethic.

Clolery: So from your perspective, who’s put a target on the backs of charities these days? Who are the most aggressive regulators?

Karin Kirchoff: It’s a good question. Utah is certainly aggressive in how they regulate. I think with any state that is particularly aggressive, we make a concerted effort to be proactively registered and up to date. So, I can think of no examples of any state specifically coming after us with the exception of, “Hey you’re not registered, you need to get registered.” Utah is one that is absolutely on the radar screen regularly.

Mary Arnold: Sometimes somebody will leave the attorney general’s office and you won’t have trouble with registrations anymore. It could be a problem as simple as one of your fundraising partners has an application and registration form in, and you have one in, and you’re getting a phone call that your fundraising partner is not registered, and both forms will be sitting on the same person’s desk in the attorney general’s office. It could be because they’re underfunded. Just dealing with those kinds of issues is time consuming.

Clolery: There are some who really want to regulate the charitable sector more. It’s a philosophy versus a financial issue. Who are the philosophers and who are the financial guys?

Arnold: I think it’s both. There are states that just throw registration forms in a box and cash the check. Other states are very keen on regulating nonprofits and they want to get rid of any of the bad apples that might be harming the reputation of other charities in that state.

Christopher Quinn: You almost have a perfect storm. You have the economy the way it is and state budgets are down. So the states that wouldn’t have typically gone after you, or tried to put forth a lot of different regulations, are now trying to look anywhere they can to make that extra thousands of dollars or hundreds of thousands of dollars.

When you have got that issue, plus the ones who are legitimately trying to find better ways to regulate things, it just mashes together. You start to see states that typically wouldn’t have a lot regulatory bills coming through all of a sudden with more and more and more. Unfortunately, sometimes state legislators they don’t necessarily have the understanding of how the nonprofit sector works. You have to be that much more aware of what’s going on, because if it gets too far down the line, then you’re in a situation where there’s not much you can do but have to change the bill or have something else introduced to fight that particular bill.

Clolery: Other than the charitable deduction, which we’ll come back to, what are your members telling you about some of the key irritants in their particular states?

Quinn: Something else that I tend to hear on a fairly regular basis is about registration laws. With each state being so different in their regulations, it becomes very difficult to keep up with them and understand why one might be so different from another. I think every nonprofit is trying to do their due diligence in complying with these regulations. But as I said before, every state is different and depending on who the regulators are, what might be the law in state X this year, might not be the law in state X next year. Other than the charitable deduction issue, this is certainly something that I receive phone calls and emails about. It’s just something we have to continually watch and help our members to be aware of any changes that might occur.

Clolery: When you get a direct mail package from a charity you need a microscope for all the different disclosures. Is that hurting the ability to fund raise? Arnold: We don’t feel that it does. Every charity has an opportunity to include how they use the money and how much of it goes to the mission. The disclosure language is usually below that. The Direct Marketing Association consumer choice language is being added by nonprofits and for-profits in their packages so that consumers can choose the frequency of communication. There’s been a lot of testing there, and for the most part, no one has seen any decline in giving.

Kirchoff: These are all direct mail donors, so they see it on every single organization’s mail. I don’t think it sends off any flags in a donor’s mind. I don’t think it impacts their decision to write a check or to fill their credit card information in and send it back. I think it’s commonplace.

Tigner: I don’t know if either of you have tested this or not but at least anecdotally, at least in a focus group, I’ve heard people start to look for this. “We know this is an authentic organization if there’s this paragraph of gobbly gook that we’re not going to read,” but it mentions the different states, and the addresses, “and I know where to look, oh there it is, oh they’re good.”

Clolery: So you think it actually improved response?

Tigner: I don’t want to say that but I think probably no harm certainly by this time.

Clolery: I remember, people were screaming, “Oh my God. Oh my God. Where are we going to put this in the packages? It’s going to ruin the design. It’s going to do this, it’s going to do that.” Now, after all these years, you don’t think it has hurt?

Tigner: The response to that sort of made perfect sense. People were working with a set piece, their control packages, and all of a sudden they’re looking at these paragraphs of stuff they’ve got to dump in somewhere. Over time, people have figured out economical ways to do it. They don’t have to redesign packages to accommodate this, that’s expensive, or to throw away stuff in your warehouse you’ve already printed. That’s really expensive. But it’s not so expensive when you know this paragraph has to go somewhere. It’s in your design and you don’t leave it out of your design.

