© 1995 by Geoffrey W. Peters
GEOFFREY W. PETERS, P.C.
9024 Trailridge Court
Vienna, VA 22182
(703) 356-0684 (fax)
For the purposes of this discussion, it seems reasonable to assume that the vast majority of nonprofits derive substantially all of their revenues from donations of some sort. These donations can be in the form of corporate or foundation grants, individual major gifts, smaller gifts as a result of direct response fundraising, etc. Some nonprofits receive funds from governmental agencies or from unrelated business income but most of these organizations also receive substantial voluntary donations.1 Therefore it is appropriate to expect that most of the costs of nonprofit regulation,2,3 are costs incurred ultimately by the donors to nonprofits.
The sources of regulation, and therefore compliance costs are multiple. Once source is the federal government and its agencies. For example the Internal Revenue Service, the United States Postal Service, the Federal Trade Commission, and arguably the Federal Election Commission all are sources of regulation and therefore costs of compliance.
Major sources of regulatory costs are state governments and their agencies through the charitable registration and regulation process. This process goes beyond the nonprofit registration statutes as an increasing number of states are forcing nonprofit organizations to register as foreign corporations “doing business in” that state even though they have no “presence”4 in the foreign state other than by mailing or telephoning solicitations.
Next there is the increasingly common additional regulatory layer imposed by cities and counties. While not yet a major source of costs to nonprofits, the sheer number of cities and counties in the United States and the specter5 of a plethora of regulatory schemes threatens even the most affluent charities. Examples here are the regulatory activities of the City and County of Los Angeles and Pinellas County, Florida.6
A final level of quasi-regulatory activity of increasing cost to nonprofits are the activities of the so-called “watchdog” agencies or groups. Organizations such as the National Charities Information Bureau, Philanthropic Advisory Service of the Council of Better Business Bureaus, the Minnesota Charity Bureau and the American Institute of Philanthropy are examples. It is certainly arguable that because these agencies are voluntary and presumably do not have the coercive power of the government, they cannot truly be considered “regulatory.”
However, two factors suggest that these “voluntary” activities take on the cloak of governmental regulation. First is the ongoing and pervasive relationship between some of the watchdog agencies and government regulators. Often they appear to act in concert suggesting that they share a common agenda. Second is the less obvious, informal benefit that appears to derive from being “approved” by the watchdog groups. Some government regulators have suggested that they would be less likely to investigate or pursue technical enforcement of regulations against “good” charities such as those “approved” by some watchdog groups as opposed to those which have been disapproved.
Regardless of what one makes of the argument that these watchdog groups are or are not regulatory in nature, it is clear that their activities cause nonprofits to spend considerable sums of donated funds in efforts to become “approved.” The risk of disapproval is at least anecdotally widely thought to be great, particularly in terms of lost opportunities for foundation grants.
There are obvious direct economic costs to donors when nonprofits to which contributions are made incur state regulatory costs. These include registration fees, payments to those who perform registration services, costs of printing mandatory disclosure statements, payments to accountants and/or auditors to certify financial reports or complete nonprofit tax returns, etc. Let us examine some of these costs.
While generalizations certainly gloss over exceptions,7 a successful §501 (c) (3) charity which solicits donations nationally by direct mail can spend, depending upon the level at which it desires to comply with regulation, as much as $3,177 in registration fees and $514.50 in annual report fees, certificates of authority, and campaign report fees.
The fees for certificates of authority to “do business in” another state can cost even more than this if the charity registers in all 50 states which some do. To accomplish this requires hiring a registered agent, such as CT Corporation which provides this service nationally at an annual fee of approximately $100 per state.8 This fee is in addition to the annual foreign corporation registration fee (not the same as the annual charity registration fee) charged by the state. Occasionally there are additional non-economic requirements in some states (e.g., an annual report).
Because of the complexity of state registration requirements, for profit organizations have gone into the business of helping nonprofits and fundraisers comply with these requirements. A survey of a number of organizations performing such services show that the method of charging nonprofits varies. Some organizations charge nonprofits a flat fee per month (e.g. $400 - $500 per month) while others charge by the state (e.g. $125 - $175 per state). It would not be uncommon for a nonprofit to pay an additional $4,800 to $6,000 per year for registration services.9
My interviews suggest that even when an outside professional is not retained, the nonprofits spend a substantial amount of time attempting to comply with state regulatory schemes. Those interviewed suggested that they spend as much as one-quarter of one person’s time, plus clerical support time simply filling in forms and securing notarized signatures from the appropriate officers of the nonprofit or its board. Thus, internal costs (including office space, fringe benefits, and overhead) can exceed the costs of paying outsiders for the service by 50% to 100%.
