Monday, November 30, 2015

National Council of Nonprofits: Nonprofit Advocacy Matters

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Action Alert: IRS Reporting Proposal Threatens Donor, Nonprofit Security
The Internal Revenue Service is proposing a voluntary nonprofit reporting regime that encourages nonprofits to ask for, store, and report donor Social Security numbers. The proposed regulations would give nonprofits the option of filing a separate new information return with the IRS and individual donors by February 28 every year to substantiate contributions of more than $250. A similar mandatory proposal was considered and rejected in the past based on numerous legal, policy, and confidentiality problems it raised. Learn more about the proposed regulations, read an analysis by the National Council of Nonprofits, and find out what you can do to take action against it before December 16 on behalf of donors, nonprofits, and the public.

Charitable Giving Incentive Renewal Caught Up in Year-End Legislative Rush
Congress returns after the Thanksgiving break with several must-pass bills – an omnibus spending bill to fund the government past December 11 and transportation legislation are at the top of the list – leaving little room or time for negotiation of a tax measure to renew numerous expired tax provisions. Caught up in the tax discussion are key charitable giving incentives: the IRA rollover and enhanced deductions for food inventories and land conservation easements. Although time is short, policymakers are negotiating on a deal to restore retroactively for 2015 and renew most of the 50+ expired tax provisions through 2016 or 2017, make some of them permanent, and add measures that are priorities for President Obama, including making permanent the expanded Earned Income Tax Credit that expires at the end of 2017. The good news for nonprofits is that the components of the House-passed America Gives More Act are considered likely to be included, but only if a deal is reached.

Time to Take Action: It appears likely that the charitable giving incentives will be included as part of the larger package restoring various tax provisions temporarily for 2015 through 2016 or 2017. Making the giving incentives permanent - which is a high priority of many in the nonprofit community - will require a significant grassroots push. Readers are encouraged to contact their Representatives and Senators and insist that the components of the America Gives More Act be included and made permanent in any tax bill passed this year. Learn more about how to take action.

Car Donation Simplification Bill Introduced
Citing the burden on nonprofits and the disincentive to donors, Members of Congress have introduced legislation to simplify the process for valuing cars donated to charitable nonprofits. The “Charitable Automobile Red-Tape Simplification Act,” or “CARS Act” (H.R.3917), would allow taxpayers donating vehicles valued between $500 and $2,500 to cite the pricing-guide value of a donated car on tax returns. Under current law, donors may only deduct the sales price actually obtained by the charity to which the car was donated. The existing process, in effect since 2005, has resulted in fewer donations of cars to support the work of charitable nonprofits and has added to the administrative burdens and costs for nonprofits. The new legislation was introduced by Reps. Todd Young (R-IN) and Linda Sanchez (D-CA), and boasts 19 bi-partisan co-sponsors, many of whom serve on the House tax-writing committee, the Committee on Ways and Means.

Governors Order Nonprofits to Deny Services to Syrian Refugees
More than 30 governors have declared that their states will not accept refugees from Syria, claiming security concerns following the Paris terrorist attacks, and several are ordering nonprofits to cease refugee resettlement efforts in their states. Recently, New Jersey Governor Christie ordered nonprofit organizations to notify the state of any Syrian placements in the state. In what is expected to be the first of several letters to nonprofits in Texas, the state Health Commission is threatening to sue the International Rescue Committee in an attempt to force the nonprofit to comply with an order from Governor Abbott that nonprofits not assist Syrian refugees. Aid to refugees from other countries are not affected by the Governor’s order, raising equal protection concerns, among many others.

Indiana Governor Pence also ordered state agencies to stop resettlement procedures for Syrian refugees, and Indiana’s Division of Family Resources reportedly sent letters to two nonprofits, ordering them to suspend resettlement efforts for families due to arrive soon. "We're saying he doesn't have the right," Carleen Miller, executive director of Exodus Refugee Immigration, said of the Governor's action. "He's actually interfering with our contractual agreements with the U.S. government." The American Civil Liberties Union is seeking a federal court injunction against Governor Pence’s actions asserting that immigration policy is a federal matter beyond the authority of state governors.