Arnold: It takes up real estate.

Kirchoff: When they started to spray bar codes on the outsides of envelopes everyone was freaking out and thinking, “Oh my God. It’s going to have a negative impact. It looks so commercially produced.” Well, now that’s so commonplace. You expect to see that on your Christmas cards, so I think the consumer just gets used to seeing whatever is common in the marketplace.

Tigner: I don’t know if I’m hearing so much on the streets yet, but there’s another thing connected to the economic issue for the states. There’s a creeping movement to various sorts of electronic short cuts for the states. They’re getting the data, they’re getting the reporting they want in some format that’s more economical for them without any regard whatsoever to the economics involved for the charity.

We have this interesting sort of political thing that happened during the past 15 years where the actual data requirements sort of consolidated into this unified registration statement. But now the formats for reporting it are starting to deconsolidate. For example, Rhode Island just wants everything sent to it in images, or Word files on a CD. It’s instructions to filers: “Send us a physical CD, that’s how we want to do intake of all information.” Hawaii, the new state in the registration business, is now requiring actual online entry. They’re still using the unified registration statement. It must be entered online at a proprietary Web site, built by the Urban Institute and paid for by Hawaii. The filer has to learn this new software that is not all that friendly and has to put a clerk to the task of spending the better part of the day learning the software and entering in all this data. That’s expensive.

It’s cheap for Hawaii but it’s pretty expensive for the filer. It adds a great deal of cost to an already expensive fee in Hawaii’s case. Another instance is Colorado where you go online to their Secretary of State’s Web site and do your registration on their own maintained Web site. As this thing proliferates, so does the expense of compliance for any national mailer.

Clolery: Have either of you done calculations on what compliance costs your organizations every year?

Kirchoff: It’s funny that you ask that because we finished catching up on a bunch of filings and it was a huge time suck across multiple departments. You have folks within my team in membership who are pulling data. You have folks who are just balancing the books, if you will, and then you’ve got folks in finance dealing with completing the registration forms. Then you’ve got the consultants externally who are giving advice and counsel. We haven’t done a formal calculation but it’s pricey.

Clolery: Could it be more than six figures?

Tigner: I would say not for solicitation law isolated. If you’re looking at adding in Form 990 and all of the sort of financial back end that you had to do, of which this is one of the outputs, I’m sure the number can get that big. But if you found a way to just isolate the solicitation law, I don’t think the number would be that big. It’s five figures, I feel comfortable in saying.

Arnold: It does take resources from all across the organization. People who do the registrations for charitable gift annuities have different expertise than the people who just do the state registrations. If you’re doing outbound telemarketing you’re reporting on the cost of the campaign so you’ve got to run all your reports on what it cost and how much revenue was generated. It’s different time periods for each state, so, you’re pulling all sorts of reports. It does take resources.

Tigner: The last time this was visited was back in the days of multistate filer project. We basically did it by focus group, just interviewing a number of organizations and seeing which staff members at different levels were committed to the task. We figured out a pretty conservative estimate at the time, this was at least 10 years ago, that the conservative number was $25,000.

Clolery: Chris, you were involved in a process of drafting letters to members of Congress with regard to the charitable deduction. You’re tracking, you said, something like 50 different bills?

Quinn: The Senate Finance Committee had put out about 500 amendments to that bill, and about 20 of them had something to do with the charitable deduction,

Clolery: 500 amendments to the bill?

Quinn: Yes.

Clolery: On the Senate side?

Quinn: Yes. Clolery: There are only 100 senators.

Quinn: There are senators who are going to put in multiple amendments. Unfortunately, that’s how the process works. There are about 20 of them that we identified who use the charitable deduction as a way to pay for the bill. There are a lot of amendments right now that have no mechanism of how they’re going to pay for it. So it’s conceivable that they could go back, decide it’s a good idea, and then say, “Well, let’s fund it with the charitable deduction or the itemized deduction issue.”

The Senate Finance Committee is doing their markup. They’re talking about all the amendments. We drafted a letter to go back up to the Senate Finance Committee just telling them that it is not a good idea to provide disincentives to give to charities, especially with all the downturn in the giving, and the expected downturn in giving. We’ll see what happens with it. We’ve gotten some fairly sympathetic ears when we’ve gone up to the Hill.

Clolery: Who are some of the White Knights?