An increasing number of states require mandatory disclosure statements in direct mail solicitations and in some cases in telephone solicitations. The printed statements typically provide a state registration number and an in-state toll free telephone number so that citizens of those states can call the agency which regulates charitable solicitations for information about the charity. The costs to produce these mandatory disclosure statements depends upon the nature of the direct mail package. Often the statements are printed on the reverse side of a letter or reply device and the cost is approximately $1.00 per 1000 letters printed. In some cases, nonprofits have printed the disclosure statements as an insert at an estimated cost of as much as $3.50 per 1000 letters printed.
While this cost might seem minor, some of the larger charities I interviewed, mail as many as 48,000,000 letters per year and thus may incur, at a minimum, an extra $48,000 cost to provide mandatory disclosures to prospective donors.
Some of the mandatory disclosure statement requirements are viewed by nonprofits as particularly annoying. For example, Tennessee requires the disclosure statement in 12 point type regardless of the typeface used in the remainder of the mailing. The statement must use the exact wording specified in the Tennessee regulations, and the disclosure must include the statement (if appropriate) that a fundraiser will receive a portion of the funds raised. This type of requirement prevents the charity from writing an introductory explanatory statement regarding the purpose of disclosure, followed by the registration numbers and telephone numbers of the states which might satisfy the spirit of the disclosure requirement but not the specifics of the regulatory requirement.
The costs of mandatory disclosure are not limited to those incurred by the charity. At several of the state regulatory agencies visited in the course of this research, one of the primary activities of the staff is responding to hundreds of telephone calls received from citizens who ask “whether the ABC Charity is a good one.” Of course most state charity officials do not answer such questions directly, but merely provide information from their records regarding the charity’s most recent financial statements or information from the charity’s registration form. In some instances, however the state charity officials have been known to provide information as to whether the charity was approved by one of the watchdog agencies, thus raising again the question of whether such agencies are in fact part of the official regulatory process.10
One of the costs of such regulatory activity is the problem which occurs when a state regulatory agency makes an error. My discussions with charity officials and those who provide registration services show substantial anecdotal evidence of agencies erroneously telling callers that a nonprofit is not registered with the state when in fact the contrary is true. When the charity official or its registration agent contacts the state for an explanation they have often merely replied that the agency had “lost the file.” Such cases appear not to be uncommon in Florida. Of course the charity only finds out about the problem when a prospective donor calls to ask why it isn’t registered. Those who never call the charity after receiving erroneous information presumably also never donate.
When the state regulatory scheme calls for a mandatory independent audit by a certified public accountant, the nonprofit which might not otherwise hire such an auditor incurs an additional cost associated with that regulation. According to the charities interviewed, this cost seemed to vary dramatically based upon the size of the charity. One small charity which I interviewed was able to secure its audit for an out of pocket, cash cost of $2,000 including the preparation of the IRS 990-tax return and certification of state financial forms. Their auditor states that they were contributing approximately $4,000 in uncompensated “in-kind” services.
On the other end of the spectrum, a very large charity which I interviewed uses one of the five largest audit firms in the U.S. It incurs an annual cost of nearly $50,000 not including the costs to prepare the tax return or $1,000 for each certification of a state financial form.
Few of charities I interviewed view the costs of an audit as an additional regulatory cost. They indicate that they would secure an audit whether or not it were required. When asked why, the responses varied between “protecting the officers and directors” to “ensuring public confidence.”
There is one external audit cost in a few states which is attributable solely to state regulation. This is the requirement that an annual financial statement be completed on a form supplied and required by the state and that this statement be certified by an independent auditor. This cost was variously placed at between $200 and $1,000 per state.
A number of nonprofits have substantial and often atypical compliance costs. These are incurred either a result of their being the target of regulatory enforcement activity or as a result of their leadership and willingness to challenge regulatory schemes. Two of the more recent public examples in the former category are the United Charity Council case11 in which, despite the charity being in bankruptcy, it is incurring substantial costs in challenging an I.R.S. effort to revoke its §501 (c) (3) tax exemption. The second example is the United Way investigation which has caused the charity to incur substantial costs as a result of governmental investigations of the activities of its former chief executive.12
In the latter category, for example is Disabled American Veterans which has incurred costs in excess of $1 million in its efforts to challenge the Internal Revenue Service on a variety of issues including the taxability of income from the rental of mailing lists.
