My Thoughts On The Likehood of NY AG's Bill To Regulate Charities

by Gary Snyder

Many charities fail to follow the rules set down by law. You can see it from the current edition of the bi-weekly Nonprofit Imperative.

In Pennsylvania the Attorney General Kathleen Kane has finally ended a two-year-plus investigation into the $10 billion Hershey charity for orphans and poor children with a settlement that imposes rules that lower board compensation and tightens board governance. That's great; but it is the third agreement between the charity and the Attorney General's Office in the last 11 years related to governance reforms at the institution, founded as an orphanage by chocolate magnate Milton S. Hershey and his wife, Catherine, in 1909. The sanctions are minimal.

The New York AG caught the former head of the Bronx Community Pride Center embezzling $143,000 from the nonprofit. Within days of her guilty plea, she was soliciting donations online for her pet rescue operation. Although it refers to it as an all-volunteer organization and it has a .org web domain, it is not listed with the state Attorney General’s Department of Charities.

Now the New York Attorney General Eric T. Schneiderman unveiled his second attempt to overhaul the governance of charities and other organizations, with a bill to address financial abuses and poor management practices while making it easier for nonprofits to operate properly in the state. The state’s top cop – whose responsibilities already include oversight of nonprofits – wants to tighten the rules governing how charities are managed, expanding transparency and strengthening the fiduciary accountability for officers and directors to ensure they’re doing their jobs. He also hopes to rein in what many critics say is excessive compensation for some nonprofit CEOs and other top executives. The goal is to prevent the kind of fraud, mismanagement and financial abuses that increasingly have come to light in recent years.

If passed, the likelihood of success is an uphill struggle. We have seen similar attempts in others states but change has been met with significant obstacles.

First and foremost is the ability of the AG to enforce the law. With struggling budgets, adding significant staff is nearly impossible. The AG office resides in a very political environment and history has shown that application of the law has not been even-handed. Take for instance the initial denial by the AG in Massachusetts to do anything about the pay and other issues surrounding the state's Blue Cross. In an election year, she acted forcefully, but backtracked a year later in the hopes that the public would not notice little enforcement in aligning the politically powerful insurer. 

Another significant obstacle are the charities themselves. Very few nonprofit boards have any idea of the laws under which they are supposed to govern. Some have rules---internal controls---but studies have shown that many are not applied. Furthermore, nonprofit boards have little or no interest in obtaining a skill set to better the agency. Most are devoid of any financial literacy.

Without the necessary skills, the boards leave the agency rudder in the hands of the executive.  As charity fraud increases, executives are one of the weaknesses in the chain of due diligence.

To create a climate of enforcement the AGs need the support of the IRS, Congress and the charity community itself. The leadership of the charitable sector has sworn off any rules in favor of self-regulation. They have fought and basically succeeded in their position.

The IRS is in the midst of turmoil. Even before the latest misstep, there has been little interest in enforcement. Unless an abuse is on the front page of a newspaper, action is seldom taken.  The IRS’ focus has been on tax collection and revenue generation. In all fairness, however, Congress has not supported the IRS with sufficient resources to refocus its direction. 

The history and current political and economic environment in which Eric Schneiderman will have to work does not forebode good results. I, nevertheless, wish him well.    

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more Nonprofits: On the Brink (2006) Silence: The Impending Threat to the Charitable Sector (2011)