Nonprofit and Charitable Sectors: Background and Issues : Background and Issues [1 ed.] 9781611223828, 9781611220278

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Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved. Nonprofit and Charitable Sectors: Background and Issues : Background and Issues, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved. Nonprofit and Charitable Sectors: Background and Issues : Background and Issues, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES

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NONPROFIT AND CHARITABLE SECTORS: BACKGROUND AND ISSUES

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ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES

NONPROFIT AND CHARITABLE SECTORS: BACKGROUND AND ISSUES

WILLIAM E. PERKINS

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

EDITOR

Nova Science Publishers, Inc. New York

Nonprofit and Charitable Sectors: Background and Issues : Background and Issues, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com

NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers’ use of, or reliance upon, this material. Any parts of this book based on government reports are so indicated and copyright is claimed for those parts to the extent applicable to compilations of such works.

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Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. Additional color graphics may be available in the e-book version of this book. LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA Nonprofit and charitable sectors : background and issues / editor, William E. Perkins. p. cm. Includes index. ISBN H%RRN 1. Nonprofit organizations--United States. I. Perkins, William E. HD2769.2.U6N643 2010 338.7--dc22 2010035908

Published by Nova Science Publishers, Inc. † New York

Nonprofit and Charitable Sectors: Background and Issues : Background and Issues, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

CONTENTS

Preface Chapter 1

An Overview of the Nonprofit and Charitable Sector Molly F. Sherlock and Jane G. Gravelle

1

Chapter 2

Lobbying Regulations on Non-Profit Organizations Jack H. Maskell

57

Chapter 3

Nonprofit Sector: Treatment and Reimbursement of Indirect Costs Vary among Grants, and Depend Significantly on Federal, State, and Local Government Practices United States Government Accountability Office

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vii

Chapter 5

Chapter 6

Nonprofit Sector: Significant Federal Funds Reach the Sector through Various Mechanisms, but More Complete and Reliable Funding Data are Needed United States Government Accountability Office

71

93

Nonprofit Sector: Increasing Numbers and Key Role in Delivering Federal Services Stanley J. Czerwinski

125

Frequently Asked Questions about Tax-Exempt Organizations Erika Lunder

137

Chapter Sources

153

Index

155

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Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved. Nonprofit and Charitable Sectors: Background and Issues : Background and Issues, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

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PREFACE A number of policy issues have direct or indirect consequences for the nonprofit and charitable sector, including the establishment of a social innovation initiative, changes in the tax treatment of charitable donations, responses to the economic downturn, and health care reform. The nonprofit and charitable sector represents a significant portion of the U.S. economy. This book provides a formal definition of the nonprofit and charitable sector, its size and scope. Also explored are how charities are funded and an overview of the charitable sector's relationship with government and policy considerations. Chapter 1- A number of policy issues have direct or indirect consequences for the nonprofit and charitable sector, including the establishment of a social innovation initiative, changes in the tax treatment of charitable donations, responses to the economic downturn, and health care reform. The nonprofit and charitable sector represents a significant portion of the U.S. economy. The sector is also highly diverse. Having a greater understanding of the nonprofit and charitable sector as a whole may help policymakers evaluate proposals that may impact the sector. The first section of this chapter provides a formal definition of the nonprofit and charitable sector. The term ―nonprofit sector‖ is generally intended to refer to organizations with federal tax-exempt status; ―charitable sector‖ refers to the subset of these organizations that have 501(c)(3) public charity status. Chapter 2- Public charities, religious groups, social welfare organizations and other nonprofit organizations which are exempt from federal income taxation are not generally prohibited from engaging in all lobbying or public policy advocacy activities merely because of their tax-exempt status. There may, however, be some lobbying limitations on certain organizations, depending on their tax-exempt status and/or their participation as federal grantees in federal programs. Additionally, organizations (other than churches or their affiliates) which meet specified threshold expenditure requirements on lobbying activities and which engage in direct lobbying of federal officials must register employees who are paid to lobby, and must file reports on lobbying activities, under the Lobbying Disclosure Act of 1995, as amended. Chapter 3- Nonprofits are key partners in delivering federal services yet reportedly often struggle to cover their indirect costs (costs not readily identifiable with particular programs or projects). This raises concerns about fiscal strain on the sector. To provide information on nonprofits’ indirect cost reimbursement, especially when funding flows through entities such as state and local governments, GAO was asked to review, for selected grants and nonprofits,

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viii

William E. Perkins

(1) how indirect cost terminology and classification vary, (2) how indirect costs are reimbursed, and (3) if gaps occur between indirect costs incurred and reimbursed, steps taken to bridge gaps. GAO selected six Departments of Health and Human Services and Housing and Urban Development grants and 17 nonprofits in Louisiana, Maryland, and Wisconsin. GAO selected these agencies for their historical relationship with nonprofits. GAO reviewed policies and documents governing indirect costs and interviewed relevant officials. GAO also reviewed research on nonprofits’ indirect costs. Chapter 4- Increasingly, the federal government relies on networks and partnerships to achieve its goals, and many of these involve nonprofit organizations. GAO was asked to assess (1) the mechanisms through which federal dollars flow to nonprofits and (2) what is known about federal dollars flowing through them to nonprofit organizations in fiscal year 2006. To address these objectives, GAO conducted a literature review of funding; analyzed data from several sources, including the Federal Procurement Data System—Next Generation (FPDS-NG) and the Federal Awards and Assistance Data System (FAADS); and analyzed nonprofit organizations’ roles in 19 federal programs. Chapter 5- The nonprofit sector is an important means through which public services are delivered and national goals addressed. The federal government increasingly relies on networks, often involving nonprofits that address many issues—health care, education, and human services, for example. Because nonprofit organizations play a key role as partners with the federal government, there is a need to better understand the sector. This testimony (1) provides a picture of the nonprofit sector—its size, composition, and role in the economy; (2) discusses how and why the federal government partners with the sector; and (3) identifies issues related to the sector as a federal partner that need to be better understood. GAO’s preliminary work on this topic focused on the intersection of nonprofit organizations and the federal government, including trends, the use of federal funding, and emerging issues. GAO interviewed key experts from relevant associations and academia, reviewed related research, and hosted roundtable discussions with key researchers and practitioners in the nonprofit area. Chapter 6- This chapter answers frequently asked questions about tax-exempt organizations. It focuses on the types of organizations described in Internal Revenue Code (IRC) § 501(c), with the main emphasis on IRC § 501(c)(3) charitable organizations. One set of questions addresses some of the primary characteristics of tax-exempt organizations, including whether they may participate in lobbying and election-related activities, and defines the terms ―tax-exempt,‖ ―nonprofit (not-for-profit),‖ and ―private foundation.‖ Another group of questions provides general information on how to form a tax-exempt organization, what information must be disclosed to the IRS and the public, and how an organization might lose its tax-exempt status. The report ends with questions intended to help the reader find resources that provide information on specific organizations and additional information on tax-exempt organizations in general. Although this chapter summarizes such information with respect to tax-exempt organizations, it should not be relied on for specific tax advice—such advice should be sought directly from the IRS or qualified tax professionals.

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In: Nonprofit and Charitable Sectors: Background and Issues ISBN: 978-1-61122-027-8 Editor: William E. Perkins © 2011 Nova Science Publishers, Inc.

Chapter 1

AN OVERVIEW OF THE NONPROFIT AND CHARITABLE SECTOR Molly F. Sherlock and Jane G. Gravelle

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SUMMARY A number of policy issues have direct or indirect consequences for the nonprofit and charitable sector, including the establishment of a social innovation initiative, changes in the tax treatment of charitable donations, responses to the economic downturn, and health care reform. The nonprofit and charitable sector represents a significant portion of the U.S. economy. The sector is also highly diverse. Having a greater understanding of the nonprofit and charitable sector as a whole may help policymakers evaluate proposals that may impact the sector. The first section of this chapter provides a formal definition of the nonprofit and charitable sector. The term ―nonprofit sector‖ is generally intended to refer to organizations with federal tax-exempt status; ―charitable sector‖ refers to the subset of these organizations that have 501(c)(3) public charity status. The next section reports on the size and scope of the charitable sector. Charitable organizations are estimated to employ more than 7% of the U.S. workforce, while the broader nonprofit sector is estimated to employ 10% of the U.S. workforce. In 2009, the charities filing Form 990 with the Internal Revenue Service reported approximately $1.4 billion in revenue and reported holding nearly $2.6 billion in assets. Nonprofit institutions serving households (largely charities) constituted more than 5% of GDP in 2008. The third section of this chapter examines how charities are funded. Revenue comes from a variety of sources, including private contributions, payments (fees for service), government grants, and investment income. Revenue sources vary significantly across different types of charities: charities involved in health care (including nonprofit hospitals) and educational institutions rely heavily on private payments while arts, culture, and humanities charities and environment and animals charities are more reliant on private contributions. Private contributions to charities are of particular interest as charitable giving may respond to

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Molly F. Sherlock and Jane G. Gravelle

changes in the tax code. As the recent economic downturn has increased the demand for goods and services provided by a number of charities, the impact of the business cycle on funding is also discussed. The fourth section provides an overview of the charitable sector’s relationship with government. From a theoretical perspective, economics suggests that the government should subsidize activities that are either public goods or have positive external effects. It can be argued that some charitable activities possess these qualities. The costs to the government of providing grants, allowing charitable contributions to be tax deductible, exempting investment income of charities from tax, and providing property and sales tax exemptions are presented. The oversight role of the government is also reviewed. Finally, the report concludes with policy considerations. This section opens by surveying what policy options are considered most important by charitable organizations themselves. Building on this, a number of policy options are examined, including (1) increasing government grants and subsidies to charitable organizations; (2) creating an oversight agency within the federal government to gather data, conduct research, and advocate for the charitable sector; (3) implementing policies designed to help charities and foundations in economic downturns; (4) changing the itemized deduction for charitable contributions by limiting, converting to a credit, or making the deduction more widely available; and (5) a variety of other tax issues. As this chapter illustrates, the nonprofit and charitable sector represents a significant, highly diverse component of the U.S. economy. Currently, there are a number of policy issues that could affect, either directly or indirectly, the structure and functioning of nonprofit and charitable organizations. President Barack Obama has turned toward the nonprofit sector while seeking solutions to social problems via the Social Innovation Fund.1 The recent economic downturn increased the demand for many of the goods and services provided by charitable organizations, while simultaneously placing the same organizations under increased financial constraints. The treatment of nonprofits in health care reform has also been a major issue, as the tax code cannot provide the same incentives to nonprofits (nonprofit health care providers and nonprofit employers providing insurance) that are available to for-profit organizations. Finally, the tax treatment of nonprofits and their contributors raises issues of efficiency, equity, and fairness. To assist policymakers in evaluating reforms that will potentially affect nonprofit and charitable organizations, this chapter provides a broad overview of the charitable sector. Such context and background information will help policymakers determine if the government’s current relationship with the nonprofit and charitable sector is efficient, or if there are policy changes that could lead to a better use of resources. This chapter begins by defining the nonprofit and charitable sector. It is especially important to understand the distinction between nonprofit and charitable organizations. While the term nonprofit tends to be used loosely in the literature, nonprofit here is used to identify the broad array of organizations with federal tax-exempt status. Charitable organizations are defined as organizations with 501(c)(3) public charity status, and are a subcategory of the broader nonprofit sector. The second section provides an overview of the charitable sector, focusing specifically on employment within the sector, as well as revenue and assets of charitable organizations. The charitable sector’s role in the broader economy is evaluated by comparing the charitable sector to other major industrial sectors.

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Third, the finances of charitable organizations are explored. Specifically, various revenue sources, both government and nongovernment, are examined. The amount of revenue coming from private contributions, government grants and transfers, private payments, and investment income is identified. The differences in revenue sources across charitable sectors are also analyzed. Finally, the impact of the economic downturn on revenue for charitable organizations is briefly addressed. The fourth section reviews the relationship between the charitable sector and government. To evaluate the relationship between the charitable sector and the federal government, the economic rationale for subsidizing charities is presented. After presenting the theoretical underpinnings for interaction between charities and government, direct evidence on the cost of the relationship as it presently exists is discussed. Finally, the report concludes with policy considerations and options. The policy options are framed by examining policy issues deemed important by nonprofit and charitable organizations. The possibility of increasing support through grants and subsidies, introducing an oversight agency within the federal government, and revising the rules on itemized deductions for charitable organization are explored.