These last three examples each involve large scale, high cost, highly publicized, federal regulatory activities. There are, nevertheless, smaller, less publicized state regulatory activities which take place on a frequent basis. Perhaps the best known of these is the multistate enforcement actions taken against a fundraiser formerly known as Watson & Hughey and a number of its clients. Regardless of the size, scope and source of the enforcement or regulatory activity, it is almost inevitable that the costs of these activities are borne by the donors.13
Kentucky recently revised its regulatory scheme adding a “point of solicitation disclosure requirement.” This feature of the statute was almost immediately subjected to a temporary restraining order preventing its enforcement.
Ohio’s charitable solicitation statute was challenged in 1991, and that case is currently on appeal in the U.S. Court of Appeals for the Sixth Circuit. Amongst the several issues is the validity of state regulation which has the effect of discriminating against charities which hire professional fundraisers.
Such regulatory challenges are becoming more frequent as it appears that an increasing number of state legislatures and promulgators of charitable solicitation regulations are ignoring the Constitutional protections afforded nonprofits engaged in solicitation activities.14 In the words of the Supreme Court of the United States:
[W]e hold that when the constitutional right to speak is sought to be deterred by a State’s general taxing program due process demands that the speech be unencumbered until the State comes forward with sufficient proof to justify its inhibition.15
Revenue enhancement by a governmental agency is not a sufficient justification for taxing free speech under numerous decisions of the Supreme Court.
Other current Constitutional litigation includes a challenge to New York’s solicitor registration fee and a challenge to the Pinellas County, Florida ordinance prohibiting charitable solicitations after 8 p.m. Still more litigation appears to be on the horizon. One group is planning a legal (Constitutional) assault on Pennsylvania’s statutory scheme. Another is currently planning litigation against the U.S. Postal Service on behalf of a nonprofit §501 (c) (6) fraternal benefit organization which has been effectively denied the right to use its nonprofit mail permit. Other examples abound within the nonprofit and fundraising industries.
All of these challenges, whether defensive (Government initiated regulatory enforcement action against a nonprofit) or offensive (Nonprofit initiated challenges to regulatory authority) are expensive and the costs to the nonprofits are usually borne by the donors.16
There are some less obvious indirect economic costs to donors as well. For example, if one makes the reasonable assumption that professional “for-profit” fundraisers17 either break even or make a profit, then the fees charged by these fundraisers to their nonprofit clients include the “overhead” or costs to the fundraiser of complying with regulation. Ultimately, the donors pay these costs as well. Nonprofits report these costs variously as consulting, fundraising, and program expenses.
The economic regulatory costs which a fundraiser passes on to its clients, and ultimately to the donors vary according to the type of fundraising and the level of compliance. Professional fundraisers must pay registration fees similar those of charities.18 Often these fees are even greater than those charged by the states to charities and may exceed $4,750 for professional fundraising counsel and substantially more for fundraising solicitors.19
Solicitors are often required to register individually as well as through their employer and may have to pay individual registration fees. For example, in South Carolina they must also be individually bonded as opposed to being covered under their employer’s bond. New York currently charges $80.00 per solicitor to register. This requirement is currently being challenged in court.
Bonding is required in a number of states with the face amount of the bonds being as much as $200,500. Bonds are typically secured through an insurance company. A well established fundraiser with substantial assets may be able to secure bonding for an annual premium as low as 1.5% to 3% of the face amount of the bond, thus limiting its annual costs to $3,000 - $6,000. New fundraisers without substantial assets may not be able to secure bonding and therefore may not be legally able to assist a nonprofit with fundraising in certain states which require bonds. Interviews with newer fundraisers shows that some had to avoid conducting campaigns in certain states and others had to provide as much as $100,000 collateral in the form of a Certificate of Deposit while at the same time paying a premium of 10% of the face amount of the bond (as much as $20,000 per year).
What seems particularly onerous about the bonding requirement is that in most states the fundraiser cannot simply put the face amount of the bond on deposit in a bank in the state requiring the bond, and at least receive interest upon the deposit. Most states require a bond by an insurance company licensed in that state. Thus the insurance company earns a premium and the fundraiser passes on the cost to the donor.
Another anomaly regarding bonding is that bonds are extremely rarely if ever revoked. It would seem that if bonding were a successful and efficient way of insuring compliance, either all fundraisers would be complying, or bonds would be revoked with some frequency. Neither is the case. Fundraisers are often fined for noncompliance but bonds are never revoked. Thus the requirement of bonding as part a state’s regulatory scheme simply increases the costs of doing business without providing a salutary effect upon fundraisers or even revenue to the state.
Just as nonprofits seek professional assistance through the maze of state regulation, so to do fundraisers. However professional fees for such assistance to fundraisers are greater. Interviews with registration professionals show that fundraisers are charged between $600 - $750 per month or between $150 - $175 per state. Additional fees are charged for each contract with a nonprofit which is to be registered. Thus annual compliance assistance costs for a medium sized agency with several clients can run as much as $10,000 per year.
