Health of Non-Profit Giving in the US

By John McGee, Principal at McGee Consulting

 The recent release of Giving USA 2009, and the subsequent analysis, has given me pause. It has led me to look at the bigger question of the non-profit sector’s health.

According to the well-researched and presented Giving USA report, individual giving (including individual gifts, estate gifts, and corporate and private foundation support) decreased an inflation-adjusted 5.7% from year to year – in other words, giving in 2008 was 5.7% less than what it was in 2007.

Americans contributed a total of $307.7-billion to charity in 2008, reports Giving USA. This represents a drop from the $314.1-billion that was given in 2007. Truly, this is an impressive set of figures. American generosity is well documented.

The impact of this drop in donations/support varied among different parts of the non-profit sector, meaning that the pain was not spread evenly throughout. Religious organizations saw an increase in giving, while human service organizations saw a sizable decrease. The dollar value of bequests was down, but considering that these normally do not come from cash, the results of the economic downturn on bequests should not be surprising.

However, American generosity does not sustain the nonprofit sector by itself. The sector relies on many other sources of revenue. As I reflect on the analysis of Giving USA 2009, it amazes me how little is being said about these other sources of revenue, what is happening to them, and their impact on the sector.

For example, non-profit hospitals that rely on Medicaid, Medicare and other government provided fee-for-service programs may find cuts in service revenue are more significant than their overall decline in individual giving. Small independent social service agencies that have developed revenue streams based on renewable local, state and federally-funded pass-through programs may find program cuts or shifts more devastating to their revenue than any decline in individual giving. As government funding decreases, organizational revenue decreases, and services provided through those funds are cut even as demand for those services increase.

The on-going budget discussions in states like California and Illinois reveal the risk that non-profit organizations are facing. The absence of tax revenues to fund programs that states use to buy services from local non-profits is not included in the discussion of private giving, or other analyses of the overall health of the sector.

Examining the study done in Connecticut, some 84% of the non-profits in the state responded that they received government funding. I suspect that in the realm of operating social service agencies, this number is consistently similar throughout the nation.  State budget cuts combined with redefined priorities (either federal or state), and reductions in fee-for-service payments, continues to place many non-profits in financial jeopardy with a corresponding reduction in services.

Add to this the impact that the economic crisis is having on the purchase of services from educational institutions, as displayed in the shift from resident to commuter status among students, and the fall-out expands ever wider.  The revenue paradigm for many non-profit institutions is quickly shifting, and not in their favor.

While many pundits tried to place a positive spin on the Giving USA 2009 report, I believe that in doing so they provided a distorted picture to public policy makers at all levels, and consequently placed many organizations in further jeopardy.  I believe this is because there has not been an across-the-board analysis of the financial health of the sector. There are other factors as well, including the impact of an escalating and shifting demand for services, coupled with the reduction of government provided services on the social safety net and the core underpinnings of access to affordable education.

To me, the bottom line is that the drop in personal giving documented in the Giving USA 2009 report represents but a small portion of the financial issues that are impacting the health of the non-profit sector right now.

MN & PA Laws On What Is a Charity

By John McGee, Principal at McGee Consulting

The recent reports in the Chronicle of Philanthropy on the new Minnesota law defining who might qualify for state and/or local tax exemption reminded me of the various steps the state legislature of Pennsylvania has taken over the years. Twenty-five years ago Pennsylvania began looking at ways to involve the non-profit community in supporting payment for public services that they consumed.  The state government made a two-pronged effort to achieve this.

The first, which still exists in various communities throughout the United States, was PILOT (Payment In Lieu of Taxes). The second was a litmus tax for granting non-profit status for state and local purposes to organizations.

PILOT was predicated on the idea that nonprofit organizations, who are exempt from property taxes, consume services that are funded through the property tax. Therefore, they should voluntarily support the municipalities whose services they consume by making a payment in lieu of a property tax assessment. But what is the value of tax-exempt property and how is it determined? The answers to these questions and other related ones were all over the map, according to a 2006 study conducted by the Chronicle of Philanthropy. So the idea of PILOT can be very hard to apply when one does not have valuation criteria to even request, let alone expect, such a donation. Passing legislation is one way to compel compliance or cooperation with the PILOT concept.

The second approach was driven by an attempt to define what a ‘public charity’ is, and then exclude those who did not meet the criteria from receiving tax exemptions. Even before the problems of applying PILOT became clear, Pennsylvania began addressing this issue. Pennsylvania was driven in part by Hosp. Utilization Project v. Commonwealth of Pennsylvania, 487 A.2d 1306 (Pa. 1985) which established a 5-pronged criteria to qualify for exemption. The standards set down by the Court continue to be litigated and legislated. The legislative battle to define what “purely a public charity” is has raged on for some time and in many states. Defining and implementing a standard across the whole Commonwealth has been, and continues to be, a challenge, as I suspect Minnesota will find.