The federal government informed many nonprofits last week that the actions and objections of the governors are not controlling. "States may not deny (Office of Refugee Resettlement)-funded benefits and services to refugees based on a refugee's country of origin or religious affiliation,” wrote Robert Carey, director of the office. He went on to explain, “Accordingly, states may not categorically deny ORR-funded benefits and services to Syrian refugees," adding that states and agencies that do not comply would be violating the law and "could be subject to enforcement action, including suspension or termination."

Connecticut Spending Cap Unenforceable, Says State Attorney General
The spending cap that has guided budget decisions in Connecticut since the early 1990s is unenforceable, according to a formal opinion issued by state Attorney General George Jepsen, underscoring how the gamesmanship usually associated with creating arbitrary budget restrictions often produces confusion and problems. In 1991, Connecticut’s General Assembly established a statutory cap designed to limit growth in most budget appropriations to increases in personal income or inflation; spending could not exceed the cap unless the Governor declared a “fiscal emergency” and 60 percent of legislators in both the House and Senate agree to the extra spending. After that statutory cap was enacted, voters approved an amendment that created a parallel constitutional spending cap. The problem, according to Attorney General Jepsen, is that the General Assembly failed to implement the constitutional amendment, because it never defined the key terms by a three-fifths vote in both chambers, as required. The Attorney General’s opinion also found that the statutory cap set in 1991 is not enforceable today, reaching the same conclusion as an opinion of the Montana Attorney General in 2005 that prior legislatures cannot bind the authority of subsequent legislatures without specific constitutional authority. The Connecticut decision will likely color future debates on spending caps and other budget gimmicks.

Cities Seize on New Jersey Judge’s Opinion Against Nonprofit Property Tax Exemption
One judge’s decision – some call it precedent setting, many others say it’s an abomination – is giving hope to cash-starved municipalities that they can soon take nonprofit resources through new taxes, fees, or payments in lieu of taxes (PILOTs). In June, New Jersey tax court judge Bianco struck down the property tax exemption of the Morristown Hospital System, asserting that the charitable nature of 21st Century nonprofit hospitals is a legal fiction and recognized no distinction from taxable for-profit hospitals. The hospital system recently settled the city’s suit for back taxes for $5.5 million. The nonprofit also agreed to pay taxes of $1 million a year for the next ten years, based on 24 percent of the assessed value of the hospital’s main campus considered taxable as used for for-profit ventures such as private doctors’ offices, a restaurant, and parking garages. The state hospital association reportedly has set up a task force to make recommendations to the Legislature on changes to the property tax exemption that are “fair” both to nonprofit hospitals and their host communities. Unclear, so far, is whether this hospital task force will make recommendations addressing potential payments by hospitals, as occurred in Illinois in 2012, or whether it will throw other types of nonprofits under the bus, as happened in Boston in 2011 that led to the much-maligned Boston PILOT scheme.

$15 Minimum Wage, Nonprofits, and Contracting: New York Perspective
In September, New York Governor Andrew Cuomo proposed raising the state minimum wage over several years to $15 per hour, following up on a similar hike in New York City for fast-food workers. To develop data on the latest proposal, the New York Council of Nonprofits conducted a survey of nonprofits of all sizes and types and developed some startling findings. While nearly half of nonprofits responding to the survey (47%) expressed support for the proposed increase, 92 percent answered that “Our financial viability would be threatened.” The survey participants focused particular attention on organizations that provide services on behalf of governments. Four out of five nonprofits (80%) answered “The State should increase all contract amounts and reimbursable rates to fully offset for the additional costs incurred.” The comment of this human service provider is representative of the views of nonprofits in many other sub-sectors: “The state cannot expect nonprofits to bear the burden of increased labor costs to provide services, the State needs to reimburse for the true cost of services provided. This practice of under compensation is already taking a serious toll on many nonprofit organizations in the child care sector.”

Pennsylvania Nonprofits Stand Up for their Fellow Citizens
The news in Pennsylvania is not good. The Governor and Legislature have been at loggerheads over a budget, which is now five months overdue and many organizations that have been providing services on behalf of the Commonwealth have not be paid since mid-summer. The Governor agrees that the “nonsense” must end and legislators say they remain committed to completing a budget deal. But they still have failed to act, putting the public in jeopardy. So what are nonprofits that are dedicated to public service, community building, and problem solving to do? Take a stand for passage of a budget, of course.