Most agencies that I interviewed felt that they also needed to consult with their advisors, usually law firms, regarding contracts with their nonprofit clients. Many state regulatory schemes have certain mandatory or prohibited clauses in such contracts.20 Some of these are rigidly enforced to the point of ridiculousness. For example, one state requires that it receive the contract within ten days after its execution. Its staff interprets this requirement to mean that it must be executed by all parties and submitted within ten days of the first signing. Thus, if a direct marketing agency forwards a signed contract in the mail and it takes five days to arrive and the nonprofit takes another few days to assemble its Board of Directors to approve the agreement, the contract is unlikely to arrive on the desk of the state regulator within ten days of the initial agency signing. In exactly these circumstances, such contracts have been rejected as not being in compliance.
A few states require the fundraiser to provide a budget of the funds to be raised and the expenses associated with the fundraising effort to the charity and the state when the contracts are registered. As a practical matter, unless there is a substantial track record with a particular nonprofit using that particular fundraising method, such estimates are nothing but an exercise in sophistry. Expert telemarketers and direct mail agencies cannot predict the reaction of the public to a fundraising appeal for a charity which has not previously engaged in such appeals any more than expert deferred giving fundraisers can accurately predict the quantum of legacies to be pledged for a charity which has never solicited deferred gifts.
Just as is the case with nonprofits, fundraisers may have to register as doing business in various states and pay fees to have registered agents in those states. Here the argument that they are doing business in these foreign states can grow even more tenuous.21 For example, how can a Virginia consultant whose only function is to write copy for a fundraising letter in Virginia for a Virginia based nonprofit corporation be said to be “doing business in North Dakota” simply because the nonprofit chooses to mail a copy of that letter to a prospective donor in North Dakota? Nevertheless, fundraisers have the Hobson’s choice of either spending hundreds of dollars complying with questionable regulations or thousands of dollars challenging them in court.
A number of fundraisers report that they also pay accountants to review the cost of fundraising allocations prior to providing such data to their clients for review by the client’s auditors. While some might argue that this is done in an abundance of caution, recent interest by the Federal Trade Commission in the area of charitable fundraising suggests to the contrary.
The statutes establishing and governing the Federal Trade Commission make it clear that it has no jurisdiction over nonprofits. However, the F.T.C. has recently shown a willingness to insert itself into the area of fundraising for nonprofits by focusing its enforcement powers upon for profit vendors to nonprofit organizations. Typically this focus is upon the fundraiser. In recent cases the F.T.C. has brought enforcement actions against fundraisers by suggesting their activities were deceptive and therefore fraudulent. At least one F.T.C. attorney remarked that “any charity that jointly allocates costs between public education and fundraising is involved in fraudulent deception and any fundraiser who raises funds for such a charity is a participant in the fraud and is liable therefore.”
Such opinions by those responsible for enforcing federal laws can have a significantly chilling effect upon the managers of a fundraising enterprise. It is no wonder that they seek legal and other professional counsel in an attempt to ensure compliance with dubious regulatory schemes.
My interviews with fundraisers who used outside assistance suggest they still spend as much as ten hours per week in compliance efforts. I did not locate any fundraisers who did not either use some outside assistance or have a full time attorney on their staff.
Fundraisers share with their nonprofit counterparts many of the same concerns about the logic or intrusiveness of various state regulatory schemes. For example, the requirement in Utah of fingerprinting and photographing fundraisers and officers of charities is viewed by many as extraordinarily onerous. Almost every person interviewed commented that “Utah’s scheme is one in which the charity and fundraiser are presumed criminal unless they can prove otherwise.” Others attributed this regulatory approach to Utah’s desire to keep charitable funds within the state and keep fundraisers out.
Other complaints registered were Kentucky’s insistence on a physical description including “Scars, marks, amputations” for fundraising consultants who would be unlikely to ever set foot in the State of Kentucky. One of the most common complaints by charities and fundraisers was the requirement of a number of states that officers of the nonprofits and fundraisers provide full name including “maiden name,” home addresses and telephone numbers, social security number, and date of birth.
Recognizing that the completed registration forms containing this information are then public records by law,22 most nonprofits, registration professionals, and fundraisers indicated to me that they do not comply with such requirements. Most use the address and phone number of the charity and refuse to supply a social security number.23 A few states however are now rejecting applications without such information.