Minnesota, like Pennsylvania, drafted and enacted legislation designed to clarify application of a court decision. In Pennsylvania’s case, the law – Act 55 of 1997 “The Institutions of Purely Public Charities Act” - continues to be discussed, and issues inside it are continuously litigated. The reason for this is not a lack of good intentions on behalf of the parties that constructed the legislation. Rather, it is the continued conflict between the need of communities to expand their sources of tax revenue and the desire (and, in many cases, the survival needs) of nonprofits not to be burdened with the taxes in question.

As pressure mounts in this poor economy to find new sources of public revenue, more states and localities will resort to either directly taxing public charities or drafting legislation that contains multi-step criteria that appears to provide safe haven for non-profit organization but that may in reality expose more of them to the potential loss of their local and state tax exemptions. 

More FTC Activity: Oregon

By John C McGee, Principal at McGee Consulting

More FTC activity occurred in Oregon (Oregon FTC and NFP fraud). There seems to be more concern over fraudulent activity by non-profits.  Discussions at all levels become interesting once-declining tax revenues are added in to the situation. 

The House will be holding an oversight committee meeting on the IRS, which may help define the type of legislation or activity for this Congress. In addition, Guidestar is holding a free webinar on grant-making compliance (additional information can be found in the ‘announcement’ file below)

The Austin, Texas area has been identified with the highest per capita concentration of non-profit organizations in the country. Interesting article (TX Austin NFP glut) on what solutions might be out there for this ‘over-population’.

Just a side note on funding sources as it relates to all of the above:

Reports from all sources indicate that resources available to the non-profit sector are shrinking.  Federal, state and local tax revenues are down meaning less government monies for programs run by non-profits, moreover it means greater pressure on the governmental entities to find new streams of income. The NFP universe will be scrutinized for any reasons to reduce, defer or eliminate considerations they currently enjoy in the tax code.  Concurrent with these pressures are the escalating demands on the NFP sector to provide services to the newly unemployed, disenfranchised or temporarily disadvantaged citizens; while being expected to meet new standards/expectations of governance, accountability and transparency with potentially fewer resources.

Agencies that are in an effort to survive and prosper in these times need to be ever vigilant of the changing requirements placed on them – either directly by donors (government, foundations or individuals) or indirectly by being in a class of recipients who are covered by regulatory decisions. This is not the time to let one’s guard down on best practices, internal controls or compliance and governance issues.

Consumer Protection Safety Improvement Act (CPSIA) does it apply to non-profit thrift shops?

By John McGee, Principal at McGee Consulting

Recently a colleague mentioned to me that thrift shops would shortly have to stop selling toys. I was curious to know why he thought this and he referenced lead content and product liability.

So I researched new laws related to those topics and found CPSIA (PUBLIC LAW 110–314) which addresses issues related to lead in products sold to children 12 and under.  It establishes lead content limits in products.  The law was passed in response to the growing number of safety concerns in products produced and sold for use by children 12 and under.

While the primary burden of this act falls on the manufacturers and private labelers of products sold for use by children to certify that it is (if covered) within the lead content limits there is an expectation that state attorneys-general (section 218) will “Stop the sale of products that violate CPSC issued safety standards.”  What is unclear in reading the legislation is what roll or responsibility do retailers have in insuring that the products covered under this legislation have met the standard defined.

Simply put it is advisable for agencies that might sale product in the categories defined by the law to be familiar with it.  While I cannot image a major campaign targeting thrift shops for selling products outside of safety standards defined in CPISA, ignorance of expectations is not acceptable (see Lawyers Alliance for New York advisory).

The language of the legislation is such that it is difficult to conclude that retailers and thrift shops (you are a retail shop even if at a significantly reduced price)  are not covered under this broad definition of “sell, offer for sale, manufacture for sale, distribute in commerce.”

A few key points to be aware of:

“Effective 1 year after the date of enactment of the Consumer Product Safety Improvement Act of 2008, the manufacturer of a children’s product shall place permanent, distinguishing marks

on the product and its packaging, to the extent practicable, that will enable…”

“Every certificate required under this section shall accompany the applicable product or shipment of products covered by the same certificate and a copy of the certificate shall be furnished to each distributor or retailer of the product.”

“it shall be unlawful for any person to manufacture for sale, offer for sale, distribute in commerce, or import into the United States any children’s toy that can be placed in a child’s mouth or child care article that contains concentrations of more than 0.1 percent of diisononyl phthalate (DINP), diisodecyl phthalate (DIDP), or di-n-octyl phthalate (DnOP).”

