States Picking Up Regulatory Pace

As nonprofits face the possibility of congressionally-imposed regulations, increasingly states are looking to establish their own rules on how charities operate.

“It’s a mixed bag of legislation,” Adam Hoffman, a public policy analyst with the National Council of Nonprofit Associations (NCNA) said of the 24 bills, which deal with the nonprofit sector that state legislators have either introduced or adopted this year.

So far in 2005, 15 state legislatures have either introduced or approved 24 bills dealing with nonprofits while in all of 2004, 19 states introduced or approved a total of 21 bills, according to NCNA.

“The only theme in the various legislation,” Hoffman said, “is that there is a lot of action out there.”

The NCNA has been looking at states and the laws they introduce concerning nonprofits because many nonprofits, especially the smaller ones, don’t have the staff to monitor the laws that are being introduced and adopted. And, most of them don’t have teams of lawyers to advise them how the laws will affect them, “so we work to be that source, Hoffman explained.

Some of the legislation is aimed at getting more revenue from the nonprofits, while other laws propose easing reporting restrictions and still other laws look to hold nonprofits more accountable and seek to make them more transparent.

Hoffman said as more states see revenue shortfalls from their more traditional funding sources — state income taxes, property taxes and sales taxes — they are seeking alternate sources, such as on the backs of nonprofits.

“And, it could get worse,” said Gary Bass, executive director of the Washington, D.C.-based public policy research group OMB Watch. Many of the states’ proposals that try to raise revenue via additional fees for nonprofits are missing the point, Bass said. “It’s the wrong solution to the problem. The shortfall in revenue that states are suffering is structural.” Much of the shortfall comes from federal tax cuts and changes in federal grants to nonprofits. Because nonprofits are seeing less money from the federal government, states have to increase their allocations to local social service nonprofits, which leaves a revenue shortfall, Bass said.

By way of an explanation of all the proposed legislation, Hoffman said he believes that it’s because of the federal Senate Finance Committee’s hearings on the nonprofit sector. He said state policy makers are watching what’s going on and want to do something in their states. “There is little if any cooperation between the federal government and the states when it comes to nonprofit regulation,” Hoffman added.

Some of the proposed legislation, “is a governance problem,” said Kay Guinane, counsel for OMB Watch’s Nonprofit Advocacy Project. “We need to look at both the states and the Senate Finance Committee for more consistency. Both are squeezing nonprofits. It’s a confluence of a federal wave and then a state wave.”

“The federal government needs to cough up more money for the nonprofits,” Bass said, so that states do not have to make up the difference.

“There needs to be more of a dialog between the federal government and state governments,” Guinane said. Groups such as the Urban Institute and the National Association of State Charity Officials try to work together with the federal government but there needs to be more work done, she added.

Bass asked rhetorically, “how can things be coordinated when we don’t know what the nature of the problem is?”

The Senate Finance Committee has been holding hearings to see what controls – if any – need to be placed on nonprofits, while legislators from Maine to California seek to adopt legislation that solves problems, which Bass said no one is sure if they even exist, in their states.

“My solution is to understand the problem,” Bass explained. “Is it a systemic problem that the public does not have enough information, or is it something more than that?”

A problem that both Bass and Guinane see with many state laws is that they are often one-size-fits-all propositions.

“One size doesn’t fit all,” Guinane said. A state can set threshold limits to target only larger charities, base it on the size of the organization’s budget or the type of charity.

For instance, in Kansas, the governor signed legislation in April that reduces some costs for smaller nonprofits, said Jesse Borjon, a spokesman for the Secretary of State’s office. The state requires that all nonprofits operating in Kansas file a financial statement. It also requires charities that raise more than $500,000 to file an audited financial statement. Prior to the passage of the new law any charity that raised more than $100,000 had to submit an audited financial statement, Borjon said. “We wanted to ease the financial burden so they would not have to go to the expense of getting an audited report,” Borjon explained.

Bass suggested, as have many others in the last few years, that rather than both Congress and states’ legislators passing laws that add to the number of hoops nonprofits must jump through to operate, they should “enforce existing laws.” In many cases, states should be the ones to hold nonprofits’ collective feet to the fire to force them to be accountable to their donors. The majority of the charities operating in the United States are local in nature, so, according to Bass, who better to monitor them? Hoffman said that 72 percent of charities have assets of less than $500,000 so any additional regulations end up increasing the operating costs for these small charities.

In addition to having states enforce existing laws holding nonprofits accountable, the IRS should also better enforce existing federal laws, Bass said.

Enforcement costs money, but Bass and a number of other nonprofit pundits believe the answer lies in the federal tax on foundations. The tax runs between 1 and 2 percent each year and Bass suggests flattening it to 1 percent and giving some to the IRS so that it can step up its enforcement operations and give the rest to the states to use for their enforcement efforts.

“However, there does not seem to be the political will in Washington to do it,” Bass explained.