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THE NONPROFIT AND CHARITABLE SECTORS2 This chapter analyzes data relating to the nonprofit and charitable sectors. For purposes of this chapter, the term ―nonprofit sector‖ is generally intended to include all organizations with federal tax-exempt status.3 The term ―charitable sector‖ is used to refer to one type of tax-exempt organization, specifically those organizations with 501(c)(3) public charity status. The Internal Revenue Code (IRC) describes approximately 30 types of tax-exempt organizations.4 Examples include charitable organizations, social welfare organizations, labor unions, trade associations, fraternal societies, and political organizations. The largest category, and the primary focus of this chapter, are the organizations described in Internal Revenue Code (IRC) Section 501(c)(3). Organizations eligible for 501(c)(3) status include charities, religious organizations, hospitals, and educational institutions.5 The entire universe of these organizations is commonly referred to as ―charitable organizations.‖ Every 501(c)(3) organization is classified as either a ―public charity‖ or ―private foundation.‖ Public charities have broad public support and tend to provide charitable services directly to the intended beneficiaries. Private foundations often are tightly controlled, receive significant portions of their funds from a small number of donors or a single source, and make grants to other organizations rather than directly carry out charitable activities. 501(c)(3) organizations are presumed to be private foundations unless they qualify for public charity status based on support and control tests.

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Molly F. Sherlock and Jane G. Gravelle

IRS Filing Requirements

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A primary source for some of the data contained in this chapter is Form 990, which is the annual information return that must be filed with the IRS by most tax-exempt organizations. Form 990 collects information about the organization’s finances, assets, and activities. For tax year 2009, public charities with gross receipts of at least $500,000 or total assets of at least $1.25 million must file the regular Form 990, while public charities with gross receipts between $25,000 and $500,000 and total assets of less than $1.25 million may file the Form 990-EZ. Public charities whose gross receipts normally do not exceed $25,000 file the Form 990-N (―e-Postcard‖), which only requires basic identifying information such as the names and addresses of the organization and a principal officer. Private foundations file using the Form 990-PF. Churches and other qualifying religious organizations are exempt from the annual information-reporting requirements. In addition to the information return, there are other situations when tax-exempt organizations must file a tax return. For example, tax-exempt organizations are subject to tax on income from business activities unrelated to their exempt purpose. Organizations subject to this tax, known as the unrelated business income tax (UBIT), must file a tax return using the Form 990-T. Additionally, tax-exempt organizations must generally pay the same employment taxes (i.e., withhold income and payroll taxes of their employees) as for-profit employers and file the applicable returns. Finally, an organization’s activities might require it to file other returns, such as an excise tax return. Table 1 presents information on the number of nonprofit and charitable organizations as of July, 2009. Of the 1.5 million registered nonprofit organizations, nearly 64% are public charities. Nearly 8% are private foundations, while 29% are other types of nonprofits. Only 52% of registered charities file Form 990. Non-filers include qualifying religious organizations, small organizations, and organizations that may no longer exist but have not been removed from the IRS Business Master File (BMF). Very little information is available regarding non-filing organizations. Table 1. Registered and Filing Nonprofit Organizations by Organization Type

Public charity Private foundation Other nonprofit Unknown

Number of Registered Organizations 986,553 115,958

Share of Total Registered Organizations 63.5% 7.5%

Number of Organizations Filing Form 990 512,689 86,591

Share of Total Filing Organizations 58.6% 9.9%

450,151 1,615

29.0% 0.1%

275,420 894

31.5% 0.1%

Source: IRS Business Master File (BMF) (July 2009), Urban Institute National Center for Charitable Statistics (NCCS) Notes: Registered organizations are those registered as having tax-exempt status with the IRS. Filing organizations are those that filed Form 990 (including 990EZ and 990PF) within 24 months of the July 2009 release date, as reported in NCCS Core Files and IRS Business Master Files.

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SIZE AND SCOPE OF THE NONPROFIT AND CHARITABLE SECTORS Employment Measuring employment in the nonprofit and charitable sector is not an easy task. There is no government agency that regularly collects systematic employment data on the nonprofit sector.6 There are two major studies that have attempted to measure employment in the nonprofit and charitable sector in recent years. Their results are presented in Table 2 and Table 3 below. The first is employment in the nonprofit sector. In 2005, the estimated total employment in the nonprofit sector was 12.9 million. The second is employment in the charitable sector. The estimated number of paid workers employed by charities in 2004 was 9.4 million. At the end of 2004, there were 132.5 million employees nationwide.7 Nearly 10% of America’s workforce works in the nonprofit sector, with more than 7% of the workforce employed by charities. Table 2 provides estimates of nonprofit employment by industry. More than half of nonprofit employment (approximately 54%) is involved in health care and social assistance. In 1998, nearly 23% of nonprofit employees were involved in other services. This proportion fell by 2005 to just over 21%. In both 1998 and 2005, approximately 18% of nonprofit employees provided educational services. Arts, entertainment, and recreation was the fourth largest category, with nearly 4% of all nonprofit employment within this category. Table 2. Nonprofit Employment by Industry

NAICS Code

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11 22 48, 49 51 52 53 54

56

61 62

Industry Agriculture, forestry, fishing, and hunting Utilities Transportation and warehousing Information Finance and insurance Real estate and rental and leasing Professional, scientific, and technical services Administrative and waste management services Educational services Health care and social assistance

11,900

0.1%

12,211

0.1%

% Change 1998 2005 2.61%

4,131 1,272

0.0% 0.0%

6,875 1,833

0.1% 0.0%

66.42% 44.10%

32,354 72,829 2,986

0.3% 0.7% 0.0%

36,602 86,548 2,910

0.3% 0.7% 0.0%

13.13% 18.84% -2.55%

119,255

1.1%

167,560

1.3%

40.51%

25,311

0.2%

21,476

0.2%

-15.15%

1,972,039 5,941,902

17.8% 53.5%

2,335,466 6,999,312

18.1% 54.2%

18.43% 17.80%

1998

1998 Share

2005

2005 Share

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Molly F. Sherlock and Jane G. Gravelle Table 2. (Continued) NAICS Code 71 72 81

403,242

3.6%

481,755

3.7%

% Change 1998 2005 19.47%

12,730

0.1%

17,902

0.1%

40.63%

2,500,681

22.5%

2,751,202

21.3%

10.02%

Industry

1998

Arts, entertainment, and recreation Accommodation and food services Other services, except government Total

1998 Share

11,100,632

2005

2005 Share

12,921,652

16.40%

Source: Estimated employment levels are from Kennard T. Wing, Thomas H. Pollak, and Amy Blackwood, The Nonprofit Almanac 2008 (Washington, DC: The Urban Institute Press, 2008). Notes: The employment levels here were estimated using data from the 2002 Economic Census conducted by the U.S. Census Bureau, the U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts from 2007, the U.S. Department of Labor, Bureau of Labor Statistics, Quarterly Census of Employment and Wages spanning 1998 through 2007, the Urban Institute’s National Center for Charitable Statistics Core Files from 1998 through 2006, and the IRS Statistics of Income Form 990 and 990-EZ Sample Files from 1998 through 2006. The NAICS Code is the North American Industrial Classification System. Shares may not sum to 100% due to rounding.

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Table 3. Employment in the Charitable Nonprofit Sector NAICS Code 51 52-53 54 61 62 71 81

Industry

2004

Information Finance, insurance, and real estate Professional, scientific, and technical services Educational services Health care and social assistance Arts, entertainment, and recreation Other services, except government Total

71,000 76,000 250,000 1,373,000 6,518,000 243,000 695,000 9,385,000

Share of Charitable Employment 0.8% 0.8% 2.7% 14.6% 69.5% 2.6% 7.4%

Source: Lester M. Salamon and S. Wojciech Sokolowski, Employment in America‟s Charities: A Profile, The Johns Hopkins Center for Civil Society Studies, Nonprofit Employment Bulletin Number 26, December 2006. Notes: Note that the total is not the sum of individual fields. This is attributable to data disclosure limitations. These estimates were made using data from the U.S. Bureau of Labor Statistics’ Quarterly Census of Employment and Wages (QCEW). Since many states only require nonprofit organizations with at least four employees to respond to the QCEW, the numbers reported here likely understate total employment in the charitable sector. The data report employment from the second quarter of 2004. Shares may not sum to 100% due to rounding.

Between 1998 and 2005, employment in the nonprofit sector grew by an estimated 16.4%. Overall, nationwide growth in employment was approximately 6.2%.8 While the utilities; transportation and warehousing; accommodation and food services; and professional,

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scientific, and technical services sectors experienced the most growth between 1998 and 2005, each of these four sectors still represents less than 1% (1.3% for the professional, scientific, and technical services) of total nonprofit employment. The first and third largest sectors in terms of nonprofit employment—health care and social assistance and education services, respectively—experienced increases in employment that exceeded employment increases for the nonprofit sector as a whole. The second employment estimate is that of the number of persons employed by the charitable sector. Table 3 presents 2004 estimates of employment by charities across various sectors. Generally, the estimates of employment in the charitable sector are consistent with estimates for total employment by nonprofits.9 Since charities are a subset of nonprofits, it is expected that there would be fewer persons employed by charities as compared to nonprofits. Figure 1 depicts regional variation with respect to the percentage of the workforce employed by the charitable sector. In relative terms, the northeast tends to see a larger proportion of its workforce employed by the charitable sector. The District of Columbia has the largest proportion of workers employed by the charitable sector, with 16.3%. In Rhode Island, 13.6% of workers are employed by a charitable organization. New York ranks third when ranking states by employment in the charitable sector, with 13.3%. Relative to other parts of the country, fewer persons are employed by the charitable sector in the south.

12.3% 10.1% 13.6% 6.7% 9.7%

12.5%

12.5%

9.2%

8.3% 4.2%

12.6% 8.9%

10.5%

10.5% 13.3%

7.4%

10.2%

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8.8%

8.1%

1.8%

11.7%

4.8% 5.1%

7.6%

8.0%

7.1%

5.7% 6.5%

5.9%

6.7%

7.7%

5.2%

5.6%

9.0% 16.3%

5.8%

6.1% 5.4%

7.4% 7.6%

9.1%

6.2%

3.5% 3.9%

3.9%

5.0%

4.1% 5.1%

5.0%

7.9%

8.5%

Source: CRS calculations based on data from Salamon and Sokolowski (2006). Percentage of paid workers employed by the charitable sector in 2004. Figure 1. Share of Workers in Each State Employed by the Charitable Sector, 2004

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Molly F. Sherlock and Jane G. Gravelle

12.3% 10.1% 13.6% 6.7% 9.7%

12.5%

12.5%

9.2%

8.3% 4.2%

12.6% 8.9%

10.5%

13.3%

7.4%

10.5%

10.2% 8.8%

11.7%

8.1%

1.8% 4.8% 5.1%

7.6%

5.7% 6.5%

7.7%

7.4% 7.6%

8.0%

7.1%

9.1% 5.9%

6.7%

5.8%

6.1% 5.4%

5.2%

5.6%

9.0% 16.3%

6.2%

3.5% 3.9%

3.9%

5.0%

4.1% 5.1%

5.0%

7.9%

8.5%

Source: CRS calculations based on data from Salamon and Sokolowski (2006). Percentage of full-time equivalent volunteer workers employed by the charitable sector in 2004.

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Figure 2. Full-Time Equivalent Volunteers as Percent of Workforce, 2004

In addition to paid workers, volunteer workers make up a significant portion of the labor involved in providing charitable goods and services. In 2004, there were an additional 4.7 million full-time equivalent (FTE) volunteer workers employed by charitable institutions.10 Figure 2 depicts FTE volunteers as a percentage of total employment in each state. While states in the northeast tend to have a larger proportion of workers employed in the charitable sector, a similar pattern does not appear for volunteers as a share of total employment. In fact, there is very little (if any) relationship between the proportion of workers employed by the charitable sector and volunteers relative to total employment.