This is just another example of a regulation that a nonprofit entity needs to be aware of and adopt appropriate internal policies and procedures to comply and minimize risk.  Therefore, it may be wise to review your policies and practices related to screening product accepted for resale in a thrift shop but at this particular moment one needs to know that the law passed in July 2008 became effective February 10, 2009.

Philadelphia and taxes

Today’s post comes once again from iOn guest contributor, John McGee. John can be found in the current issue of the Chronicle of Philanthropy, in an article about social networking and LinkedIn within the “economy and philanthropy” supplement.

In a recent nonprofit update, Grant Thornton LLP reported that Philadelphia has moved to expand the tax on unrelated income earned by nonprofits by amending its definition of the business privilege tax (BPT).  The BPT is a tax on gross receipts and net income. There is much debate in Philadelphia about how this tax should be used, if at all.

The change includes a provision that revenue “generated by a nonprofit organization from rental of any residential or commercial real estate is deemed income derived from unrelated business activity.” This provision based on a variety of analysis is different from that which is required by federal reporting standards for unrelated income. This expanded BPT presents a whole new set of budget issues to nonprofits and potentially provides the cash strapped city with a new revenue stream.

Some would argue that Philadelphia has a history of aggressively (Executive Order 1-94 as an example) viewing nonprofits as a potential source of tax revenue. Over the years they have implemented a number of efforts to impose a PILOT (payment in lieu of taxes) program to cover the cost of city services consumed by the nonprofit community.

Recent reductions in tax collections at the state and local levels have resurrected the debate over taxing nonprofits in some capacity. The most common idea is the PILOT concept because the real estate tax is a key component for local governments funding of critical services. These services are consumed by all in the community including nonprofit organizations. The recent closure of libraries in major cities has intensified this debate as reported in a December 2008 issue of the Library Journal.

While the issue of nonprofit property tax has been being debated for some time (NY Times article 11/12/07) the likelihood of a significant change has always appeared low. The situation is radically different now.

One thing to consider is: if organizations must divert funds from programs to pay the taxes or charges levied by communities, who will pick up the slack in services caused by the reassignment of those assets? Will the cities lose more in services than they gain in revenue?

Add this effort to that of the proposal in Massachusetts to levy a 2.5% tax on the assessed value of an endowment over $1 billion, and it becomes obvious the nature of this discussion and debate has changed. The question for the nonprofit sector is how to respond to these growing pressures and, more importantly, how to respond to the debate over what a charitable nonprofit is – a debate currently raging in other sections of the world.

Hospitals Beware – Nonprofits Be Vigilant

Today’s post comes to us again from guest contributor John McGee:

In its January newsletter, Fund Raising and Non-Profit Report (produced by Copilevitz and Canter, LLC) reports on comments made by Senator Charles Grassley in a December 13, 2008 Wall Street Journal article. It is suggested that new minimum requirements for aid to the poor (community benefit) may be legislated by Congress for non-profit hospitals. These minimums if legislated would change the debate on requirements to allocate a certain percentage of one’s operating revenue or expenses to approved charitable purposes.

TE/GE Commissioner Steven T.  Miller in January 12, 2009 speech addressed specifically issues related to community impact as it applies non-profit hospitals. In his address he acknowledged that the 40 year old standard may be outdated; that Schedule H on the new 990 will enhance transparency and accountability of hospitals to the existing standard; that any changes to the standard will cut both ways and that we are entering a new era in medical care and will need to monitor those changes as they apply to the exemption standard.

In comparing the comments of Mr. Miller with those credited to Senator Grassley, I must wonder if they are sharing them most recent data and current impressions. These are issues the hospital organizations will need to address if proposed changes to the community benefit standard are suggested based on outdated or incomplete data. Using Mr. Miller’s comments as a guide, it would seem that primary data is available but comprehensive date will not be until the new 990 has been used and validated.

The bigger issue for the general non-profit sector is if Congress legislates minimum allocation requirements to meet the community benefit standard for non-profit hospitals to retain their tax-exempt status; can that concept be applied to the general population of non-profits by extension or other legislation? Historically, the courts have ruled that such standards are not acceptable but in today’s fiscal and regulatory environment changes may be afoot.  Any proposed legislation dealing with minimum requirements will need to be scrutinized and evaluated as to how it not only impacts a segment of the tax code but how it might impact the full contingent covered by the code.

Mass stripping of tax exempt status by 2010?