November 23 was “celebrated” as the Stand for Pennsylvanians Day. More than 100 organizations participated in the project organized by the Pennsylvania Association of Nonprofit Organizations, the United Way of Pennsylvania, the Adams County Community Foundation, the Pittsburgh Foundation, the PA State Alliance of YMCAs, and a coalition of nonprofits and schools districts. 

The campaign goals were two-fold:
  • To tell the collective story of Pennsylvania citizens directly impacted by the budget impasse, and
  • To mobilize clients and members of local communities to support the bi-partisan efforts already underway to pass the budget.

Participants accomplished their goals through a media campaign demonstrating the impact that nonprofits make on their local communities and the people they serve. Word was spread through Twitter (#StandForPA) and Facebook. Nonprofits from across the Commonwealth reached out to their legislators and the Governor expressing the simple message: pass the budget.

Much media attention was devoted to a Statehouse rally conducted that day. Speakers laid bare the severe challenges the politicians are inflicting on Pennsylvanians. A director of a domestic violence and sexual assault shelter reported that the budget crisis has forced her to not pay bills, leading to its phone service being shut off and staff worried about getting paid, as it had to ask more than 180 people seeking refuge to go elsewhere for assistance. A representative from an organization providing employment for people with disabilities shared that the failure of the government to complete contracts – a result of government agencies not knowing how much they can spend – has forced his nonprofit to lay off several of the employees that the state contracts are designed to help.

Anne Gingerich, Executive Director of the Pennsylvania Association of Nonprofit Organizations, brought home the demands of the nonprofit community and all Pennsylvanians adversely affected by the budget impasse: “We need to get a budget passed and we need to start looking at next year's budget frankly and how to build a system so that we do not go through this again.”

Federal Issues
  • Charitable Giving Incentives
  • Car Donation Deduction
State and Local Issues
  • State Interference in Nonprofit Contracts: IN, NJ, TX, US
  • Spending Caps: CT, MT
  • Property Tax Exemption: IL, MA, NJ
  • Minimum Wage: NY
Advocacy in Action

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Nonprofit VOTE Webinar
Thursday, December 10th, 2:00 pm Eastern
Join this presentation to learn how nonprofit service providers and community-based organizations have improved voter turnout among traditionally low-voting communities by helping their clients/consumers to register to vote or encouraging them to sign a pledge to vote. Find out how you can apply the lessons learned from these activities to your work in 2016. Register now!

Worth Quoting
“This is a huge issue for nonprofits -- and the American public.”
— Tim Delaney, President & CEO, National Council of Nonprofits, quoted in Charities Chafe at IRS Proposal to Collect Donors' Social Security Numbers, Fox News, November 22, 2015, explaining several serious problems with the proposed IRS rule that could have charitable nonprofits – and ultimately scam artists posing as nonprofits – asking donors for their Social Security numbers.

“While everyone wants to see program purpose dollars maximized, bear in mind that administrative and fundraising expenses are an indispensable part of running an organization. They help to ensure efficiency, accountability and compliance with the law; can help an organization by increasing awareness of and support for its activities; and can lead to stronger operations and sustainability through the building of a more stable, diversified funding base.”
- Linda Czipo, Executive Director, Center for Non-Profits in New Jersey, providing Tips for Making Informed Giving Decisions that apply equally to government grantmaking, published in the Front and Center blog, November 24, 2015.

Worth Reading
Success Metrics Questioned in School Program Funded by Goldman, Nathaniel Popper, New York Times, November 3, 2015, reporting on irregularities in how success was measured in the Salt Lake City, Utah social impact bond program, potentially leading promoter Goldman Sachs and the state to significantly overstate the effect that the investment had achieved in helping young children avoid special education.

Inside Track: Caldwell makes transition from photography to philanthropy, Pat Evans, Grand Rapids (MI) Business Journal, November 20, 2015, relating the career trajectory and lessons learned of Kyle Caldwell, former Executive Director of the Michigan Nonprofit Association, current Board Chair of the National Council of Nonprofits, and newly appointed Executive Director of Grand Valley State University’s Dorothy A. Johnson Center for Philanthropy.