It seems somewhat reasonable that, for example, the President of General Motors having been asked to volunteer as a Board member of a nonprofit, might not want to publicize his or her home telephone number. It also seems reasonable, given the pervasiveness of credit card fraud and the like, that volunteer directors might not wish to provide their dates of birth, social security number, home address, and phone number in fear that such information once made public might fall into the wrong hands.
Other concerns expressed to me regarded the requirements in Georgia and Tennessee for a resume with a ten year employment history, or the requirement in Kentucky that the registrant pay $5.00 for a criminal background investigation, or the requirement in Tennessee to provide salary data for officers, or the requirement in Georgia to provide financial statements of the fundraisers. None of these requirements seemed to those who I interviewed, many of whom support some regulation in principle, to be reasonable methods to ferret out fraud and corruption in charitable solicitations.
Some of the regulated who most strongly support regulation for the “good of the industry” still long for a single registration form to reduce the costs and uncertainty of compliance. One charity officer who does her own registration work referred to the psychological stress and jeopardy associated with not knowing what is being asked on certain forms or what requirements may be imposed. This individual was clearly motivated to and attempted to comply with any and all regulations. Yet she was frustrated to have a registration rejected by a state solely because the notary who had notarized a signature had mistakenly written the wrong date on the notarization. This same charity competes in the marketplace against others who not only don’t worry about such trivial matters but who don’t even bother to register.
Less obvious than the prior two types of economic costs are those associated with indirect effects of regulation. For example, many states require substantial bonds for professional fundraisers. This creates an economic barrier to entry into the business of professional fundraising. Such barriers often prevent small, less well financed agencies from entering the marketplace. The anti-competitive effects of this type of regulation (bonding) causes larger, better financed agencies to be able to establish and maintain generally higher fees since they need not compete with these less well financed smaller or start-up fundraising agencies.
Similarly, my research shows that there is a significant underground economy populated by fundraising agencies and nonprofits which do not comply or register either in every location where required by statute or in some cases in any locations as required by statute. The lack of even handed regulatory enforcement by the states creates further economic dislocations.24 Often the nonprofit or fundraiser which attempts in good faith to comply with registration requirements finds itself having to hire lawyers and accountants to assure meeting tortuous technical requirements thus adding significantly to the “overhead” of the nonprofit or fundraiser. These increased costs are ultimately borne by the donors to such nonprofits. Non-compliance is often substantially less expensive because of irregular enforcement patterns.
If it is assumed that non-fraudulent, honest nonprofits and fundraisers are more likely to attempt to comply with regulatory requirements, the effect is to raise costs to the “honest” nonprofits while maintaining lowered costs for their less scrupulous brethren.
Evidence of this non-compliance is plentiful. For example, New York publishes a list of registered charities with certain information about each. Many of the charities which register in New York also solicit funds in most or all of the remaining states. Yet a cursory check of registrations in other states shows that a substantial number are not registered elsewhere. The reverse is true if one checks Pennsylvania registrations and then compares them to New York.
During informal interviews it became apparent that many fundraisers and nonprofits which solicit donations on a national basis register only when forced to do so by threatened court action. Some organizations base their refusal to register on principled grounds indicating that they feel it is an infringement on their Free Speech rights or their rights to freedom of religious beliefs. Others indicate that it is merely an economic problem and that they do not register because of the inconvenience and cost.
What is most amazing is the range of organizations that do not register. One of the largest charities in the United States which mails tens of millions of solicitations each year works with a direct mail agency which refuses to register on the grounds that they are an “advertising agency” and not a “solicitor” and therefore such rules do not apply to them. Since it appears that enforcement action regarding registration requirements is random at best, once again it is those who voluntarily attempt to comply who incur the costs of compliance. Those who avoid registration seem mostly to be successful in avoiding any costs for their avoidance. Some report successful avoidance for many years.
When I have asked regulators about this problem of inconsistent enforcement, they most often have responded by indicating that they don’t have the resources to enforce the regulations thoroughly and that they cannot act without complaints from citizens regarding specific solicitations. Given the relatively small universe of donor responsive lists being used by direct mailers and telemarketers, it seems astonishing that regulators are not “seeding”25 such lists as a device to detect unregistered mailers as opposed to awaiting citizen complaints.
What are the costs of regulatory compliance? For a small charity without major sources of income employing a small to medium sized agency, the compliance costs may be as much as $25,000 per year in direct and indirect economic costs, not to speak of any non economic costs.
For a large charity attempting to comply with regulatory requirements but without involvement in any enforcement activity or challenges to regulation, the annual costs may easily surpass $150,000. If enforcement activities or challenges are involved, the costs may easily be as much as $500,000 to $1,000,000 per year. Across the entire industry, literally millions of donor’s dollars are being spent annually on regulatory compliance. Is it worth it? Is the public better protected as a result of this expenditure? Are fraudulent operators being caught in great numbers? Or, are we spending millions of dollars in pursuit of a few charlatans and in the process rounding up hundreds of innocents whose only failing was forgetting to dot the “i”?