Today’s post comes from guest columnist John C. McGee:

500,000 nonprofits could find themselves stripped of their exempt status by May 2010, as reported in January by Suzanne Coffman, GuideStar’s director of communications. That astonishing number comes from the IRS directly, as those organizations who have yet to file a 990-N as required under provisions of the Pension Protection Act of 2006 (PPA). To put this different way, roughly one-third of all registered nonprofits are at risk of losing their exempt status.

The provision in question requires exempt organizations that don’t meet a specific income threshold to file a new return with the IRS (income of course, as reported in form 990 or 990-EZ). The potential loss of nearly one-third of the registered non-profits within the next 18 months can be avoided by an active, aggressive, and coordinated educational campaign between the IRS, the states, organizations that have group exemptions, the accounting profession and the state associations of nonprofits.

What is or has the IRS done to inform nonprofits of this requirement? The bear minimum as required by law.

They have posted a notice to their highly informative website … all you need is awareness of the site and the time to devote to monitoring regularly for updates.

As part of their communication of this critical paperwork change, the IRS has also mailed out 650,000 postcards in February 2008 to organizations it believes are covered under this provision of the PPA. Notices sent to a group of entities that are now required to report because Congress believes they may not exist anymore or that it has outdated contact information for.

So to whom did the cards actually get sent to? Have they, in good faith, truly tried to notify effected nonprofits of their new tax obligations? Anyone in marketing will tell you that for a message to be heard and acted upon it, needs to be repeated frequently.  The IRS certainly has not aggressively advocated for awareness. My question is does the IRS have the will to drive this effort? And how many nonprofits will lose their exempt status and not know about it until it’s too late?

This is a major issue getting very little attention. See more of my thoughts on this issue here and here, from The Chronicle of Philanthropy.

Madoff + non-profits = new regulations?

Our friend and guest columnist John C. McGee was kind enough to pen his opinions for us:

A few thoughts on the Madoff debacle – as I continue to listen to and read about the fallout from the Bernard Madoff collapse I am concerned about the long-term consequences of the event – those being enhanced regulatory oversight of the non-profit sector and its activities.

Obviously, the collapse of a $50 billion fund is devastating. With many foundations and personal fortunes lost the impact of the demise of the funds under Madoff’s direction has been immediate and will in some ways be long-lasting simply through the loss of those funds. Already as has been reported in many media sources that various foundations have closed and non-profit organizations have reduced services. These are immediate and truly troubling events in a global economy that can ill-afford the loss of services those organizations provided directly or funded.

These consequences have already happened and there is little we can do now about restoring those lost funds. Organizations and individuals will and can respond to the needs of affected organizations but the fundamental event has already happened and unfortunately cannot be undone.

It is the future fall-out that we need to be vigilant of. With the changing of administrations, attitudes towards regulatory oversight will change. It has already been suggested that part, if not a significant portion, of the Madoff debacle was a result of lax regulatory enforcement. Therefore, it is reasonable to expect more vigilant enforcement efforts and a revisiting of existing laws and procedures to make such an event more difficult in the future.

The non-profit sector needs to be aware that legislation directed at investment disclosures and transparency will potentially impact their policies, procedures, operations and relationships with donors.

Congress, I expect, will fast-track regulatory review of the Securities and Exchange Commission (SEC) and may very well expedite the reauthorization of the Federal Trade Commission (FTC).

It is not the practice of Congress to pass legislation entitled ‘non-profit regulatory oversight’, rather they are more likely to include such oversight in some omnibus regulatory renovation or reauthorization legislation.

In the last Congress, the Senate in SB2831 wanted to extend the authority of the FTC to include those organizations recognized under section 501(c)(3) of the Internal Revenue Code. I expect this effort along with additional controls placed on investment practices through changes in the SEC oversight responsibilities to be early on Congress’ agenda. I also expect that Congress will explore a variety of means to enhance regulatory oversight of segments of the economy not least of which will be the non-profit sector. Simply put I expect 2009 to be a very active year related to regulatory issues and it is incumbent upon us to be attentive to these efforts.

The chart below compares seven federal tax law attributes of five common types of tax-exempt organizations, which is useful for non-profit organizations.

Common IRS Tax Law Restrictions on Activities of Exempt Organizations

Write to John C. McGee and view his LinkedIn Profile here

Should donors be wary?

Today the Wall Street Journal offers a “guide for vetting charities.” As nonprofit governance is a topic we’ve grown quite interested in at i On Nonprofits, we’ve recently made the acquaintance of an expert on this subject, who will be sharing his insights on this and other news and nonprofit sector items going into the new year!

John McGee is an executive with 32 years of nonprofit management experience, specializing in issues of regulatory compliance and governance for nonprofits. With the ongoing debate about how nonprofits can (or indeed, should) be run froma  regulatory standpoint, we look forward to bringing you John’s ideas and advice in the coming weeks.