Quinn: We do have one person in particular, Sen. John Thune (R-SD), who during the original debate put forward an amendment trying to protect charitable giving and the deduction in and of itself. He’s written articles about how that particular segment of it should be taxed. You go up to the Hill and there’s so much pressure on everyone to pay for things. On Capitol Hill, the people who push back the least on something are the ones who are going to be taxed. That’s essentially what we’re trying to do.

Clolery: Have you been surprised by the lack of the unanimity on the charitable side with regard to the healthcare legislation and the charitable deduction? It seems like there’s always a number of organizations that say, “This is not going to hurt giving.”

Tigner: There are always a number of organizations that want to position themselves in the quid pro quo posture. Most of our constituent organizations would agree that we’ve got a big healthcare problem in this country. So, it’s sort of disloyal to immediately be seen as, “Well we’re just protecting ours and to hell with healthcare.” A number of organizations felt constrained to not get into this game, quickly and forcefully.

However, I think there are very few umbrella organizations that speak for nonprofits, at least in D.C., that are still doing that straddle. I think most people feel that the long-term threat to charitable giving, evidenced by dipping into the well this time however much, can be proven to affect giving today or tomorrow. I think in most people’s minds it has become largely irrelevant. The real issue is the charitable deduction needs to be protected and the proof about how damaging this incursion is, is not important. What’s really important is to protect it from incursion at all.

Clolery: Several years ago there was a major charity that had a United States senator just beating them senseless everyday on the Hill. That charity went into that senator’s community, and said, “This is what’s going on in the Senate. Here’s what your senator is doing and this is how, if this is passed, it will destroy your community.” It worked. Has the nonprofit sector come up with a plan yet to take this to the American people, to go into communities and say, “If this charitable deduction legislation goes through as is, say goodbye to the playgrounds, say goodbye to the theaters, say goodbye to the lifeguards at the pool?”

Tigner: We had a strategy meeting with most of these umbrella groups. There is a great hope that persuasion from umbrella organizations that command a great deal of grassroots power, as the senators know, a very forceful presentation from them, will persuade the Senate to not include an incursion or a reduction of the charitable contribution deduction. But, that said, organizations with very far flung and well developed grassroots networks are part of this coalition and if the important senators aren’t persuaded, I think the next step you’ll see is exactly what you’re describing, a very forceful, aggressive grassroots effort to make this a popular voter issue.

Quinn: I think there are two things. One, I think there is a lack of understanding on the issue. You’ll see comments from just regular people on the street who don’t make the connection between charities and this particular issue. They just assume if someone has the money why wouldn’t they just continue to give? But the fact is that’s just not the case.

The other issue is that this is a very slippery slope. If this comes through, in any form, it’s a proverbial camel’s nose under the tent. And once they’ve hit it this time, what are they going to do next time? Is it going to be a further roll back? Once you give any ground on this it’s to say, “Well okay they gave ground this time, what can we push?”

Tigner: Yeah, if they gave ground this time because healthcare was important, what’s the next important thing?

Kirchoff: Then there’s this question of what are the charities doing to come up with a plan to tackle this? All the charities that I know are focused on their core mission, right? Many of them have had staff layoffs.

Clolery: Come on. You don’t have lobbying arms?

Kirchoff: We do. But if you think about all these bandwidth issues and the ability to wrap one’s head around the complexity of what’s happening with healthcare reform, it really straps organizations. Those that are larger and have lobbying arms and have D.C. presences and government affairs offices, they’re likely a little bit more plugged in. But if you think about the hundreds of thousands of charities that don’t have that, there’s absolutely no way any of those organizations are even going to be able to scratch the surface on this, let alone figure out how to mobilize their support.

Tigner: Except through their umbrella groups, where the coalition they’ve chosen to join keep issues like this in focus.

Clolery: So what’s troubling all three of you? Start with from a regulatory standpoint, other than the charitable deduction. Is there some state regulation, what are the hot buttons for you?

Arnold: One of the things we keep track of is the “Do Not Mail” bills that come up periodically in the states. That’s a little bit on the decline this year. I guess states have other things on their minds right now so there haven’t been very many.

Clolery: Karin what are you guys watching? What’s on your radar?

Kirchoff: I’m always watching telemarketing regulation. We started doing some testing around the use of robocalls. There’s this disclaimer that you now have to have on robocalls. You understand the need for regulation as Mary was saying. You’ve got these fly-by-night organizations that are just milking 70-year-old ladies who are worried about children or animals or whatever’s at risk. But, the cost associated is not just filing, right. It’s tracking this stuff. It’s understanding the net effect of the charitable deduction, the threats to charitable deductions as it relates to the healthcare bill. There are all of these sticks poking into the cage of fundraisers who are really just trying to raise revenue to support their organization’s work.

