States and Localities Squeeze Nonprofits

Are localities looking for revenue in the wrong place?
October 19, 2011 AT 1:00 PM
Penelope Lemov
By Penelope Lemov  |  correspondent
Penelope Lemov is a GOVERNING correspondent. She was GOVERNING's health columnist and was senior editor for several award-winning features.

In the search for revenue, some states and localities are getting awfully aggressive with nonprofits. For example, a few California counties are threatening to do away with nonprofits' exemption from paying property taxes if officials decide that nonprofits are not using their assets in a way that primarily benefits Californians. Over in New York state, Gov. Andrew Cuomo is demanding that all New York-based nonprofits that receive money from the state file details about how much they pay their executives. A specially formed task force will review the data and possibly issue a report with recommendations for reform. And in Minnesota, nonprofits are complaining that they're increasingly being hit with fees and assessments to pay for elevator inspections, waste water, fire inspections and other local government functions.

Intimidation? Maybe. An antagonistic approach? Certainly. A new problem? Not at all. For years, states and, even more so, localities have been trying to "encourage" nonprofits to pitch in more for the cost of services. The push comes at a time when nonprofits large and small have been hit by a trifecta of other troubles: a reduction in both individual and corporate philanthropy (as well as increased competition for those funds), cuts in government support and increases in demand for services.

Is there a point where trying to squeeze revenue out of the nonprofit sector is counterproductive? I asked Elizabeth Boris, director of the Urban Institute's Center on Nonprofits and Philanthropy, and Tim Delaney, president and CEO of the National Council of Nonprofits, this question and others. Here's an edited transcript of the interview.

Why shouldn't nonprofits pay property taxes?

Elizabeth Boris (EB): Communities very often compete to draw in businesses and give them tax breaks. The fact that nonprofits are not paying property taxes is nothing new, especially for areas that are giving breaks to businesses. There's a long history of recognition of the contribution these nonprofit organizations bring to communities and that they are in many cases providing basic services to communities that, if they weren't there, the government would be providing.

Tim Delaney (TD): One governor, who had to cut 88 programs because of budget problems, said she would talk to nonprofits and get them to pick up the slack. But we have no slack. We're stretched way too thin.

It sounds like you're talking about smaller nonprofits. What about larger institutions, like universities, hospitals and churches?

TD: In Boston this spring, the mayor and City Council started sending out tax bills to the largest nonprofits, saying we want you to pay 25 percent of what you would have paid if you weren't exempt. Those institutions have brought in endless job opportunities and good will to Boston. If city officials were trying to bring in Intel to build a new plant, they would be giving out tax benefits to recruit new jobs. Here they have existing jobs, and they are stepping on their own neighbors. It's important for us as leaders of the nonprofit and government sectors to work together so informed decisions can be made that benefit the broader community.

How do you assess California's approach of taking away the exemption from some nonprofit organizations?

TD: It appears that some local tax assessors applied some novel interpretations that created unnecessary confusion and alarm regarding the availability of tax exemptions in California. We understand that the relevant policymaking board is now involved and has ordered a re-evaluation of procedures to reduce misunderstandings, confusion, and complexity so nonprofits can continue to proudly operate in California and contribute to the well-being of that state and the nation.

EB: It would seem pretty sad if we can't have organizations that are promoting the common good receive some boost, incentive or subsidy from the government for their good work. That said, organizations should be bona fide charities, doing activities that are within their charter.

What about New York's approach, asking nonprofits to file forms about executive pay?

TD: There are two task forces underway in New York. The attorney general (AG), who has oversight authority over nonprofits, established one. The tone was recognizing that there are a lot of unnecessary burdens placed on nonprofits and that it is time to look at some of the accountability measures, reporting mechanisms and other procedures that are adding to costs and diverting already limited resources away from nonprofits and government missions. The AG wisely invited government people and nonprofit leaders to come together and figure things out.

There was a disturbing story in The New York Times in which allegations were made that nonprofit executives with state contracts were getting paid too much. The governor promptly established a task force to investigate nonprofit executive compensation and started sending out questionnaires. Nonprofits are not resisting oversight. Nonprofits recognize that we are accountable for public dollars. Let's broaden the review and see how much executives of businesses with government contracts are being paid.

EB: The salaries of the highest paid employees are on a nonprofit's IRS form 990. It's public information. We post the forms on our website. We know where the highest salaries are: They are directors of athletic teams in huge universities, surgeons in hospitals and medical schools, and CEOs of billion-dollar nonprofits. There is the notion that one way nonprofits can be not attending to their charitable mission is by retaining too much revenue for their own administration and salaries. Anytime there's a scandal with someone making a high salary in a nonprofit then that becomes a lever for looking more carefully.

Some state and local officials are hoping nonprofits will raise philanthropic money to cover services they've had to cut. Can they?

TD: We are competing directly with governments for donations. Arizona set up a program inviting people to make donations to build a wall across the border. Big public universities are hiring development officers to raise money because legislatures are cutting them. There are not enough philanthropic resources to support all the programs governments are abandoning.