Revenue Table 4 reports the revenue of 501(c)(3) public charities reporting as of July 2009. For charities filing Form 990, total revenues for 2009 are $1.40 trillion. Revenue information is provided by 512,889 public charities filing Form 990 with the IRS. The revenue raised differs significantly across sectors. For example, nonprofit hospitals that are charitable organizations are less than 1% of all filing organizations. Yet amongst revenues for filing charitable

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organizations, 41% is reported by hospitals. More than 29% of assets held by filing charitable organizations are held by hospitals. Charitable hospitals receive the largest share of revenue. Other health-orientated charitable organizations are also responsible for a relatively large share of revenue flowing into the charitable sector, more than 15%. Given that 9.6% of filing organizations are health organizations, the fact that these organizations bring in 15% of revenue is closer to being proportional. The higher-education sector, like the hospital sector, generates a highly disproportionate level of revenue and holds a disproportionate quantity of assets. While only 0.5% of charities are higher-education organizations, higher-education organizations generate more than 11% of revenue flowing to charitable organizations and hold more than 21% of the charitable sector’s assets. These data suggest that while higher-education and hospital charitable organizations are relatively few in number, they are a very large part of the charitable sector in terms of revenue and assets. Charitable organizations focusing on providing goods and services in the realm of arts, culture, and humanities tend to have below-average revenue. While more than 12% of charitable organizations filing Form 990 are in the arts, culture, and humanities category, the sector only generates 2.3% of total revenue flowing into the charitable sector. In terms of revenue, arts, culture, and humanities charities are markedly smaller than health and education charitable organizations. Charitable organizations with a focus on the environment, human services, and the public benefit also tend to be smaller, as evidenced by the fact that these sectors represent a larger share in the number of organizations than the sectors’ share in revenue generation or asset holdings. The data in Table 4 also highlight the limited amount of information reported by religious charitable organizations. While 22.6% of registered charitable organizations are religious organizations, only 6.5% of organizations filing 990 are religious charities. Since religious organizations are not required to file Form 990, very little is known about the revenue generated and assets held by religious charities.

Assets Table 4 also reports total assets across different types of public charities. Charities reporting as of July 2009 held $2.6 trillion worth of assets. These assets are held by the 512,899 public charities filing Form 990. As was seen with respect to revenue, asset holding patterns vary across charitable sectors. Charities in the education sector stand out when examining asset holdings. Specifically, education charities hold nearly 33% of assets held by charitable institutions, while only 18% of charitable organizations filing Form 990 are in the education sector. Relative to other types of charities, education charities hold more assets. This observation is driven by asset holdings of higher-education institutions, and the large asset holdings in the endowments of some of these institutions.

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Table 4. Charitable Organizations by Group: Revenue & Assets (billions of dollars) NTEE Group

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Arts, Culture, and Humanities Education Higher Education Environment Health Hospitals Human Services International, Foreign Affairs, and National Security Public and Societal Benefit Religion Related, Spiritual Development Mutual/Membership Benefit Organizations, Other Unknown Total

# of Registered Organizations 99,263 10.06% 149,411 15.14% 4,177 0.42% 45,882 4.65% 72,410 7.34% 6,384 0.65% 261,984 26.54% 14,781 1.50% 107,946 10.94% 213,574 21.64% 2,521 0.26% 8,700 0.88% 987,033 100.00%

# of Organizations Filing 990 64,347 12.55% 91,113 17.76% 2,378 0.46% 24,924 4.86% 49,357 9.62% 4,822 0.94% 163,885 31.95% 9,361 1.83% 65,835 12.84% 33,110 6.46% 1,617 0.32% 2,140 0.42% 512,889 100.00%

Total Revenue 32.67 97.84 158.94 13.73 216.16 577.06 175.50 30.80 81.33 12.14 2.49 0.30 1,398.95

2.34% 6.99% 11.36% 0.98% 15.45% 41.25% 12.55% 2.20% 5.81% 0.87% 0.18% 0.02% 100.00%

Total Assets 100.39 303.68 551.22 33.05 256.06 757.08 268.79 31.65 254.61 26.68 15.07 0.64 2,598.92

3.86% 11.68% 21.21% 1.27% 9.85% 29.13% 10.34% 1.22% 9.80% 1.03% 0.58% 0.02% 100.00%

Source: The Urban Institute, National Center for Charitable Statistics, http://nccsdataweb.urban.org/ and Internal Revenue Service, Exempt Organizations Business Master File (July 2009). Notes: Revenue and assets are for organizations that filed Form 990 or Form 990EZ within 24 months of the July 2009 Business Master File release date. Organizations are grouped according to the National Taxonomy for Exempt Entities (NTEE), a system for categorizing the activities of nonprofit organizations established by the National Center on Charitable Statistics. Registered organizations are those appearing in the Business Master File. Revenue and assets are for filing organizations only.

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Health-related charities also hold a disproportionate volume of assets relative to the number of organizations in the health sector, while charities in the human services and housing sectors hold a share of assets that is less than their share of filing organizations. Specifically, health charities hold nearly 36% of assets while only 5.5% of charitable organization filing Form 990 are in the health sector. More than 10% of charities filing Form 990 are in the human services sector, yet the human services sector holds less than 6% of charitable organizations’ assets. Housing charities are another sector where the share of assets held is relatively low. Nearly 4% of all charitable organizations filing Form 990 are in the housing sector yet the housing sector only holds 2.5% of all charitable organizations’ assets. One important point to note when examining the revenue and asset data presented in Table 4 is that there is no adjustment or control for charity size. Revenue and assets for the health and education sectors are relatively high, reflecting in part their tendency to be larger than other types of charities. Health charities, for example, averaged $26.5 million in revenue and $33.3 million in assets. Arts, culture, and humanities organizations are much smaller, with the average institution in this sector generating $0.5 million in revenue and holding $1.6 million in assets. Charitable sectors that tend to have organizations smaller in size hold a lesser share of the charitable sectors’ total revenue and assets.

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Revenue and Assets in the Broader Nonprofit Sector Table 5 contains information on the assets and revenue for public charities relative to private foundations and other nonprofits. While public charities represent approximately 59% of nonprofit organizations filing Form 990, charities bring in 71% of revenue, a disproportionately large share. Nearly 10% of nonprofit organizations filing Form 990 are private foundations. Private foundations hold a disproportionate amount of assets, with nearly 15% of nonprofit assets held by foundations. While nearly 32% of nonprofits are neither charities nor foundations, less than 20% of revenue and 24% of assets are held by these other nonprofits. Table 5. Total Revenue and Assets by Nonprofit Type (billions of dollars)

Public charity Private foundation Other nonprofit Unknown Total

Number of Share of Total Organizations Filing Filing Form Organizations 990 512,689 58.6% 86,591 9.9%

Total Revenue Reported on Form 990 $1,397 $181

71.1% 9.2%

Total Assets Reported on Form 990 $2,598 $621

Share of Total Assets 61.3% 14.7%

275,420

31.5%

$386

19.7%

$1,014

23.9%

894 875,594

0.1% 100%

$1 $1,966

0.1% 100%

$2 $4,236

0.1% 100%

Share of Total Revenue

Source: IRS Business Master File (BMF) (July 2009), Urban Institute National Center for Charitable Statistics (NCCS).

Notes: Filing organizations are those that filed Form 990 (including 990EZ and 990PF) within 24 months of the July 2009 release date, as reported in NCCS Core Files and IRS Business Master Files. Columns may not sum due to rounding.

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Source: CRS calculations based on U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.3.5. Notes: Shares determined using Gross Value Added by Sector. Figure 3. Nonprofit Institutions Serving Households’ Share of GDP

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CONTRIBUTION OF CHARITIES TO GDP To evaluate the contribution of nonprofits and charitable organization to total output, data from the agency charged with measuring the size of the U.S. economy, the Bureau of Economic Analysis of the Department of Commerce (BEA), is utilized. As illustrated in Figure 3, in 2008 nonprofit institutions serving households (NPISH) were responsible for generating 5.2% of U.S. GDP, or $751.2 billion worth of output.11 The share increased 0.4 percentage points between 1998 and 2008.12 Nonprofits’ share of output consists of wages paid to nonprofit employees, the rental value of assets owned and used by nonprofits while providing services, and rental income from tenant-occupied housing owned by nonprofits. While the Bureau of Economic Analysis’s data provide the best representation of the nonprofit sector’s share in the economy, some care should be taken in interpretation. First, the NPISH classification represents a subset of all nonprofits, and therefore represents a share of economic activity smaller than that of the entire nonprofit sector. The NPISH classification also is not synonymous with what is typically thought of as the charitable sector 501(c)(3) organizations. Social welfare organizations and labor unions, for example, may be included in the BEA’s NPISH category but are not 501(c)(3) charitable organizations. On the other hand, some 501(c)(3) organizations may not fall within the NPISH classification, such as those that sell goods or services in a manner similar to businesses. Overall, it is likely that the NPSIH’s share in GDP is greater than that of the charitable sector, but less than that of the nonprofit sector. Other cautions include the fact that there are difficulties in placing a value on much of the output of charitable organizations. Since pricing the value of charitable output is difficult, the BEA estimates the value of output by using the cost of the inputs. Determining the cost of inputs, however, presents its own set of problems. Employee wages are the largest component of charitable organizations’ costs. As was noted above, the data on the number of employees in the charitable sector are not precise. A final issue is the fact that the BEA’s method for

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measuring the nonprofit sector’s output only includes measurable costs of inputs. However, many nonprofit and charitable organizations are supported via volunteer efforts. Since these efforts do not represent a cost they are not included in the measure of output.

THE NONPROFIT & CHARITABLE SECTORS VS. OTHER MAJOR ECONOMIC SECTORS To compare the size of the nonprofit sector to other major economic sectors, employment levels are examined. As was noted above, there were nearly 13 million nonprofit employees in 2005, and an estimated 9.4 million employees in the charitable sector in 2004. Table 6 presents employment in selected industries in 2005.13 In terms of employment, the charitable sector is larger than the construction sector. The charitable sector is also larger than the finance and insurance, and real estate sectors combined when size is measured by employment. The charitable sector has nearly half as many employees as the government, where the government includes all federal, state, and local government employees.

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Table 6. Employment by Industrial Sector, 2005 (thousands) Industrial Sector Construction Manufacturing Retail Trade Finance and Insurance Real estate and rental and leasing Educational Services Health care and social assistance Government

2005 Employment 7,353 13,954 13,467 5,829 2,004 2,543 13,258 19,872

Source: Bureau of Economic Analysis, Table 6.5D, Full-Time Equivalent Employment by Industry. Notes: The government sector includes federal government employees, both civilian and military. The government sector also includes state and local government employment, including those involved in providing education.

Table 7. Contribution to GDP by Industry (billions of dollars) Industrial Sector Construction Manufacturing Retail trade Finance and insurance Real estate and rental and leasing Educational services Health care and social assistance Government

Value Added 581.5 1,637.7 885.5 1,064.9 1,783.5 138.3 1,019.7 1,840.0

Share of GDP (%) 4.1 11.5 6.2 7.5 12.5 1.0 7.2 12.9

Source: Bureau of Economic Analysis, Gross Domestic Product by Industry Accounts, Value Added by Industry, 2008.

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Table 7 provides the contributions of various economic sectors to GDP. As was illustrated in Figure 3, nonprofit institutions serving households (NPISHs) represented 5.2% of GDP, or $751.2 billion in 2008. In terms of contribution to GDP, NPISHs are a larger part of the economy than the construction sector and the educational services sector.14 NPISHs contribute nearly half as much to GDP as the manufacturing sector. Drawing conclusions regarding the importance of the charitable sector in the economy depends critically on what is being measured. When looking at employment figures, the charitable sector appears to be larger than the construction, manufacturing, finance and insurance, real estate and rental and leasing, and educational services sectors. However, only the construction and educational services sectors had contributions to GDP below the contributions of NPISHs in 2008. Further, direct comparison of the data presented on the nonprofit and charitable sectors’ employment to NPISHs contribution to GDP is not appropriate since NPISHs, by definition, are not all charitable organizations nor all nonprofit organizations. To gain further perspective on the relative size of nonprofit organizations, Table 8 compares the distribution of employees at the establishment level of nonprofit firms to establishments in the financial services and real estate industry and to establishments across all industries. While establishment data do not provide information regarding the overall size of nonprofit firms to for-profit firms, the establishment data do allow for a couple of observations. First, relatively speaking, there are fewer very large establishments in the nonprofit sector. Only 6% of nonprofit establishments have more than 1,000 employees on site, while 14.6% of all establishments (for-profit and nonprofit) have more than 1,000 employees on site. In the financial services and real estate sector, 27.2% of establishments have 1,000 or more employees. Second, there are fewer very small establishments in the nonprofit sector than in all sectors taken together. While 52% of nonprofit establishments have less than 10 employees, 58.1% of all establishments have less than 10 employees. In the financial services and real estate sector, 51% of establishments have less than 10 employees. Nonprofit establishments are more likely than the typical establishment to be mid-sized, with more than 10 but less than 1,000 employees. Table 8. Distribution of Employment by Establishment, 2008

Number of Employees

Distribution of Nonprofit Establishments (%)

Less than 10 10-24 25-99 100-999 Greater than 1,000

52.0 13.2 12.5 16.3 6.0

Distribution of Financial Services and Real Estate Establishments (%) 51.0 6.0 5.5 10.3 27.2

Distribution of Total Establishments (%) 58.1 12.1 8.2 8.8 14.6

Source: Medical Expenditure Panel Survey, 2008.