No analysis of the costs of regulation would be complete without at least a brief discussion of the possible benefits.
Americans are known world wide for their generous support of charities. At a time when the government and political institutions have reached a nadir in the confidence in which the public holds them, it is even more critical that the nonprofit sector builds credibility so it can provide services which the government cannot or will not. Scandals such as those involving United Way serve only to reduce confidence in the charitable community. The constant negative carping of some of the watchdog organizations only adds credibility to those who believe that many or most charities are fraudulent.
Does anyone seriously believe that only the few hundred N.C.I.B. approved charities are worthy of support when there are more than 500,000 I.R.S. approved §501 (c) (3) organizations alone?
Charity regulators should play an important role in helping the public regain confidence in the nonprofit community.
The role of regulation should be to ferret out and prosecute fraudulent charities and charitable solicitation schemes. There are sufficient civil and criminal laws to permit economic recovery or prosecution of wrongdoing. But the detection and prosecution of charitable fraud is not furthered by rejecting registrations because a notary made an error on a date or because it took four weeks to collect all the necessary signatures. The goal of protecting the public is not furthered by asking public spirited volunteer board members for their home phone numbers and social security numbers.
The role of the government is a delicate one. It has awesome powers and resources when compared to voluntary associations of citizens seeking to advance a cause or relieve some suffering. The Supreme Court of the United States, the Constitution of the United States, the Founding Fathers, and students of this country such as Alexis de Tocqueville have all in various ways remarked about the strength in America as a result of our generous nature, our willingness to combine for the common good, and our structure of laws which limit the intrusion of the government into the lives of the people. Regulators should be mindful of this history when exercising their authority.
Instead of viewing most charities as the enemy, or as files to be “processed,” it would behoove regulators to find ways to reduce the amount of money donors pay for charitable regulation and fundraising. Establishing a standardized registration form which asks only that information which is truly needed and useful would help charities as well as regulators. Preprinted renewal forms where the charity or fundraiser is merely asked to confirm or change the registration information from the prior year would also be helpful. Accepting GAAP audited financial statements in lieu of re-certified and restated statements on various states’ forms would reduce costs. Reducing registration fees to those truly necessary to finance the registration process, and not using charitable donations as an alternative to tax revenue, would be most welcome. Public expressions of confidence in the legitimacy of the vast majority of the charitable and fundraising communities would encourage contributions and thereby reduce fundraising costs.
These are some of the things which the states have within their power to do. It remains to be seen whether they will do them.
Over a period of more than two years, I have been involved in collecting data on the regulation of charities and fundraisers. These data have ranged from anecdotal information gathered by interviews or otherwise, to systematic reviews of official documents, reports and statistical summaries. They have included information regarding federal agencies such as the U.S. Postal Service, the Internal Revenue Service, the Federal Trade Commission, and the Federal Election Commission. The data have also included some information regarding regulation by local city and county governments. The primary focus however has been on state registration and regulation. In addition, I have attempted to review some of the literature regarding charitable regulation in order to place my analyses of the data in context.
As a result of these data collection efforts, I have had access to charitable registrations, fundraising contracts, reports of campaign solicitations, and annual reports and IRS Form 990 tax returns comprising more than 1,200 documents regarding more than 300 nonprofits and fundraisers. Much of this information only has relevance for other research I am conducting regarding the various methods of contracting for fundraising services and fees charged by fundraisers and not for the costs of regulation. This brief report has as its focus the latter topic. In time, I hope to produce further reports on other related and unrelated topics.
I wish to acknowledge the contributions of many others to this ongoing research. Of particular note has been the ongoing cooperation of the charitable registration and regulation offices and staffs of the States of New York, Pennsylvania, and Virginia. The cooperation of the managers and staffs of these state offices were the basis for the majority of the documentary data collected. Several other states have provided helpful information on multiple occasions including Florida, Massachusetts, and Maryland.
Many nonprofits have also been helpful, some of which have asked to remain anonymous. While I will not specifically name these charities here, there are four individuals who work with some of these charities who have been particularly helpful. Amongst these are: Max Hart and Anita Bloom of Disabled American Veterans, Rita Hofbauer of Save Our Aging Religious, and Robert Mills of Council for Government Reform.