Worth Studying
The Nonprofit Sector in Brief 2015: Public Charities, Giving, and Volunteering, Brice McKeever, Urban Institute, October 29, 2015, the annual update of key nonprofit data.

How State Economies Are Performing, Mike Maciag, Governing, November 20, 2015, providing state-by-state employment data from 1998 to present.

Numbers in the News
Number of states with grades of D or F in ethics and transparency, according to a joint analysis from the Center for Public Integrity and Global Integrity. Alaska scored the highest (C), and Michigan the lowest (F), in the survey that asked local journalists to respond to 245 questions. According to the report authors, “state governments are plagued by conflicts of interests and cozy relationships between lawmakers and lobbyists, while open-records and ethics laws are often toothless and laced with exemptions."
Source: State Integrity 2015, November 9, 2015; see also, In State Rankings on Ethics and Transparency, Alaska Wins and Michigan Loses, Travis Fain, Governing, November 9, 2015.

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Thursday, April 30, 2015

Southern Tier Capacity Building Workshops [Binghamton]

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How to be an Engaging Nonprofit (Part 1) [Binghamton]
The Role of Authentic Communication, Conversation and Caring in Fundraising 
We've heard about the importance of messaging and marketing and their role in fund development for nonprofits.  We know that, in order to reach people who might care about our cause and give something (time, talent and treasure), we have to "sell" what we do to the right audience. For many nonprofit staff and board members, this nomenclature doesn't quite fit with what we do on a daily basis - nor is it something we've been trained for.
For more information and to register, click here.

In Part 1 of this session (June) we will focus on:
  • Being true to who you are.
     Who are you as a nonprofit? Does your nonprofit have an organizational personality, culture, voice? What do you stand for, work for, fight for, and lose sleep for?  Does everyone on the board and staff agree?
  • Being honest with those that care about you.
     How do you communicate your values? How do you live them every day? How transparent are you with successes and challenges you may face?

How to be an Engaging Nonprofit (Part 2) [Binghamton]

Part 2 of this session (July) will focus on:
  • Being kind and generous
     Show people that you care. What do you have that people value? How can you give it away for free? How do you strategically leverage that to keep friends engaged in the relationship cycle?
  • Creating a safe place for valuable conversation
     How do you actively listen and converse with those that care about you? How do you show people that you value what they say and most importantly, how do you demonstrate that you are responsive?
  • Asking for help or feedback
     How do you finally ask for "action?" Whether it's a donation, attendance at an event, volunteers for a project, etc. How do you make it feel like the next authentic step in the relationship? Have you done enough to build trust? Have you created a relationship in which people feel like your partner?
  • Continuing the Engagement
     How do you build the engagement cycle into your strategy on an on-going basis?
To register for this workshop, click here.


These workshops are supported by United Way of Broome County, The Stewart W. and Willma C. Hoyt Foundation, The Community Foundation for South Central New York, and Conrad and Virginia Klee Foundation.




About the Southern Tier Capacity Building Mini-Grant and Assessment Programs: 
Nonprofits who have a Board Member attend will qualify to apply for the 2014 Southern Tier Capacity Building Mini-Grant Program, as well as special assessment support offered directly by the New York Council of Nonprofits.

The  Mini-Grant Program and special assessment assistance are supported by United Way of Broome County, The Stewart W. and Willma C. Hoyt Foundation, The Community Foundation for South Central New York, Conrad and Virginia Klee Foundation, and United Way of Delaware and Otsego Counties, Inc.

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Monday, April 27, 2015

Risk Management: Directors of Nonprofits

Court of Appeals to Directors of Nonprofits: “Nonprofit” Does Not Mean “No Risk for You”


The U.S. Court of Appeals for the Third Circuit recently upheld a $2.25 million jury verdict against the directors of a nonprofit nursing home, holding them personally liable for breach of their duty of care. Their sin? Failing to remove the nursing home’s administrator and CFO “once the results of their mismanagement became apparent.” While the court overturned a punitive damages verdict against five directors (the jury had found nine other directors liable for compensatory damages but not punitive damages), it upheld punitive damage awards of $1 million against the CFO and $750,000 against the Administrator. The decision, while unusual, illustrates that serving on a nonprofit board is not risk-free even if as in this case, the directors do not breach their duty of loyalty or engage in any self-dealing. [In re Lemington Home for the Aged, 777 F.3d 620 (3d Cir. 2015).]