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HOW ARE CHARITIES FUNDED? Revenue

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Charities raise revenue from a variety of sources. The first source of revenue is from fees or private payments for service. The second way charities raise money is through the receipt of government grants and payments. Charities also rely on funding via private contributions (from individuals, corporations, bequests, and foundations). Finally, charities are able to raise revenue by earning returns on investments as well as through some other revenue sources. Figure 4 illustrates how much total revenue was raised in 2005 from each of these revenue sources. Overall, charitable organizations raised $1.2 trillion in revenue in 2005. Private payments for service are the largest category of revenue for charitable organizations. Private payments for service may include a wide variety of services, such as payments for medical care and education tuition. In 2005, charities collected $590 billion in payments for services. Payments for services constituted 49% of total revenue in 2005. Government grants and payments represent the second largest revenue source for charitable organizations. In 2005, $351 billion worth of government grants and payments were made to charities, or 29% of total revenue. While it appears from this measure that the government plays only a moderate role in financing charitable organizations, it is important to remember that the government subsidizes the activities of charitable organizations in other ways. For example, charities receive various tax benefits, such as exemption from federal income tax, eligibility to receive tax-deductable donations, and the ability to issue tax exempt bonds,15 in addition to indirect benefits that may arise from undertaking activities encouraged by other incentives in the tax code.16 This chapter provides further detail on the government’s relationship with the nonprofit and charitable sector below.

Source: Wing, Pollak, and Blackwood, The Nonprofit Almanac, 2008, p. 134 and CRS calculations. Notes: CRS calculations based on data provided by the National Center on Charitable Statistics based on data from the Internal Revenue Service, Statistics of Income Division Exempt Organizations Sample Files, public charities only. This sample is derived from organizations filing Form 990 and thus does not include small organizations or religious charities. Figure 4. Revenue by Source, 2005 (billions of dollars)

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Private contributions in 2005 were $143.77 billion, or 12% of overall revenue to charitable organizations. There is substantial attention given to this revenue source, as it is believed that private contributions to charities are likely to fluctuate in response to changes in economic conditions and the tax treatment of contributions. These issues are explored in greater detail below. Charitable organizations made $81 billion from investments in 2005, which represents 7% of their overall revenue. Investment income includes the sales of securities, interest, and dividends. The recent recession has likely decreased revenue flowing into charitable organizations from investment income. For example, university endowments lost 23% on average between July 1, 2008, and November 30, 2008.17 Other revenue, of which there were $30 billion in 2005, make up 3% of overall revenue received by charitable organizations. These revenue come from revenue sources such as membership dues, net special events income, and other miscellaneous revenue-raising activities.

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Revenue Sources by Charitable Sector Charitable organizations are highly heterogeneous. One aspect of heterogeneity is charitable organizations’ revenue sources. To explore this further, Figure 5 examines the distribution of revenue sources across different types of charities. The data used to derive Figure 5 is available in Table A-1. While the reliance of different types of charities on various revenue sources varies along a number of dimensions, there are a few patterns of particular interest. First, it is clear from the chart that charities providing education and health care receive the majority of their revenue from private payments for service. These fee-for-service organizations are much less reliant on private contributions than other types of charities. It is also important to note that for hospitals, the government grants and payments category includes government payments via Medicare and Medicaid. The charts in Figure 5 also show that arts, culture, and humanities and environment and animals charities rely most heavily on private contributions.18 Charities that rely heavily on private contributions are more susceptible to economic fluctuations and changes in the tax code that would affect individual giving. These issues are discussed further below. The charitable sector that is most reliant on investment income is education. Nearly 17% of the charitable education sector’s revenue in 2005 were generated from investments. For higher education institutions, this figure was over 19%. As noted above, university endowments suffered substantial losses in 2008. Revenue for educational institutions are more susceptible to fluctuations in markets likely to impact investment income than other types of charitable organizations. Overall, understanding what types of charitable organizations have a greater reliance on specific sources of revenue may help policymakers understand the potential for external economic conditions to impact the well-being of the charitable sector. Educational institutions, with a greater reliance in investment income, are more likely to be adversely affected directly by the downturn of financial markets.19 Charities where a larger proportion of revenue come from private contributions, such as arts, culture, and humanities and

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environment and animals, are more likely to be impacted by changes apt to cause fluctuations in private giving, such as changes to the tax code. Charities that derive the majority of their revenue from private payments, such as health care and education institutions, are less likely to suffer revenue losses when external factors cause changes to the level of private giving.

Growth in Revenue Sources

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Table 9 shows the percentage change in real revenue between 1995 and 2005 delineated by charitable sector. Total revenue received by charitable institutions grew by 68.6% over this time period. Private payments to charitable organizations grew more during the time period than other revenue sources. Much of this increase appears to be driven by the increase in private payments received by hospitals. The portion of the charitable sector involved in health care receives the majority of their revenue from private payments. Private payments in the health care sector have also grown faster than private payments in any other sector. As the revenue demands for health care charities generally have increased, these charities have seen a greater increase in private payments than in other revenue sources. In fact, between 1995 and 2005, the portion of revenue from private payments declined in real terms for charitable health care organizations (although this figure still increased for hospitals).

Source: CRS calculations using data published by Wing, Pollak, and Blackwood, The Nonprofit Almanac, 2008, p. 134. Notes: Data is from the National Center on Charitable Statistics based on U.S. Internal Revenue Service, Statistics of Income Division, Exempt Organizations Sample Files, public charities only. Figure 5. Comparing Revenue Sources Across Charitable Sectors (2005 share of total revenue)

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Molly F. Sherlock and Jane G. Gravelle

Some charitable sectors have experienced much larger growth in revenue with respect to private contributions than others. Overall, private contributions to charitable sectors increased nearly 69% between 1995 and 2005. However, charities involved with the environment and animals, human services, and international issues all experienced growth in revenue from private contributions in excess of 100% during that time period. It is also noteworthy that growth in investment income between 1995 and 2005 was highest for charities in the education sector. Education receives a larger proportion of their revenue from investment income than most other charitable sectors. This trend is driven by higher education institutions, where the growth in the share of revenue coming from investment income has been the highest in the time period observed. Again, it should be noted that the financial assets of higher education institutions did not fare well in 2008, and the growth in the revenue coming from investment income has likely slowed. Finally, the charitable sectors that have seen the largest growth in revenue overall are relatively small. Between 1995 and 2005 the revenue flowing into the international charitable sector increased by 190%. The international sector, however, still earned less than 1.7% of the charitable sector’s total revenue. The environmental charitable sector’s revenue also increased more than average, 90% between 1995 and 2005. Even in the face of this rapid growth, the environmental charitable sector captures less than 1% of charitable organizations’ total revenue.

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Table 9. Percentage Change in Real Revenue, 1995 - 2005

Arts, culture, and humanities Education Higher education Other education Environment and animals Health care Hospitals Other health services Human services International Other operating public charities Supporting public charities Total

Government Private Private Investment Other Grants and Total Contributions Payments Income Revenue Payments 91.36 53.40 59.51 28.86 53.85 65.32 59.07 41.75 116.15 136.73

62.01 60.54 68.58 78.29

70.50 62.93 95.50 114.55

76.10 89.00 10.47 51.06

44.36 52.88 25.00 3.66

64.40 63.00 70.20 90.18

-19.26 88.86 -46.15

105.85 112.42 89.17

48.43 43.60 80.47

60.37 55.54 76.03

66.62 102.06 -2.24

72.83 76.48 61.54

102.33 302.45 44.39

88.85 83.93 81.37

41.97 71.70 166.37

25.27 66.67 -21.23

57.99 -28.57 7.84

67.03 190.62 65.89

96.77

-20.76

100.46

66.93

13.98

41.32

68.89

83.27

52.73

56.93

44.82

68.60

Source: CRS calculations based on data from Wing, Pollak, and Blackwood, The Nonprofit Almanac, 2008, p. 134-137. Notes: Revenue are adjusted to constant dollars prior to calculating the percentage change. The percentage change is the change in revenue over the 1995 to 2005 time period.

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Nongovernmental Financing: Private Contributions Private contributions to charitable organizations come from four different sources. The first is gifts from individuals. In 2008, individuals gave $229.28 billion.20 The second is charitable bequests, or gifts from estates. In 2008, total bequests were valued at $22.66 billion.21 The third source of giving comes from corporations. Corporations gave $14.50 billion in 2008.22 Finally, grants to charitable organizations are made by foundations. In 2008, it is estimated that foundations gave $41.21 billion. Total giving by all four groups was $307.65 billion in 2008. Total giving in 2008 was 2% less (5.7% less after adjusting for inflation) than total giving in 2007. This is the first decline in giving since 1987. Figure 6 shows giving by individuals, bequests, corporations, and foundations in real terms in 1998, 2007, and 2008. Between 2007 and 2008, giving by individuals and from bequests both fell by more than 6% (in real terms). Giving by corporations fell by 8% (in real terms). Giving from foundations remained relatively constant, falling by less than 1% (in real terms). Despite the recent reduction in the amount of contributions charities receive from gifts, charitable organizations still received more in 2008 than they did a decade earlier. In real terms, gifts from individuals increased by 25% between 1998 and 2008, bequests increased 32%, corporate giving increased 30%, and gifts from foundations increased by 83%. While real giving has increased, looking at giving relative to the size of the overall economy provides a better picture of society’s generosity. To evaluate the generosity of society over time the ratio of charitable giving to GDP is examined. Figure 7 plots giving as a percentage of GDP and disaggregates giving across sources. Giving as a percentage of GDP was greater than 2% into the 1970s. From the early 1970s through the late 1990s giving as a percentage of GDP remained below 2%. In the late 1990s, giving as a percentage of GDP began to increase, reaching a peak of 2.37% of GDP in 2005. Since 2005, giving as a percentage of GDP has fallen. In 2008, giving as a percentage of GDP was 2.16%. The increase in giving as a percentage of GDP between the 1990s and 2000s was driven primarily by giving from individuals and giving from foundations. Prior to the late 1990s, giving by individuals was less than 1.5% of GDP. Since 1999, giving as a percentage of GDP by individuals has not fallen below 1.6%. In 2008, giving as a percentage of GDP by individuals was 1.61%, down from its peak of 1.78% in 2005. Throughout the 1980s and most of the 1990s giving by foundations never exceeded 0.15% of GDP. In 2008, this ratio was 0.29%. Giving as a percentage of GDP by foundations increased between 2007 and 2008. Overall, giving as a percentage of GDP by foundations has nearly tripled since the 1970s. Giving relative to GDP by bequests and corporations does not exhibit such clear patterns. Corporate giving as a percentage of GDP in 2008 was 0.10%. Relative to GDP, corporate giving in 2008 was the same as it was throughout most of the 1990s. Corporate giving relative to GDP was lower (0.07% - 0.08%) in the 1970s and higher (0.12% - 0.13%) in 2005 and 2006. Bequests relative to GDP were 0.16% in 2008, lower than they were in the early 2000s (when the ratio was 0.20%). Compared to the 1970s and 1980s, bequests as a percentage of GDP are still 0.03 – 0.06 percentage points higher. To more fully understand the impact of giving on the charitable sector, it is important to address what types of charities receive gifts. Figure 5 illustrates that the largest source of funding for arts, culture, and humanities as well as for environment and animals charities is

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private donations. Both of these types of charitable organizations received more than 40% of their revenue from private donations in 2005.23

Source: CRS calculations based on data from The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 210-211. Notes: Giving by individuals, bequests, corporations, and foundations is presented in 2008 dollars. Real values were calculated using the CPI-U.

