Thursday, May 13, 2010

A Postcard from the Future

The signs of the times are clear and potentially disturbing. In this era of big government, the benefits and protections long afforded churches and other nonprofit ministries are increasingly at risk.

While the financial pressures of state and federal governments are the key drivers of the potential incursions on nonprofits, changing attitudes on Capitol Hill towards charities are also a factor.

New proposals impacting nonprofits by state governments are reported in the media on almost a weekly basis. New fees and losses of sales or property tax exemptions are all possibilities.

Are you familiar with the acronym PILOT with respect to property taxes? PILOT means payments in lieu of taxes and it is based on the “soft” contacts some larger charities are receiving. With states beginning to ask for the voluntary payment of property taxes, it may only be a short step from voluntary to required payments.

At the federal level, there are increasing rumblings about potential changes impacting charities and givers. The notion of capping the charitable deduction for high income givers was floated last year. The proposal was very controversial and it was omitted from the health care bill. However, the Administra­tion included the charitable contribution deduction cap in the budget proposals for 2011, so the concept is not dead. While the impact of a contribution is an imponderable, it certainly would not be an incentive for giving.

On the Hill, there are more frequent references to the cost to the federal Treasury of charitable deductions and tax-exempt status churches and other nonprofits. It is estimated that the charitable deduction costs the Treasury $46 billion annually. Allowing churches and other charities to have tax-exempt status costs the Treasury another $50 billion per year. With these estimates come the not-too-veiled-threats of restoring some of these dollars to the Treasury to fund programs.

In response to these concerns, ECFA is stepping up to the Capitol Hill challenge. We are now devoting more energy to developing key relationships on and around the Hill than at any time in ECFA’s 30-plus years.

In its spring meeting, the ECFA board approved six public policy positions representing fundamental areas of significant interest to our members (see below).

This is an important time for ECFA members to pull together, coalescing around principles of accountability and standing firm behind public policies that are fundamental to our existence. Your organization can do this through your strong support of ECFA, encouraging other Christ-centered ministries to join ECFA, letting your Congressional representatives know about the good work you are doing, and praying for our leaders at the federal and state levels of government.

Wednesday, May 12, 2010

IRS Reports on the Nonprofit Colleges and Universities Compliance Project

The IRS recently released an interim report relating to responses to compliance questionnaires sent to 400 public and private colleges and universities. Colleges and universities make up one of the largest nonprofit segments in terms of revenue and assets.

After combing though the report, I noted several items of particular interest:

  1. Endowment funds. The target spending rate for endowment funds in the study range from 4.7% to 5.0%. Charles Grassley, (R-IA) has pushed hard for a minimum 5% endowment spending rate. There are some that might suggest the 5% goal effectively becomes a ceiling on the endowment spending rate.

  2. Highest paid employees. In the case of large organizations, the highest paid employee was often a sports coach—(43% of organizations).

  3. Use of the rebuttal presumption: More than half of the organizations in each size category reported using a rebuttal presumption process to establish key compensation. On all size levels, the use of comparability data to establish compensation was present less frequently that the other rebuttal presumption factors (adequate documentation and approval by an independent governing body). One would have expected the percentage of organizations using the rebuttal presumption to be much higher.

  4. Conflict of interest policies. While 80% of organizations in each size category are reporting having conflict of interest policies covering members of the ruling body and top management officials, it is surprising that this percentage is not 100%.

  5. Unrelated business income. One key issue the IRS has identified through the survey is that many public and private institutions are involved in business activities that they are not reporting as taxable income to the federal government.

    Most of the institutions surveyed also are not seeking out expert advice to determine whether to report those activities, the agency found. More of the institutions surveyed also are not seeking out expert advice to determine whether to report those activities, the agency found. More than 60% of all the colleges responding to the survey reported that they did not rely on independent accountants or the college’s general counsel on such matters.

  6. Disclosure of financial statements. Only 76% of small colleges and universities reported making their audited financial statements available to the public while 91% of medium-sized organizations and nearly 97% of large colleges and universities reported doing so. ECFA members are required to make their financial statements public. It is surprising that 100% of the organizations studied are not committed to this important step of transparency.

  7. Compensation policy. Only 34% of the smaller organizations had a formal written compensation policy and even the large organizations only averaged 63% with a formal written compensation policy. These numbers are surprisingly low.

The IRS said it has already begun audits of more than 30 institutions based on their responses to the survey. Thirteen institutions that did not respond to the IRS questionnaire are also being examined, as well as an undisclosed number of colleges that did answer all of the questions, the agency stated. The IRS has not identified the institutions that were sent the questionnaire nor the colleges that are getting audited.

It will be interesting to see if this compliance project becomes a model for questionnaires and compliance in other niches in the nonprofit arena.