The Lemington Home Case

Founded in 1883, the Lemington Home for the Aged was the oldest nonprofit unaffiliated nursing home in the United States dedicated to the care of African Americans. For decades, the Home had been “beset with financial troubles” and by the early 2000s it was being cited by the Pennsylvania Department of Health for deficiencies at a rate almost three times greater than the average.

In 2004, the Home’s Administrator [Mel Lee] Causey started working part-time while continuing to draw a full salary. That same year, two patients died under suspicious circumstances; an investigation by the Department of Health found that Causey lacked the qualifications, knowledge and ability to perform her job. An earlier independent review also recommended that Causey be replaced. Although the Board obtained a grant of over $175,000 to hire a new Administrator, the funds were used for other purposes and Causey stayed on.

The Home’s patient recordkeeping and billing were in a state of disarray. The Home was cited repeatedly for failing to keep proper clinical records. CFO Shealey stopped keeping a general ledger, instead simply recording cash transactions on an Excel spreadsheet. When a consultant conducting an assessment of the Home for a major creditor requested records, Shealey responded by locking himself in his office, forcing the consultant to “camp outside.” Shealey also failed to collect at least $500,000 from Medicare because he stopped sending invoices.

In January 2005, the Board voted to close the Home, but concealed that fact for three months before filing for bankruptcy. In those three months, the Home stopped accepting new patients, making it less attractive to potential buyers. While in bankruptcy, the Board failed to disclose in its monthly operating reports that the Home had received a $1.4 million payment, which could also have increased its chances of finding a buyer. The court held that these facts supported the jury’s verdict that the defendants had “deepened” the corporation’s insolvency, which the court said was actionable under Pennsylvania law. [777 F.3d at 630.]

The court of appeals upheld the jury’s compensatory damages verdict against the directors despite the Home’s bylaw provision protecting the directors from claims for simple negligence and requiring proof of selfdealing, willful misconduct or recklessness. [Lemington, No. 10-800, 2013 WL 2158543, at *6 (W.D. Penn. May 17, 2013).] Both the court of appeals and the district court held that the evidence supported a finding that the directors breached their duty of care by recklessly (1) continuing to employ the Administrator despite actual knowledge of mismanagement and despite knowing that she was working only part-time in violation of state law; and (2) continuing to employ the CFO despite actual knowledge of mismanagement, including his failure to maintain financial records. [777 F.3d at 628-30; 2013 WL 2158543, at *7; In re Lemington Home for the Aged, 659 F. 3d 282, 286-87 (3d Cir. 2011).] Despite these holdings, the court of appeals reversed the award of punitive damages against the five directors, holding that there was insufficient evidence that they possessed the requisite state of mind and no evidence of self-dealing. [777 F.3d at 634-35.]

The Result in Lemington Home: Unusual But Not Unique

Lemington Home is not the only case in which a court has held that directors of a nonprofit breached their fiduciary duties. Other cases—some new and some old—show how directors of nonprofits sometimes find themselves in the crosshairs, especially after an institution fails.

Perhaps the best-known case is Stern v. Lucy Webb Hayes Nat’l Training School for Deaconesses & Missionaries, 381 F. Supp. 1003 (D.D.C. 1974), where the district court held that the directors breached their fiduciary duties of care and loyalty by failing to supervise the nonprofit’s finances and by approving transactions that involved self-dealing. The court found that the board’s finance and investment committees had not met for over a decade, and the directors had left management of the nonprofit to two officers who worked largely without supervision. Nevertheless, the court declined to award money damages against the directors, opting instead to impose certain reforms on the board.