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Figure 6. Charitable Giving

Source: CRS calculations based on data from The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 210-211. Figure 7. Giving as a Percentage of GDP, 1967-2008

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Figure 8 plots giving to different types of charitable organizations in 2008, 2007, and 1998. When looking at data from the giving perspective, it is clear that religious organizations are the recipients of the largest share of gifts. Further, religious organizations were one of the few categories to experience an increase in giving between 2007 and 2008. Overall, giving fell by 5.7% between 2007 and 2008, with the largest declines in gifts to grantmaking foundations (-22%); human services (-16%); and arts, culture, and humanities (-9%). Between 1998 and 2008 overall giving increased by nearly 32% in real terms. Again, there was wide variation across sectors. The sectors that experienced the largest increases in giving over the course of the decade were international affairs (98%), environment and animals (42%), and education (30%).24 Giving to religion grew over the course of the decade, but the rate of growth was relatively low (19%). Giving to arts, culture, and humanities decreased by 2% between 1998 and 2008. This is particularly noteworthy since the arts, culture, and humanities charitable sector receives the largest share of revenue from private contributions. There are a number of issues which may affect giving by individuals. These include whether or not individuals can deduct contributions, fluctuations in personal income, and broader economic conditions. Individuals who itemize deductions have a greater incentive to give, as the price of giving is reduced by the marginal tax rate. In 2005, those itemizing gave on average 3.54% of their adjusted gross income. Non itemizers gave on average 1.34% of their adjusted gross income.25 It is important to note, however, that those choosing to itemize deductions tend to have higher incomes and thus perhaps a greater ability to give. Individual charitable deductions are subject to various restrictions, which include being generally limited to 50% of modified adjusted gross income.26

Source: CRS calculations using data from The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 212-215. All values are adjusted to 2008 dollars using the CPI-U. Figure 8. Giving to Charities by Type

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Individual giving to charity is also responsive to income. Table 10 shows how giving and the amounts given vary across three different income groups. In 2004, 56.3% of households with less than $50,000 in income gave to charity, 81.4% of households with income between $50,000 and $99,999 gave to charity, and 93.3% of households with income greater than $100,000 gave to charity.27 In 2004, the average household gave just over $2,000. This figure appears to be driven by a few households making relatively large gifts as the median charitable gift was $775. The average giving for households making $100,000 or more per year was more than three times the average giving of households making less than $50,000. The median gift by households making more than $100,000 was more than four times as much as the median level of giving by households making less than $50,000 per year. Economists have also made attempts to measure the elasticity of charitable giving with respect to income, which is the percentage change in giving relative to the percentage change in income. Empirical work that has attempted to estimate the elasticity of charitable giving with respect to income has produced a wide range of results.28 While many studies have found an income elasticity of less than one, the fact that individual contributions relative to GDP have remained relatively constant over time (see Figure 7) suggests that income elasticity is more likely unit elastic. If the income elasticity were in fact less than one, as income increased over time one would expect charitable giving relative to income to decline.29 Charitable bequests are given by estates upon an individuals’ death. It is estimated that about 120,000 estates leave bequests each year. Most bequests come from small to mid-sized estates, where the estate is small enough in size that filing of estate tax returns is unnecessary. Only about 8,000 estates filed estate tax returns in 2008. These 8,000 estates were responsible for about 85% of all giving via bequests, illustrating that giving via bequests is highly concentrated amongst the most wealthy decedents.30 Concern is often expressed that a reduction in or elimination of the estate tax would lead to reduced giving to the charitable sector.31 Recent work has found that bequests are responsive to changes in estate taxes as well as overall wealth.32 Corporate giving can be made in one of two ways. The first way is as a direct gift from the corporation. The second way is via a corporate foundation. A typical corporation is estimated to give about 1% of its domestic pre-tax income to charitable organizations, or about 0.08% of corporate sales.33 Corporations’ charitable deductions are generally limited to 10% of taxable income, among other restrictions. Table 10. Giving and Household Income, 2004

% of households giving Average annual amount per donor household Median annual amount per donor household

All Income Groups 70.2% $2,047 $775

56.3% $1,186

$50,000 $99,999 81.4% $1,871

$100,000 and above 93.3% $3,886

$450

$815

$1,830

< $50,000

Source: Center on Philanthropy Panel Study, 2005 Wave.

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Table 11. Share of Revenue from Government Grants, 2005 Type of Nonprofit

Arts, culture, and humanities Education Environment and animals Health Human services International and foreign Other Total

Share From Government Grants (%) 12.5 14.9 14.1 3.4 22.7 21.9 18.9 9.0

Source: CRS calculations using data from Wing, Pollak, and Blackwood, The Nonprofit Almanac, 2008, p. 134.

The final source of private contributions or charitable gifts comes from foundations. As noted above, in relative terms, giving by foundations has increased more than giving by individuals, bequests, and corporations over the past decade. In 2008, The Bill and Melinda Gates Foundation gave $2.8 billion in grants (giving by all foundations was $41.2 billion in 2008). Giving by the Gates Foundation increased by $0.8 billion between 2007 and 2008, contributing to the overall stability of foundation giving between 2007 and 2008 as grantmaking by other foundations fell.

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Government Financing: Grants and Transfers From Figure 4, government grants and payments to charitable organizations were $351 billion, or 29% of charitable organizations’ total revenue. What Figure 4 does not do is identify whether payments were made for fees for service (such as Medicare payments), grants, or transfers. Similarly, Figure 5 shows that the share of government grants and payments in total revenue varies substantially across different types of charities. Government grants and payments are much more important in health (37%) and human services (36%) than in other types of charitable organizations. Table 11 reports estimates of the share of revenue that comes from grants alone, excluding fees for services. These data are gathered directly from the Form 990 for charitable organizations that were required to report. The data used to generate Figure 4 and Figure 5 were from the IRS Statistics of Income division exempt organization sample files on public charities. In a few cases grants are larger as a share of income than the share of total payments reported above. These grants, of course, may have performance requirements, but they are not allocated to particular individuals and services received. Government grants are about 9% total revenue for the charitable sectors included in Table A-1, or about $100 billion for 2005. The data indicate that government payments for health as a share of revenue are primarily due to fees. Virtually all of the government payments in the remaining sectors, other than human services, reflect grants.34 Grants are most important in human services and international organizations, and least important in

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health. These data do not include religious organizations, where government grants are unlikely to be an important source of revenue. Grants reflect the nature of the specific charities (they are less important for organizations such as hospitals that rely heavily on fees). Grant support is more important in areas where the government has a special interest, such as the human services and international sectors. The Bureau of Economic Analysis’s (BEA’s) National Income and Product Accounts provides information on government transfers, which are relatively small. In 2007, the government provided approximately $20 billion in transfer payments for all nonprofit organizations serving households.35 It is not clear how transfers are defined, but grants can include contracts and agreements for services, as well as transfers. The BEA data does not separate these transfers by type of charitable organization. The data presented here do not separate state and local government funding from federal government funding. Government funding to charitable organizations may come directly from the federal government, from state and local governments that have received the funding from the federal government (rather than raised the revenue themselves), or directly from state and local governments. One study finds that, for 2001, only 12% of grants and fees originate with state and local governments; 37% are financed by the federal government but flow through to nonprofits via state and local programs, and the remaining 51% are provided directly by the federal government.36 If Medicare and Medicaid, the main fee-related items, are excluded, the states continue to supply only a small share (9% of their own funds) but administer a much larger share of federal funds (61%). While the federal government appears to be the primary source of funds via grants, state and local governments are the primary source of oversight.

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The Business Cycle’s Impact on Funding As is the case for many entities during an economic downturn, charities may suffer declines in funding. For some, the decline comes at the time when their services may be in greater demand. Analysis of past recessions suggests that the level of charitable giving declines during downturns, but that charitable giving as a percentage of income does not decline. The level of giving has declined during the current recession. Nonprofits overall tend to fare no worse than, and perhaps better than, other sectors during downturns, although this recession may have been more troubling because of the fall in asset values. There are significant differences in giving trends across different types of charitable organizations. The greatest decline in giving during the recent economic downturn has been for human welfare organizations. Human welfare organizations as a sector are likely to experience increased needs for their services during a downturn. While giving declined in inflation-adjusted terms between 2007 and 2008 by 6%, the decline for human services organizations was 16%.37 Recessions can also affect assets, such as those held by university endowments and foundations (whose purpose is primarily to provide grants to active charitable organizations). The current recession has been accompanied by a significant fall in the value of assets which affected charitable organizations’ assets. Despite the fall in asset values and in gifts to

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foundations, foundation grants to other organizations fell less than inter-vivos giving by individuals, bequests, and corporate giving. Another major pressure on nonprofits during the recession has been the decline in support by governments (primarily state governments), including delays in payments. A recent survey of nonprofit organizations found that 35% have experienced a loss in government support while 37% reported experiencing delays in government payments.38

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How Have Nonprofits Fared during Past Economic Downturns? Sectors of the economy fare differently during a recession. Generally, sectors that produce investment and durable consumer goods (such as housing, automobiles, and household furnishings) and luxuries tend to suffer the largest declines in demand. Necessities and items that are immediately consumed, such as food and health care, tend to be more resistant, as are items that are a small part of the household budget. That is, individuals tend to economize on big-ticket items whose purchase they can delay. Charitable contributions tend to share features of both types of goods. While charitable contributions are not a necessity, they are typically small as a part of individuals’ budgets. Evidence indicates that there is a tendency for giving to fall in real (inflation adjusted) terms during a recession. During the 12 recession years since 1967, charitable giving declined in 8 of those years.39

Source: CRS calculations based on the Center for Philanthropy, Giving USA 2009, and National Income and Product Accounts. Other charitable contributions (the difference between the two lines) include corporate, foundations, and bequests. A version of this chart appeared in CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples. Figure 9. Charitable Contributions as a Percentage of Output, 1967-2007

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Molly F. Sherlock and Jane G. Gravelle Table 12. Changes in Giving by Source, 2007-2008 Source of Giving Individual Bequest Foundation Corporate Total

Share of Giving (%) 75.0 7.0 13.0 5.0 100.0

Nominal Change (%), 2007-2008 -2.7 -2.8 3.0 -4.5 -2.0

Inflation Adjusted Change (%), 2007-2008 -6.3 -6.4 -0.8 -8.0 -5.7

Source: CRS calculations using data from The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 210-211.

Table 13. Changes in Giving by Recipient, 2007-2008 Charitable Recipient Sector Religious Educational Foundations Human services Health Public society benefit Arts, culture, humanities International affairs Environment/animals

Share of Giving (%) 35.0 13.0 11.0 9.0 7.0 8.0 4.0

Nominal Change (%), 2007-2008 5.5 -5.5 -19.2 -12.7 -6.5 5.4 -6.4

Inflation Adjusted Change (%), 2007-2008 1.6 -9.0 -22.2 -15.9 -10.0 1.5 -9.6

4.0 2.0

0.6 -5.5

-3.6 -9.0

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Source: The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 212-215. Unallocated giving accounts for 6% of giving.

Charitable Contributions in Past Recessions Although real giving tends to decline during recessions, it is not clear that giving is affected more than average expenditures. Figure 9 shows the pattern of giving as a percentage of GDP from 1967 through 2008. Recession years are noted via shaded bars.40 Charitable giving as a percentage of GDP has remained relatively stable over business cycles. Overall, there has been an upward trend in giving as a share of output since the 1980s. The Current Recession: Charitable Giving in 2008 Charitable giving declined during the recent recession, with a fall of 2% in nominal terms from 2007 to 2008.41 This reduction was a decline of 5.7% adjusted for inflation. The declines differed depending on both the source of giving and the recipient as shown in Table 12. The pattern for foundation grants suggests that, despite the loss in value that occurred in assets in this period, using assets to finance grants seemed to provide more stability in giving. There is evidence that giving by foundations has acted as a stabilizing force in the past.42 The effects also differed by the recipient of giving. As shown in Table 13, different types of charities are affected in different ways. Religious giving, which accounts for the largest share of the total, had an increase in real giving between 2007 and 2008 of 1.6%, a

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differential of 7.3 percentage points from the average effect. The other sector with an increase, public society benefit organizations, include organized giving arrangements that flow through to other beneficiaries, such as United Way, Jewish funds, and donor-advised funds. The largest decline in giving was for foundations, but these institutions largely accumulate assets and make grants to other organizations, and their giving to other organizations was more stable than other giving. Outside of foundations, the organization that had the greatest drop in inflation-adjusted contributions, 16%, was for human services, where the needs during a downturn and dependence on contributions are likely the greatest. Most other institutions had a real decline of 9% to 10% (education, health, arts, environment), 4 percentage points worse than the average across all institutions. International affairs had a smaller drop than average, 3.6%. It is important to note that nonprofit organizations that receive charitable contributions generally have other important sources of revenue, such as user fees, earnings from assets, or government support. Figure 4 shows that total charitable contributions received as a share of total revenue of public charities was approximately 12% in 2005. For the health care sector, which includes nonprofit hospitals, charitable contributions were approximately 2% of total revenue in 2005 (see Figure 5). The share of charitable contributions in total revenue varies for other sectors. In 2005, arts, culture, and humanities organizations received approximately 43% of their revenue from charitable contributions, the education sector about 13%, environment and animals 48%, and human services 16%. Some of these nonprofit institutions may be fairly resilient to cyclical pressures (such as hospitals). Attendance at colleges and universities is also likely to rise when jobs are scarce. Charitable organizations and giving are also linked to endowments which can be a source of funds in difficult times (but may also fall in value during a recession).