Similarly a number of direct mail and telemarketing fundraisers as well as lawyers and accountants for nonprofits and fundraisers have been helpful. Many of these have requested anonymity but they know who they are and I can only thank them for their insights and willingness to share proprietary data. I can publicly thank the following law firms: Perlman and Perlman (New York), Maureen E. Otis (Houston), Copilevitz and Cantor (Kansas City), and the Nonprofit Services Group (Washington, D.C.).
Finally, I have to acknowledge the benefits I received from informal association with a number of industry groups and as a result of articles published in various trade publications. While none of these played any official or even unofficial role in this research my attendance at their conferences and the ability to associate with their members and staffs have been helpful in suggesting sources of information and in providing access to professionals in the nonprofit and fundraising industries. The industry groups include: the National Federation of Nonprofits, the Association of Direct Response Fundraising Counsel, the American Telephone Fundraisers Association, the Free Speech Coalition, the National Society of Fundraising Executives, and the Direct Marketing Association. The trade publications include: Philanthropy Monthly, the Nonprofit Times, and the Chronicle of Philanthropy.
Having acknowledged all of this assistance, I hasten to add that I alone am responsible for all information, analyses and opinions as well as for any factual inaccuracies. No reader should make assumptions regarding the sources of the information contained herein. I have spoken to number of people at various times and who serve in various roles in the nonprofit, fundraising, and regulatory communities. The impressions of what they said are my own. Further, none of the opinions expressed herein are the responsibility of nor should they be attributed to any organizations with which I have or am currently consulting or to any of my legal clients. Nothing herein should be construed to be legal advice to any person or organization.
1 An interesting topic which is beyond the scope of this report is the question of what is the proper method of calculating the costs of fundraising. Some charity “watchdog” groups argue for the exclusion of some or all “Gift-in-Kind” income and/or against allocation of joint costs despite the clear efforts of some charities to use direct marketing for public education. While the logic of these arguments seems dubious, the same faulty logic could easily be used to require the exclusion of government grant income on the grounds that such grants are not voluntary donations but rather coerced redistribution of resources through taxation. Similarly, the issue of accounting for the costs and value of volunteer labor is inadequately addressed by such watchdog groups.
2 The phrase “nonprofit” and “charity” are used interchangeably herein. In fact, there is a distinction both in fact and in some states’ laws between the two. For purposes of this report the phrases refer to nonprofit organizations which solicit donations from the public regardless of their mission or I.R.S. classification and typically includes §501 (c) (3), §501 (c) (4), §501 (c) (19) organizations.
3 The “costs of nonprofit or charity regulation” as described in this report refers to regulation of nonprofits because they are nonprofit or because they solicit funds from the public. Not discussed are the costs of compliance with laws equally applicable to other “for profit” organizations such as the costs of incorporation, compliance with anti-discrimination regulations, compliance with the myriad of regulations relating to the employment of staff, etc.
4 Under the Constitution, states may not create barriers to commerce amongst the states. Therefore, their efforts to regulate end at their borders unless the enterprise being regulated has a “presence” or “nexus” within the state doing the regulation. Normally, in commerce, merely mailing letters or making telephone calls from another state is not a sufficient nexus to be said to be “doing business in” the foreign state. The regulation of charitable solicitation appears to be an exception to that general rule, although a legal argument to the contrary can be made.
5 There are more than 5,000 jurisdictions in the United States which could, theoretically, impose their own regulatory schemes and attendant costs upon charitable solicitations. Currently regulation is required by approximately 40 states and a handful of cities and counties.
6 Los Angeles has a particularly onerous, extensive, and expensive to print, mandatory disclosure form. Los Angeles also does not differentiate amongst types of fundraisers thus requiring direct mail consultants who never get within 2,000 miles of the county to register by providing their height, weight, color of eyes, date and place of birth. Pinellas County charges a $100 registration fee in what appears primarily to be a scheme not to regulate solicitations by nonprofits but rather to raise funds for the county. The use of charitable solicitation registration fees primarily as a revenue source raises significant questions under the First Amendment to the Constitution of the United States. This issue is discussed by Henry C. Suhrke in Should Charity Regulation be a Profit Center for State Government?, December 1993 Philanthropy Monthly at 5.
7 Exceptions include, in some states §501 (c) (4) organizations, churches, educational institutions, smaller organizations which receive less than a stated threshold amount of donations, etc. Part of the costs of compliance is determining what rules apply to your particular organization since there is no uniformity or consistency amongst the various jurisdictions.