Tigner: It’s been assumed for a while that “Do Not Mail” is the logical stepchild to “Do Not Call” and that something was going to be around the corner. The activity in the states might make it happen. My own view about this, aside from the fact that the first rounds of that were sort of successfully beaten back, is that all mailers, nonprofits especially, are protected by the horrible economic condition of the postal service. Congress is already looking square in the eye the prospect that in the near term they’re going to once again have to shell out taxpayer revenue to keep the Postal Service afloat. With that reality probably facing it, I really find it hard to believe that we’re going to have federal support for something that threatens to substantially reduce the volume of advertising mail. I’m thinking that circumstantially, at least in the short run, we’re fairly well protected.

Clolery: You have two different issues there. One issue is how can the states stop you from mailing when the U.S. Supreme Court said it’s protected free speech. Number two, the Postal Service is so vital to the information flow of the American people, why do people have such a problem with funding it? Yes, we can get into the arguments about multiple postal operational issues. But why do people get so hot under the collar when they have to fund getting their mail?

Tigner: I’m not so persuaded, although it might be true. I’ve not seen any surveys or anything that individual taxpayers are necessarily opposed to taxpayer support for the Postal Service. But I think Congress is really happy to have another big ticket not on its ledger somewhere where they have to play their zero sum game. Well, not zero sum game. I forgot they print money.  Theoretical zero sum game.

I think they’re happy to not have to have this behemoth that they have to feed every year.

Clolery: What else is out there?

Tigner: One entity with a really big stick, potentially, is the Internal Revenue Service. The new Form 990 really digs into relationships with professionals and fundraising arrangements. This is the first time that there’s been any more than a superficial inquiry into this subject matter. I think it’s fairly safe to conclude that there’s more of the stick that the IRS is already wielding. They’re going to figure out a way to start using it. There’s got to be some reason they’re collecting all this information.

Furthermore, this same body of information, theoretically, enhances, and improves, the reach of the individual state regulatory offices. It remains to be seen what the consequences of all this new data collection and relationship collection is, but, history indicates that it will be something, and it’s likely to be more sticks.

Arnold: Some of it is seems very judgmental in terms of the questions that are asked on the new IRS form, if your staff flies first class or anything other than economy.

Tigner: There is one single area though that is worth focusing on. It’s pretty obscure but I think for affected constituencies it won’t be. Historically the IRS used to ask all its filers “to what states do you send a 990?” The implication is that’s what states usually ask you for if you have to register and the IRS thinks “it’s our 990 so I think we’ll ask about where our 990 is going.” That was the question on the 990 that was about state regulation. The question has been reframed now, and the question now asks something like, “Where are you soliciting?” and “Where are you registered.” In other words, it flags for the filer, the prospect, that they’ve got all of these states that they need to be doing something with.

Frankly, big chunks of our community have never bothered with this subject matter — hospitals, colleges and universities, religious organizations. Rightly or wrongly, an alumni association at Elon College, does not check and see if its alumni mailing to Alaska requires it to go there and register. This highlighting on the 990, I think, is going to begin driving a lot of those constituencies into the welcoming arms of state registration offices that, heretofore, have been indifferent about it. 

Clolery: But when the state university of X starts mailing to various surrounding states, the attorneys general are going to start taking notice.

Tigner: In part, I think it might work the other way. You’ll have these big institutions with lawyers and CFOs and saying “Huh? What’s this stuff? We didn’t know about this.” And, “Do we have to comply with this?” So they call the lawyer and the lawyer says, “Well, yeah, Alaska says you do.” I think there’s going to be a chain reaction here and the result is going to be way more compliance costs incurred by constituencies that haven’t bourn them to date.

Arnold: What is the percentage of nonprofits that do not file in states?

Tigner: I don’t know but I think the honest answer is colleges and universities don’t, and the reason they don’t is because the state officials, they can’t tell you this, are indifferent. They don’t care whether the University of California Alumni Association files with Virginia.

Clolery: If they don’t have to file within their own home state why would they have to file elsewhere?

Tigner: Well, that’s precisely what accounts for this behavior. People have said, “No. We don’t have to. This stuff doesn’t have anything to do with us.” But, the IRS is now asking them to look at it.