A California bill that would change how nonprofits registered in the Golden State value restricted Gifts In Kind (GIK) sailed through the state Assembly yesterday, days after it was released out of the Appropriations Committee.
Assembly Bill 1181, sponsored by Assemblywoman Monique Limón (D-Santa Barbara), who serves as chair of the Nonprofit Select Committee on the Non-Profit Sector, passed the Assembly by a vote of 69-1. The lone No vote came from Minority Leader Marie Waldron (R-Escondido), one of only 19 Republicans in the 80-seat Assembly. The measure was introduced in February and released out of the Appropriations Committee by a 17-0-1 vote on Wednesday. The measure now heads to the state Senate, where Democrats began the new term in January holding 29 of 40 seats.
Nonprofit advocates and accountants believe that the measure would undermine Generally Accepted Accounting Principles (GAAP) already being followed across the United States.
The bill was borne out of recent cases that Attorney General Xavier Becerra brought against charities for allegedly overvaluing GIK. The AG’s Office issued cease-and-desist orders against Food For the Poor, Catholic Medical Mission Board and MAP International. All three are headquartered elsewhere but raise funds in California so they are required to register with the state Registry of Charitable Trusts. The AG took issue with charities including what he believed to be overvalued GIK into its program spending calculations. The three nonprofits have been fighting the litigation for more than a year and the case is expected to soon be resolved in the charities’ favor, according to sources.
A.B. 1181 “addresses reported practices by a small number of charities that inflate the value of their publicly reported revenue and program expense, especially with respect to in-kind donations of pharmaceutical drugs,” according to a one-page fact sheet by the assemblywoman’s office. “Overvaluation of the gifts-in-kind leads to an inflated total revenue for the charity which makes the charity appear more successful and efficient to the public and potential donors.”
Since the value of the donation is highly variable, the bill is necessary to clarify for all nonprofits and donors what reporting practices are transparent and fair for all involved, according to the explainer. It cited the recent case of Giving Children Hope, in which the charity created two subsidiary companies that purchased pharmaceutical drugs from a European wholesaler for less than $225,000, then donated the drugs to the parent charity, which reported the total value at almost $35 million, using U.S. drug prices rather than the actual price paid by subsidiaries. As part of the settlement, the charity agreed to pay $400,000.
If financials for organizations in California differ from the organization’s federal Form 990, and across states, that’s not helping to clarify anything for donors, according to Shannon McCracken, chief executive officer of The Nonprofit Alliance (TNPA). “Why would a donor in New York see different financials from a donor in California?,” she asked rhetorically. The measure also could set a precedent for states to create their own accounting rules outside of GAAP, which are set by the Financial Accounting Standards Board (FASB).
National organizations or international organizations could be subject to recalculations of their federal Forms 990 and audited financial statements if registered in the more than 40 states that require it. “That’s an extreme example but it might not end with California, they’re often a leader on this,” McCracken said. In the past, if states wanted to see changes, they worked with FASB to evolve the Form 990, she said, working through existing channels so changes to financials are not just geographic.
The Nonprofit Alliance was among two organizations with representatives who spoke out against the bill during a committee hearing last month. The other was the California Society of CPAs (CalCPA).
Language of the bill “would undermine uniform national accounting and valuation standards by essentially allowing California to set its own accounting standards and procedures that significantly deviate from those that are accepted and universally utilized throughout the United States,” Jason Fox, director, government relations, for CalCPA, wrote in a three-page letter to the assemblywoman. “These uniform accounting standards are also embedded in state statutes, regulations and guidance for auditing requirements for a multitude of state and local programs,” he said.
Fox suggested amending the bill to require an organization soliciting donations in California that received a noncash contribution restricted to delivery outside the U.S. to indicate this on its annual renewal form filed with California AG and disclose it on its website as well on all forms of solicitations of financial support.
In a letter to Limón, Charles “Chip” Watkins, an associate with Webster, Chamberlain & Bean, LLP, which advises charities on fundraising contract and compliance, requested that the bill be withdrawn. He worked in the Office of the Chief Counsel in the Internal Revenue Service (IRS) during the 1980s and collaborated with the IRS on the Form 990 revision a decade ago.
The proposed amendment to California’s business and professional code would “arbitrarily limit the ‘source’ of GAAP to the FASB, ignoring the integral contributions of AICPA and FASB,” Watkins said.
The Financial Accounting Foundation (FAF) also raised concerns about how the bill would contradict GAAP standards. FASB created a Gifts-In-Kind Working Group, in discussion with members of National Association of State Charities Officials (NASCO), to identify potential changes in GAAP that might address concerns, according to Teresa Polley, FAF’s president and CEO. FASB expects to complete its research within the next few months, she said in a letter to Limón.
“The conversation about valuation of pharmaceuticals and other GIK is not new and there is likely continued room for improvement. That said, it is not in the donors’ best interest if organizations with global impact are reporting different sets of financials in one state than another,” said Michael Thatcher, president and CEO of Charity Navigator, a charity evaluator based in Glen Rock, N.J. “The IRS Form 990 is a single annual report of an organization’s health. If state legislators and regulators believe, as California seems to, that GAAP methodology needs to evolve, it would certainly be better for donors — and nonprofits — to consider that as part of a Form 990 update.”
The last overhaul of the federal Form 990 was done in 2007.