8 Some states such as North Dakota will not permit charitable registration unless the nonprofit is already registered as a foreign corporation “doing business in” that state. This is despite the clear wording of the North Dakota statute regarding the definition of “doing business in North Dakota” which exempts foreign corporations from registration if the only contacts with North Dakota are via letters mailed or telephone calls made into the state. North Dakota’s requirement also flies in the face of the recent decision of the Supreme Court in the Quill sales tax case. Thus, in North Dakota, a complying charity must pay the fees of a registered agent (approximately $100.00) plus the costs of registering as a foreign corporation ($60.00) in order to have the privilege of registering as a charity ($10.00).
9 Apparently it is not only law firms which provide these services, despite the potential for other such organizations and individuals being charged with “unauthorized practice of law” under state law. There are individual entrepreneurs and accounting firms which also offer registration services to nonprofits and fundraisers.
10 A serious question has arisen as to whether the information provided by the N.C.I.B. watchdog group is accurate or whether their approval process is consistent. A recent study by C. Emigh and G. Williams done for the National Federation of Nonprofits suggests severe inconsistencies in the N.C.I.B. decision process. It is unclear what the legal liability of the state would be for distributing such erroneous information about a charity to potential donors.
11 United Cancer Council v. Commissioner of Internal Revenue, Case 2008-91X (U.S. Tax Court).
12 It is interesting to note that when the United Way investigation first began, the charity was not under investigation by any state or federal regulators and was fully approved by all of the watchdog agencies. While not intended as a criticism of the regulators or watchdog agencies (my belief is that the criticism should be of the charity’s directors), this example does suggest that there are significant limits on the abilities of regulators to detect fraud, waste and abuse within a charity’s operations.
13 The primary exception, of course, is where the enforcement activity costs a fundraiser money which cannot be recovered from fees and other income derived ultimately from charitable clients. This is a rare occurrence which primarily happens only when the fundraiser is forced out of business.
14 When a charitable organization solicits contributions, that activity constitutes speech protected under the First Amendment and as such, any regulation or restraint of such speech must be circumspect and exist only to protect a compelling governmental interest. Schaumburg v. Citizens for a Better Environment, 444 U.S. 620 (1980); Secretary of State of Maryland v. Joseph H. Munson Co., 467 U.S. 947 (1984); Riley v. National Federation of the Blind, 487 U.S. 781 (1988).
15 Speiser v. Randall, 357 U.S. 513, 528-29 (1958).
16 In some instances, under various federal and state statutes, a nonprofit organization which successfully challenges a regulatory infringement of its rights can recover from the government its costs of litigation including attorney fees. Thus, while the donor may foot the bill during the litigation, it may be the taxpayer who foots the bill for inappropriate regulatory activity.
17 For purposes of this report, the word “fundraiser” is used to describe a variety of consultants including telemarketers, direct mail agencies, advertising agencies, etc. Many of these organizations help nonprofits with public educational activities which go far beyond fundraising. For example, some direct mail agencies work with 501 (c)(4) grassroots lobbying organizations to help educate the public about certain issues and only incidentally ask the public for funds. Such clients may derive most of their income from corporate donations or major gifts. For simplicity, all of these activities will be referred to as fundraising despite the fact that much of the activity is marketing of a completely different nature. See n.19 infra. for the distinctions between fundraising counsel and fundraising solicitors.
18 At least one state charges a very modest fee to fundraising solicitors, but the fee varies, increasing with the amount of the funds raised by the solicitor. This presumably gives rise to the power of the state regulatory agency to review the financial statements of the fundraising agency in order to insure compliance with its fee structure. Since information provided by charities and fundraisers to state regulatory agencies is, in almost every state, public information by statute, presumably if an inquiry were made in this state, the financial statements of the private, for-profit fundraiser would be open to review by its competitors.
19 The distinction between fundraising counsel and fundraising solicitor varies by state (as does the terminology) but in general the counsel acts as a consultant to the nonprofit but does not actually receive the donations nor solicit them in person or by telephone. The door to door or telephone solicitor or consultant which directly contacts the public or receives the donation is generally considered a solicitor and is often subject to higher registration fees and bonding costs.
20 More than twenty-five states have some requirements regarding the contracts between fundraisers and nonprofits.
21 See footnote 8 and the text accompanying it regarding “doing business in” a foreign state.
22 More than thirty states have provisions requiring that this information be made available to the public.
23 It is illegal to require a person to supply his or her social security number for any purposes other than official business with the federal Social Security Administration.
24 This is not a suggestion that the state regulatory agencies are purposely avoiding enforcing their registration schemes. There may be many reasons for lack of even handed enforcement, the primary one of which is lack of resources. Another is lack of familiarity with the industry resulting in lack of creativity in investigatory techniques.
25 “Seeding” a list is simply a process by which a person makes a donation in order to have his or her name added to a list so they can determine when the list is being used, by whom, for what, and how often.