Endowments and Assets The National Association of College and University Business Officers (NACUBO) follows the endowment size of colleges and universities, covering their fiscal years which normally begin on July 1. For the 2008 fiscal year (covering the second half of 2007 and the first half of 2008) asset values rose by 0.5%, a loss in real terms and much smaller than previous growth. A special follow-up survey found a 22.9% decline in the five months from July 1, 2008, to November 30, 2008.43 (Corporate stocks fell further, but have since begun to recover.) Foundations experienced a 28% drop in the value of assets during 2008.44 Foundations hold a large quantity of financial assets. In 2007, total foundation assets were estimated to be $682 billion.45 Community foundation assets represent a relatively small share of that total, $56 billion in 2007.46 The largest foundation, the Bill and Melinda Gates Foundation, had assets of $39 billion, while the top 10 foundations by asset size held $112 billion in 2007.47 Data on returns filed with the Internal Revenue Service on public charities showed assets held by charities in 2006 to be $2.2 trillion, but a large share of this figure is likely to be buildings and other physical assets. (This amount does not include most assets of religious organizations.) Charitable organizations related to health (likely to be hospitals) accounted for $867 billion. Education accounted for $682 billion. Educational institutions are known to have large endowments, and endowments accounted for half their assets.48 University endowments had been growing rapidly, and in the latest reports, total assets rose to $837 billion (the total for all public charities was $2.6 trillion, and for hospitals $921 billion).49

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Earnings from endowments appear, overall, to be larger than receipts from charitable contributions for colleges and universities, although endowments are highly concentrated in large institutions.50 Another consequence of loss of asset value is likely reduced individual giving, especially by high-income donors and through bequests. High-income donors tend to be more likely than the average donor to contribute to certain types of nonprofits, such as health, education, and arts, as well as foundations, and less likely to contribute to religious and human welfare organizations.51 As asset values fall, reducing the wealth of high-income donors, charitable contributions tend to decline.

Outlook 2009 Although annual data for 2009 are not available, surveys have been conducted regarding how charities are faring. A summary report has been published by the National Council of Nonprofits.52 This overview provides information suggesting nonprofits continue to feel the pressures of increased demand for their services coupled with decreasing revenue. More than a third of nonprofits have had to cut operations. The surveys, particularly several state surveys, cite reduced support from governments as more problematic than reduced support from individual and foundation giving (corporate giving is also cited as declining significantly). Although all three levels of government (federal, state, and local) are mentioned, it is primarily state support that is falling. In addition to funding cuts, states apparently have been delaying payments for services they have contracted with nonprofits to provide. One study, from Connecticut, is specifically focused on contract payment delays.53 One national survey found that 35% of respondents reported declines in government support and 37% reported delayed payments from the government. Some additional funds for charitable activities were provided in the 2009 federal stimulus plan, many of these funneled through state and local governments. The additional funding was summarized in a publication by the National Council of Nonprofits.54 Overall, however, it appears that governments, particularly state governments, may be contributing to the financial difficulties of nonprofit organizations, even to the point of not paying for contracted services.

THE CHARITABLE SECTOR’S RELATIONSHIP WITH GOVERNMENT Various charitable activities are subsidized by the federal tax code or funded via government grants. In order to understand the rationale for government support of the charitable sector, it is important to understand the economic theories relevant for charitable activities.

Market Failures: Justifying the Subsidization of Charities There are two types of market failures used to justify government subsidization or support of the charitable sector. The first is the notion of public goods. Generally, the free market will provide too few public goods, due to the free-rider problem. Government

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intervention can help by increasing the quantity of public goods provided. The second relevant market failure is externalities. An externality is an outcome of a transaction whereby the market participants do not face the full cost or benefit of their actions. Each of these market failures is discussed in the context of the charitable sector in the following sections.

Public Goods Pure public goods are characterized by two properties: the fact that they are non-rival and non-excludable. For a good to be non-rival, one person’s consumption of the good does not diminish another’s ability to consume that same good. For a good to be non-excludable, it is either impossible or prohibitively expensive to prevent consumption of the good once the good has been provided. One example of a pure public good is clean air. The market itself is unlikely to provide a public good due to the free-rider problem. Once a public good, such as clean air, is provided, it is available for everyone to enjoy. Since individuals know that the pure public good, such as clean air, will be available to them once provided they may wait for others to provide the good and not contribute themselves. Without contributions, the good is not provided. Just because a good has the characteristics of a public good, it does not mean that this good will not be provided (at least partially) by the private market. In some cases, one person’s demand for a good may be high enough that they are willing to provide the good on their own. Once provided, the public good is there for all to enjoy. Individuals also tend to give more towards providing public goods than standard economic models would predict.55 This happens to the extent that individuals are altruistic, and care about the well-being of others in addition to their own well-being. Altruism, and the well-being that individuals get from giving, motivates people to give both time and money to causes like religious organizations, disaster relief, local charities, educational institutions, and research causes among others. Economists have also postulated that the warm glow model can be useful in explaining why individuals give to charity.56 In the warm glow model, individuals not only care about the total amount of the public good provided, but also about their individual contribution to the total. Individuals are expected to contribute to a charitable cause up to the point where their contributions cease to make them better-off. Even under a warm glow model, economists expect public goods to be underprovided, since individuals do not take into account the positive external effects of their contributions. Individuals may be motivated to give to charitable causes to the extent that their own well-being depends on the well-being of others in society. Here, redistribution has the potential to make all members of society better off.57 In this sense, increasing the consumption of the poor can be viewed as a public good. Redistribution can improve everyone’s well-being, but the optimal level of redistribution is not likely to be achieved by the market absent government intervention, due to the free-rider problem. To the extent that charitable goods and services are underprovided by the market, government subsidization of charitable activities (or government provision of goods and services provided by charities) can increase overall well-being. The government supports charitable organizations that provide public goods in two major ways. First, the government provides grants directly to charitable organizations providing public goods. Second, the government provides tax breaks to charitable organizations providing public goods.

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Externalities The second rationale for government intervention via the charitable sector is the case of externalities. A number of activities in the charitable sector are associated with positive externalities. With a positive externality, there are benefits to engaging in certain transactions that do not accrue to either party involved in the transaction. For example, education is thought to have positive externalities. Not only does the person receiving an education benefit, but educated people are better equipped to participate in a functional democracy. Knowledge has positive externalities to the extent it is transferred between individuals outside of the formal education setting. Health care provision may also have positive external effects. When an individual receives a vaccine against a communicable disease, not only does that individual benefit by not becoming ill, but the entire community benefits as the risk that the individual will spread the disease to others is diminished. Subsidization of organizations providing goods and services associated with positive externalities has the potential to increase society’s overall well-being. Is There an Economic Rationale for Nonprofit Hospitals? Some have come to question whether the favorable tax treatment for some charities is justified, such as the exemption for nonprofit hospitals. In the United States, there are both for-profit hospitals and nonprofit hospitals. Only nonprofit hospitals may qualify for taxexempt status as 501(c)(3) charitable organizations.58 In order to qualify, the hospital must provide charity care and ―community benefits.‖ Under the community benefit standard, hospitals are judged on whether they promote the health of a broader class of individuals in the community.59 A hospital could meet the standard by providing charity care (i.e., free or reduced-cost care). However, there is no requirement that hospitals provide charity care, and they may qualify for the 501(c)(3) charitable status by providing other types of community benefits. Given the large loss in tax revenue associated with treating nonprofit hospitals as taxexempt 501(c)(3) organizations, it has come into question whether the benefits provided by these institutions are worth the costs.60 Some have argued that since hospital services are not a public good (a person’s consumption of medical care is rival and excludable), hospitals should not be given the same tax advantage as other charitable organizations providing true public goods.61 Analysis comparing nonprofit hospitals to for-profit hospitals has found that nonprofit hospitals do provide higher levels of uncompensated care, more emergency room care and labor and delivery care, but less Medicaid care. The monetary value of community benefits provided by nonprofit hospitals is unclear, leaving open the question as to whether the favorable tax treatment is justified.62

Relationship with the Federal Government The government supports and affects nonprofits in several ways in addition to providing grants and transfers. Recently, the federal government has begun undertaking social innovation initiatives involving nonprofits. As noted above, payments and grants to nonprofits from the government represent a significant share of receipts, although the importance of the share varies by type of nonprofit, and transfers per se are small. Another

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significant source of government support to the charitable and nonprofit sector arises from tax benefits, provided by both federal and state governments.63 These relationships are discussed below first for the federal government and then for state and local governments.64 Estimates regarding the value of the government’s relationship with the charitable sector suggest that grants amount to about $100 billion, with the federal government supplying about 90% of the funds. Federal tax subsidies are valued to be approximately $115 billion to $130 billion, and state and local tax subsidies are approximately $30 billion to $50 billion. In sum, the government provides approximately $245 billion to $280 billion to the nonprofit and charitable sector via grants and tax subsidies.

Federal Government

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The federal government’s oversight over charities largely stems from the tax benefits provided to the sector. Nonprofit and charitable organizations are generally exempt from tax on most income, including investment income. Additionally, donations to charitable organizations are tax deductible, effectively subsidizing charitable giving. Recent legislation established a social innovation fund in the Corporation for National and Community Service, and President Obama has created the White House Office of Social Innovation and Civic Participation to coordinate these efforts. This program is briefly discussed before turning to a discussion of several types of 501(c)(3) organizations and issues that have been subject to recent congressional interest and the financial benefits related to taxes and the postal subsidy.

Social Innovation Initiatives The Edward M. Kennedy Serve America Act (P.L. 111-13) enacted in 2009 established a social innovation fund that is administered by the Corporation for National and Community Service. This corporation administers domestic volunteer initiatives (such as VISTA).65 A budget request for $50 million has been submitted. In addition, a White House Office of Social Innovation and Civic Participation has been established to coordinate these efforts. According to White House officials the objectives of this initiative were to develop partnerships with the private sector (nonprofits, businesses, and philanthropists), support and spread innovative ideas (such as Harlem Children’s Zone), support greater civic participation through media, and promote national service.66 Foundations Most foundations differ from operating charities in that they often have a single donor. In addition, while a gift to a foundation is deductible for income (and estate and gift) tax purposes, the funds are not immediately used for active charitable purposes. Rather, funds are invested and donations are often made to charitable organizations from earnings that may allow the corpus of the foundation to be maintained and grow. Contributing to a foundation and allowing the funds to grow allows the benefits of both the charitable deduction and the exemption of tax on earnings. To address concerns that foundations could simply retain earnings and grow indefinitely, and because foundations are often closely tied to a family or specific group of donors, tax

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laws require a minimum payout rate (5%) and restrict activities that may benefit donors. The tax code imposes taxes and/or penalties for self-dealing, failure to distribute income on excess business holdings, for investments that jeopardize the charitable purposes, and for taxable expenditures (such as lobbying or making open-ended grants to institutions other than charities). There is a 1% tax on investment income of foundations, and an additional 1% penalty if the foundation does not make a certain minimum distribution (based on distributions made in the previous five years), or has been subject to a tax for failure to distribute in the previous five years.