Starting in 2007, seven years of litigation (and millions of dollars in legal fees) ensued between two nonprofits interested in the creation of a memorial to Armenians who died during the First World War and two of their directors; the nonprofits lost their claims against the directors and ended up having to indemnify them. The district court denied summary judgment on the issue of whether the directors had breached their fiduciary duties but then concluded after a bench trial that the directors’ decisions and the process by which they made them were reasonable and, even if the directors had breached their duty, the corporation could not show that it suffered injury as a result. Armenian Genocide Museum and Memorial, Inc. v. The Cafesjian Family Foundation, Inc., 691 F. Supp. 2d 132 (D.D.C. 2010); Armenian Assembly of America, Inc., et al., v. Cafesjian, 772 F. Supp. 2d 20 (D.D.C. 2011), aff’d, 758 F.3d 265, 275 (D.C. Cir. 2014).

In 2010, the National Credit Union Administration sued the unpaid volunteer directors of Western Corporate Federal Credit Union seeking $6.8 billion in damages on account of the directors’ alleged failure to supervise the credit union’s investment decisions. The credit union had invested heavily in diversified portfolios of securitized mortgage-backed securities; when the credit crisis hit, the NCUA took over the credit union (much the way the FDIC takes over failed banks) and sued the former directors and officers. The district court granted the directors’ motion to dismiss, holding that the directors were protected by the business judgment rule. Nat’l Credit Union Admin, v. Siravo, et al., No. 10-1597, 2011 WL 8332969, *3 (C.D. Cal. July 7, 2011). (Two of the authors of this feature represented all directors and one officer in this litigation.) The officers did not fare as well; the court held that the business judgment rule did not protect them, and at least some officers ended up paying some money to the NCUA and suffering other sanctions.

These cases are unusual, which goes a long ways toward explaining the unusual rulings. Generally, absent fraud, bad faith, a conflict of interest, a wholesale abdication of responsibility, or decisions that are clearly unreasonable based on facts known at the time, the business judgment rule will protect directors of nonprofits from personal liability for a breach of the duty of care. But vindication can take years of litigation and lots of money.

What Are the Lessons of Lemington Home?

You can be sued. To be sure, directors of for-profit corporations are sued far more often than directors of nonprofits, but directors of nonprofits can be sued, nonetheless. 

If you are sued, the litigation can go on for years and be very expensive—even if ultimately you are vindicated. 

Because litigation—even unmeritorious litigation—can be expensive, directors should not serve without the protection of adequate directors’ and officers’ insurance (D&O insurance).

Directors of nonprofits, despite usually being volunteers, can face personal liability for breach of their fiduciary duties and will be held to much the same standard of care as directors of for-profit corporations.

Some states have enacted statutes dealing specifically with nonprofit directors’ duty of care. Pennsylvania has such a statute: 15 Pa. Cons. Stat. Ann. § 5712 (2011). [See Lemington, 659 F.3d at 290. Likewise, California has such a statute: Cal. Corp. Code § 7231.] But it is far from clear that these statutes offer directors of nonprofits any more protection than they offer directors of for-profit corporations; the differences are subtle, at best.

The business judgment rule offers directors some protection, but it is not an all-purpose shield against claims based on dereliction of duty, let alone disloyalty or self-dealing. To gain the protection of the business judgment rule, a director must be assiduous and informed before making decisions. Specifically: 

The board must supervise: it must ensure that the organization’s management are qualified to perform their duties and are actually performing those duties. The failure of the directors in Lemington Home to do this led to their being jointly and severally liable for $2.25 million in damages [777 F.3d at 626, 628.] 

The board must seek and follow independent expert advice where appropriate: the directors in Lemington Home failed to follow the recommendations of independent advisors to replace the Administrator, even after being awarded funds to do so. They also ignored the advice of their bankruptcy counsel. [Lemington, 2013 WL 2158543, at *7.]

Special care must be taken if the nonprofit veers toward insolvency:

Before filing for bankruptcy, consider conducting a viability study. In vacating the award of summary judgment for defendants, the Third Circuit in Lemington Home noted that the Board declined to pursue a viability study before filing for bankruptcy and suggested that this called into question the adequacy of their pre-bankruptcy investigation. Lemington, 659 F.3d at 286, 292. Beware the “deepening insolvency” theory. Although not recognized in every jurisdiction, the theory holds directors and officers accountable to creditors if their post-insolvency management increases the losses that creditors suffer.

This article was originally published as a “Client Alert” on on March 27, 2015. It is reproduced with permission.