Donor-Advised Funds and Supporting Organizations In recent years, concerns have been raised about charitable vehicles that have some of the same features as foundations: donor-advised funds and supporting organizations. Donoradvised funds are funds where donors make contributions to the fund and the institution holding the accounts makes contributions to charitable organizations with the advice of the donor. While the donor has no legal control, in practice the donor’s wishes are likely to be respected. Supporting organizations do not actively engage in charitable activities but support organizations that do by contributing funds. Supporting organizations fall into three categories: type I organizations directly controlled by the charitable organizations; type II organizations controlled by the same entity controlling the charitable organization; and type III organizations related to the charitable organization (these organizations may support many charitable organizations). Donor-advised funds and supporting organizations share many features with private foundations, but have historically not been generally subject to self-dealing rules and other restrictions (meant to prevent the donor from receiving a private benefit) or payout requirements (meant to keep the organization from accumulating funds without paying out some amount for charitable purposes).67 In an effort to address concerns that abuses were occurring and that, in some cases, little was being paid out, the Pension Protection Act of 2006 (P.L. 109-280) imposed a number of regulatory requirements and also required a Treasury study of donor-advised funds and other supporting organizations to evaluate whether they should continue to receive tax-exempt status. Donor-advised funds eligible for charitable contributions are prohibited from providing benefits to the donors, and are required to have a governance structure if grants are made to individuals (such as a scholarship fund). Contributions of closely held businesses must be sold within a short period of time. Supporting organizations must indicate which type they are and certain type III organizations will eventually be subject to a minimum payout. The Treasury Secretary was charged with determining the details of the minimum payout requirement through regulation. On September 24, 2009, the Treasury issued a proposed regulation to impose a 5% rate (which is the same rate that applies to private foundations), pending comments due in December 2009.68 At this time, however, donor-advised funds are not subject to a payout requirement. Endowments Endowments also share a number of characteristics with foundations. Specifically, deductions for the contribution are made in advance of the expenditure and the endowment principal may be maintained or grow. Endowments receive tax-exempt earnings, but there is no payout requirement. In recent years the growth of university and college endowments

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raised concerns and led to discussions of possible payout requirements. The Senate Finance Committee received testimony on college endowments in connection with hearings held on offshore funds in 2007. Major university endowments are invested in, among other assets, offshore hedge funds, and one issue discussed during the hearing was whether these investments were being used to avoid the unrelated business income tax. The witnesses discussed the growth of endowments and also addressed the relationship between endowments and affordability, showing that a very small increase in payout of universities and colleges with the largest endowments could obviate the need for tuition increases and could fund significant increases in student aid.69 The Senate Finance Committee also sent a survey to colleges with endowments of more than $500 million to obtain more details about their endowments and payouts.70

Charitable Contributions While charitable deductions are available to all taxpayers, individuals who take the standard deduction do not use the charitable contribution deduction. (The logic behind the standard deduction is that it accounts for the tax-deductable activities of individuals choosing not to itemize deductions.) Slightly over one-third of individual taxpayers itemize; about 30% deduct charitable contributions. Individuals’ contributions are, in general, limited to 50% of income for most charities, but are restricted to 30% for certain nonprofits, including nonoperating foundations and institutions set up for the benefit of members (such as fraternal lodges). Individuals can contribute property as well as cash. The contribution of appreciated assets has particularly beneficial treatment, as the value of most appreciated assets can be deducted without including the capital gains in income which would be subject to tax. (Some contributions of property are limited to the smaller of basis or fair market value, such as business inventory.) For that reason, gifts of appreciated property are limited to 30% of a donor’s adjusted gross income for most general charitable donations, and to 20% for donations to organizations with more restricted giving limits, such as non-operating private foundations. Deductions for inventory property used in a business are generally limited to the cost of production and not market value. Individuals can also deduct costs of volunteering for charitable purposes, including outof-pocket expenditures, costs of using a vehicle, and travel costs when there is no significant personal element. In lieu of calculating costs of operating an automobile, volunteers may deduct 14 cents per mile. This amount is set by statute and is smaller than amounts allowed for medical and moving purposes (24 cents), which are in turn smaller than the amounts allowed for business purposes (55 cents). These latter rates are adjusted for changes in costs.71 Like individuals, corporations are subject to restrictions on their ability to deduct charitable contributions. For example, corporate contributions are generally limited to 10% of taxable income. In some cases, the tax code encourages the donations of certain types of property: for example, there is an enhanced deduction for donations of food inventory to organizations serving the needy. There are a number of temporary provisions, referred to as extenders, that allow more generous tax treatment for certain contributions. The most important, in revenue terms, is the IRA rollover provision allowing individuals who are 70½ to contribute amounts in individual retirement plans directly to charity without including the distribution in income. This provision is advantageous to those who do not itemize deductions and benefits taxpayers

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because certain provisions (such as the taxation of social security benefits) are triggered by adjusted gross income. Other major extenders relate largely to gifts of inventory.72 A number of difficulties arise in administering the charitable deduction tax provision. For example, there is no third-party reporting to help confirm that deductions are legitimate. There are also concerns about the valuations of certain types of property, including not only gifts by the wealthy, but also gifts of vehicles and household furniture. Recent legislative initiatives have increased recordkeeping requirements and placed other restrictions on noncash charitable contributions.73

Exemption of Tax on Investment Income of Nonprofits Direct data on the cost of the tax exemption for investment income for nonprofits are not available. The lack of tax on earnings of nonprofit organizations is not considered a tax expenditure. Consequently, the Joint Committee on Taxation does not provide estimates of the cost of this provision. In an effort to estimate the cost of the tax exemption of investment income for nonprofits two different data sources are reviewed. The Bureau of Economic Analysis (BEA) reports for 2005, $128 billion in dividends, interest, and capital gains for nonprofit institutions serving households. At a 35% tax rate, this would result in $45 billion of revenue loss. This estimate does not include net rent (which is likely to represent a relatively small share) and also excludes some capital gains income of religious organizations. Data taken from all organizations filing Form 990, including net rent, dividends, interest, and capital gains on securities, indicate $170 billion of income for FY2006. At a 35% rate, total revenue loss is $60 billion. For the data from the Form 990, charitable organizations with contributions deductible under 501(c)(3) accounted for 55% of the investment income, foundations about 32%; the remainder of the income is attributable to charitable organizations not exempt under 501(c)(3). Among the charitable organizations, half the investment income was received by the education sector (over a third in higher education) and about 30% in the health category. Income from university endowments soared in recent years before declining during the recession. For FY2007, total increases of university endowments were $88 billion; with 30% projected to be unrealized capital gains, income was about $53 billion, as compared to the $34 billion reported the previous year.74 As the economy fell into recession, however, earnings fell precipitously. These fluctuations in earnings make it difficult to determine a steady state rate of growth, but had the BEA estimate increased by a normal growth rate of 5% or so per year, endowment income would be $55 billion for 2009. Estimates using data from the Form 990 are closer to $70 billion. In either case, the estimated cost of exempting this income from taxation exceeds the cost of the charitable contribution deduction, which is approximately $50 billion. The asset income estimates include foundations, supporting organizations, and endowments, but do not include donor-advised funds. The amounts in these funds are small relative to the remaining nonprofits’ assets, but have been growing quickly.75 As is the case with other provisions, this value of the exemption varies substantially across different types of charitable organizations. On average, charities filing with the IRS report that investment income is less than 7% of revenue. However, for higher education and supporting organizations, that portion of income is close to 20%. Investment income is 9% for arts, culture, and the humanities, but less than 3% for environment and animals, health,

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human services, and international. The lesser importance of investment income for health stems from the fact that the majority of the health revenue comes from fees for services (whether private or public). In health care, investment income is similar in size to charitable contributions while in the education sector investment income is about twice as large as charitable contributions. In other sectors, investment income represents a much smaller share of overall income than do charitable contributions. The exemption of income for nonprofits and charitable organizations also interacts with attempts to provide relief or incentives for businesses that are channeled through the income tax system. For example, in stimulus proposals enacted in 2008 and extended in 2009, provisions such as bonus depreciation which were provided to stimulate investment spending were not available to nonprofits because they depended on tax liability. Similarly, proposals designed to provide relief for small businesses to help pay costs of providing health insurance for low-income employees in some versions of proposals (e.g., H.R. 3200) would not be available to nonprofits.

Charitable Contributions and Other Tax Expenditures Table 14 provides the estimated cost of various provisions benefitting the charitable sector. The tax savings from deducting charitable contributions is estimated at approximately $50 billion, with the majority of the costs reflecting deductions for the individual income tax. Table 14 also provides the revenue effects for allowing nonprofit educational institutions and hospitals to issue tax exempt bonds, and the provisions exempting housing allowances of ministers from tax. In addition to the tax benefit for income taxes, there is also a charitable contribution deduction for the estate tax. This deduction is estimated at $4.3 billion.76 Estimates for the value of the charitable contribution subsidies are provided separately for education and health. Specifically, 14% of the tax expenditures associated with allowing charitable contributions to be tax deductable accrue to the education sector, while 9% accrue to the health-oriented charities. These shares are similar to their shares of total charitable giving (14% and 7%) but are higher than the shares for individuals, which are about 11% and 4%. Foundations tend to give a larger share to education and health, 23% and 24% respectively, and account for 13% of contributions.77 Table 14. Tax Expenditures and the Nonprofit Sector, FY2009 (billions of dollars) Provision Charitable contributions Education Health Other Tax exempt bonds Education Hospitals Ministers’ housing allowance

Individual 46.2 6.3 4.0 35.9 3.7 2.1 1.6 0.6

Corporate 3.2 0.4 0.3 2.5 1.4 0.8 0.6 —

Total 49.4 6.7 4.3 38.4 5.1 2.9 2.2 0.6

Source: Joint Committee on Taxation, Estimates of Federal Tax Expenditures, FY2008-FY2012, JCS2-08, October 31, 2008.

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Table 15. Distribution of Charitable Giving Across Income Classes, 2005 (percentage of all households from income class giving to charity type) Type of Charity Religious Combined purpose (e.g., United Way) Basic needs Health Education Arts Other (e.g., environment, international) Total Giving from Each Income Class Addendum: directed at poor Addendum: share of households

Less than $100,000 59.4 34.8 49.1 13.9 5.9 4.4 31.4 35.6 41.4 90.4

$100,000$200,000 11.3 9.8 12.9 5.1 2.5 1.9 6.0 7.9 9.6 7.4

$200,000$1 million 20.8 46.1 27.9 21.9 63.5 59.3 37.9 36.2 34.4 2.1

More than $1 million 8.6 9.3 10.2 59.1 28.2 34.4 24.7 20.3 14.6 0.2

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Source: Patterns of Household Charitable Giving by Income Group, 2005, prepared for Google by the Center on Philanthropy at Indiana University, Summer 2007.

The larger shares of charitable contributions deduction benefits for education and health reflect the pattern of giving by income class. Those who itemize deductions (about 30% of returns) are in the higher income classes. Itemizers account for over 80% of contributions. Table 15 provides data on the distribution of giving by income class. Higher-income individuals give more than the average share of contributions to health, education, and the arts, and are less likely to give to religious organizations and those providing for basic needs. For example, while only 0.2% of households have income over $1 million, these households provide 59.1% of charitable giving to health. The 0.2% of households with income over $1 million is responsible for 20.3% of total giving. Table 15 also provides information on giving directed at the poor. The data on giving directed at the poor show the percentage of total giving focused on the needs of the poor coming from each income class.78 Because the types of charities higher-income individuals contribute to tend to help the poor somewhat less, they provide a smaller-than-average share of their contributions to the poor. Relative to revenue, arts, culture, and humanities is likely to have the largest benefit from the tax subsidy for charitable contributions because this sector is favored by higher-income individuals and, as shown in Figure 5, contributions are a large share of receipts. Most of the tax benefit from the estate tax goes to foundations (over half). Bequests are disproportionately given to education, health, and arts and culture. Foundation grants also tend to favor these types of activities.79

Postal Subsidies Qualifying nonprofits are eligible for reduced postal rates. In the past when the federal government appropriated funds to cover this cost, the value appeared to be several hundred million, and could perhaps be as much as $1.15 billion today. Currently, the cost is shifted to other mailers. The provision has been criticized by for-profit competitors as an inefficient and potentially unfair way to aid nonprofits.80

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State and Local Governments State and local governments provide benefits to nonprofits through mechanisms such as grants (as discussed above) and tax subsidies. Tax subsidies include state income and estate tax provisions similar to the federal provisions, as well as property tax and sales tax exemptions.

State and Local Tax Benefits State and local governments provide tax subsidies for charities through income taxes (largely state tax sources, which oftentimes piggyback on the federal income tax structure), property tax exemptions (primarily local tax sources), and sales tax exemptions (primarily state tax sources). There are also state inheritance taxes. The value of these subsidies is more difficult to determine given the heterogeneity in state tax systems and revenue sources. This is particularly true for property taxes which are collected locally, leading to greater data limitations and overall revenue uncertainty. Table 16 provides estimates of the value of state and local tax subsidies to nonprofit organizations. Regardless of the uncertainties, the property tax exemption provides charitable organizations with the most tax savings. The property tax exemption is particularly useful to organizations with significant real property such as churches, educational institutions, housing nonprofits, and art museums. Adding income subsidies, worth approximately $10 billion to $12 billion, and sales tax exemptions brings the total value of state and local tax subsidies to $30 billion to $50 billion.

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Table 16. State and Local Tax Subsidies, 2008-2009 (billions of dollars) Provision Exemption of investment income Charitable contributions, individual Charitable contributions, corporate Inheritance tax Property tax exemptions Sales tax exemption Total

Tax Benefit 7-9 3.2 0.4 0.1 17 - 32 3.3 31 - 48

Source: CRS calculations and Woods Bowman and Marion R. Fremont Smith, ―Notes on Nonprofits and State and Local Governments,‖ and by Evelyn Brody and Joseph J. Cordes, ―Tax Treatment of Nonprofit Organizations: A Two-Edged Sword?‖ in Nonprofits and Government, Collaboration and Conflict, ed. by Elizabeth T. Boris and Eugene Steuerle (Washington, DC, Urban Institute, 2006), pp. 181-218 and141-180. Notes: Corporate provisions were based on increases in the corporate marginal tax by adding state and local taxes to the federal tax, which, as estimated by the Treasury Department, were 13% of the federal estimated tax benefit. The range for investment income reflects the $55 billion to $70 billion range cited in the text. Estimates of the tax benefit from individual provisions assumed an average marginal tax rate of 3% for state taxes and a 30% federal marginal tax which, allowing for deduction of state taxes on federal returns, indicate a state value that was 7% of the federal value. The inheritance tax was based on the ratio of state to federal tax collections. Property tax estimates were increased 33% to account for religious property. These exemptions are updated to 2008 based on revenue collections.

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Potential Impacts of Government Grants on Giving

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The amount of money spent on grants is not necessarily the amount of money the charities ultimately receive. With grants, there is a possibility that government grants will displace individual contributions (government funds substitute for private funds) or that government grants will lead to more private contributions (government funds and private funds as complementary).

Government Funds and Private Funds as Substitutes Crowd-out, or charities substituting government funds for those that would have been raised privately, is an important issues for policymakers in considering funding levels for charitable activities. The level of crowding out determines how much the government must spend to increase the supply of the public good. Most economists expect that crowd-out is partial. Crowd-out would be full, meaning that each additional dollar of government spending on the public good corresponds to a dollar decrease in private funding, when individuals only care about the total amount of the good provided (as opposed to caring about where the funding for providing a good comes from). When non-contributors are taxed to provide the public good, crowd-out will be partial. Crowd-out will also be partial when there is a warm glow associated with giving.81 The empirical evidence on the existence and magnitude of crowd-out provides mixed results. A number of studies find significant, although mostly partial, crowding-out effects.82 Other studies find empirical evidence of crowding-in. (Crowding-in occurs when government spending leads to additional private-sector spending. Why this may occur is discussed below.) It spite of these seemingly inconsistent findings, there are some trends that appear to be emerging. The first is that the degree of crowding-out varies by charity type. While crowd-out has been found for public radio, shelter, and human services, crowd-in has been found for crime and legal-related charities; food, agriculture, and nutrition charities; and other specific human services charities.83 Other work has found that government grants crowd-in donations for libraries, hospitals, scientific research, and higher education.84 Some of this could have to do with the fact that different types of charities generally rely on different funding sources. The second is that crowding-out also depends on levels of support and where the money is coming from (what level of government). Empirical work looking at American theaters found that theaters with low levels of public support tended to experience crowding-in, while crowding-out was more common for theaters with larger levels of government support. Federal support appears to have a crowding-in effect at any level, while local support initially crowds in at low support levels but begins to crowd out at higher levels of support.85 Considering the possibility of crowding-out is important for policymakers looking to boost charitable activity within a given sector. Recent work has found that governments should not only be concerned with the fact that government spending can potentially crowd out private support for charities, but also that government grants can cause charities to reduce their fund-raising efforts.86 Empirical work shows that crowd-out via reduced fund-raising is partial, but at least one study has found that crowd-out of fund-raising is greater than crowd-out of private donations.87 There is also evidence that private contributions and fund-raising efforts both increased in the arts when the government cut funding for the National Endowment for the Arts.88 This observation may

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have implications for policy. Governments providing grants to charitable organizations may want to consider matching grants, where receiving organizations are required to show increased fund-raising efforts in order to receive the grant. Alternatively, government grants could be accompanied by a maintenance of fund-raising effort clause.89 On the flip side, when the government reduces funding to charitable organizations the loss may be mitigated by increased fund-raising efforts leading to greater levels in private funding.

Government Funds and Private Funds as Complements At other times, the government and charities work together and their efforts to provide goods and services are complementary in nature.90 One reason for this relationship may be that in those instances, it is more efficient for the government to hire an outside organization than to provide goods and services themselves. With large bureaucratic organizations, such as the government, providing additional services may not be cost effective. Nonprofits and charitable organizations may also have better information with respect to the needs of the communities they serve, leaving these institutions equipped to meet the needs of specific communities. The government may be more inclined to partner with nonprofit as opposed to for-profit institutions since monitoring costs are lower. Since nonprofits do not face a profit incentive, the motivation may be tilted more toward providing quality services rather than minimizing costs. When the government’s relationship with nonprofit and charitable organizations is complementary in nature, it is not expected that additional government spending would crowd out private support. Over the past few decades, social welfare spending by governments has increased dramatically, while the rate of charitable giving has remained relatively constant.91 This fact alone lends support to the argument that the government and nonprofit or charitable sectors complement one another in aggregate, rather than act as substitutes.92 Government funding of nonprofits or charitable activities can serve as a signal of institutional quality. In this case, when government funding to a specific charitable sector or institution increases, private funding will also increase. This observed phenomena is referred to as crowding-in. Instances where crowding-in has been observed empirically were noted above. While it might seem that there is little consensus regarding whether government spending leads to crowding-out or crowding-in of private giving to nonprofit and charitable organizations, there are some lessons the empirical literature can provide. The main lesson is that government support can either be a complement to or substitute for private funding, depending on circumstances. Circumstances that may matter, for example, might be the initial level of funding and the source of the government spending.93 Circumstances will vary across nonprofit and charitable sectors as well as across institutions within sectors. This would suggest that government grants and support to the charitable sector be targeted as the potential for crowding effects are considered.

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Taxes and Charitable Contributions The effect of tax subsidies provided to charitable contributions on giving depend on the extent to which the tax subsidies induce additional charitable giving. If tax subsidies do not induce additional charitable giving, the subsidy provides a windfall to the taxpayer (without providing additional funding to charitable organizations). It is useful for policymakers to understand how much charitable giving is induced by the tax code, and the revenue losses associated with these provisions. The relationship between the amount of contributions and the revenue cost of the subsidy depends on the price elasticity of giving. The price elasticity of giving is defined as the percentage change in quantity given divided by the percentage change in price (in this case, the price of charitable giving is 1- t, where t the marginal tax rate). This relationship is always expected to be negative, as an increase in the price of giving (decrease in tax rate) should be associated with decreased giving. Since the relationship is expected to be negative, elasticities here are referred to in absolute value. If this elasticity is less than one (in absolute value), the induced giving will be less than the cost of the charitable contribution deduction. When this is the case, more funds for the charitable sector could be generated by spending government funds using alternative means, such as grants (absent crowding-out). The most recent estimates of the price elasticity of charitable giving by living individuals (inter-vivos giving) suggest that the elasticity is below one. A recent CRS report uses a value of 0.5 as a central estimate.94 This price elasticity suggests that a dollar of revenue loss induces $0.50 of giving. Therefore, the $50 billion of loss from itemized deductions is expected to induce increased giving of $25 billion. Giving from estates via bequests also represents an issue of concern for charitable organizations. Giving from estates is affected by both the estate tax rate and the wealth of individuals. The percentage change in giving relative to the estate tax rate is the price elasticity. Empirical evidence tends to suggest that the price elasticity in giving from estates is greater than one.95 This suggests that the giving received by charitable organizations from estates exceeds the revenue loss from allowing the tax deduction. Revenue losses from allowing estates to deduct gifts are relatively small, about $4 billion annually.

POLICY CONSIDERATIONS This section considers a variety of policy issues, drawn from a number of sources. Some of these issues stem from current and past legislative proposals, others arose during current debates, and still others are the result of this chapter’s findings. Given the size and diversity of the nonprofit and charitable sector, an exhaustive list of policy options is not feasible. Instead, some of the most legislatively relevant have been presented below.96 Before considering possible policy proposals, it is useful to consider what nonprofits themselves indicate are their most important policy priorities. The Johns Hopkins Listening post project surveyed nonprofit executives focusing on children and family services, elderly housing and services, community and economic development, and arts and culture.97 The survey results indicated the four top priorities were

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restoration and growth of federal funds in their field; reinstatement and expansion of tax incentives for individual charitable giving; federal grant support for nonprofit training and capacity building; and reform of reimbursements under Medicare, Medicaid, and other programs to ensure they cover the cost of services.

Other proposals that more than half of respondents identified as somewhat or extremely useful included

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           

expansion of tax incentives to encourage volunteering; student loan forgiveness for those working in the nonprofit sector; a credit for investment making low-cost private capital available; restoration of the estate tax; a commitment to support research and improve data on the nonprofit sector; expansion of national service programs like Americorps; replacement of the charitable contribution deduction with tax credits; a federal agency to represent and promote the interests of the nonprofit sector; strengthening of government oversight agencies; clarifying the community benefits standard (this issue relates to nonprofit hospitals); eliminating or reducing the limits on lobbying activities; and providing a special category of ―hybrid‖ organizations, such as social enterprises (organizations that operate businesses but with a social mission, such as hiring the hard to employ or using the surplus for a charitable purpose).

The importance of different priorities varied by type and size of charitable organizations. All organizations considered federal funding important, while those organizations that rely on reimbursement for services considered reform in that area important. Museums considered tax provisions (restoring the estate tax and expanding charitable giving) important while community and economic development organizations considered nonprofit training and capacity development important. Small nonprofits (less than $500,000) considered tax incentives for individual charitable giving, health insurance tax credits, and training funds important. The Independent Sector, an organization representing the charitable community, has also provided a list of policy proposals.98 Most of the policies indicated above were suggested in their report. Their work also included some specific tax proposals, including extending and expanding the IRA rollover provision, revising the excise tax on foundation income, and allowing mileage deduction rates to be the same as those of business. The Independent Sector also suggested, in addition to loan forgiveness, offering scholarships in return for a specific term of service in the nonprofit community. They proposed that loans, training, and technical assistance similar to that provided by the Small Business Administration to for-profit firms be provided to nonprofits. They also proposed relief from new funding obligations under the Pension Protection Act of 2006. Modifying lobbying rules, including allowing private foundations to support non-partisan lobbying of organizations they contribute to, was also suggested. The Independent Sector indicated that anti-terrorism restrictions may have discouraged international charity and might be revised. Proposals from the Independent

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Sector also emphasized that subsidies provided to employers in a health care reform should also be made available to nonprofits. It is natural that nonprofits and charitable organizations want more support from the government. These desires should be weighed against the effectiveness and efficiency of nonprofits and other potential uses of government funding. GAO testimony suggested that improving the governance and skills, particularly of nonprofits, and collecting more comprehensive data are among the issues that might be addressed.99 There have also been a series of legislative proposals that relate to the tax treatment of charitable contributions and organizations.100 Some of these proposals expanded benefits, while others were designed to address potential abuses.

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Increased Funding for Grants and Subsidies Are federal grants for nonprofits and charities insufficient, adequate, or too generous? This type of assessment is almost impossible to make, although the questions that need to be answered are straightforward. Is the objective worthy of diversion from other budgetary purposes or diversion from private consumption and investment if financed by tax increases? Will the funds provided cause crowding-in or crowding-out of private giving? Can the objective be met more efficiently with a government program or a nonprofit one? These questions, of course, must be considered on a project by project basis. For example, evidence on crowding-out and crowding-in suggested variation by type of charity. Are subsidies that are tied to specific features of the charity desirable compared to grants? These subsidies include existing ones, such as the postal subsidy and tax subsidies that are tied to reliance on charitable giving or investment funds, or, in the case of state and local subsidies, need for real property. Normally having benefits triggered by these characteristics might be thought to be less desirable than targeted grants, because the government can make a judgment about whether the activity is desirable. That is, the tax subsidies tend to favor education and arts, while grants tend to be more important in other charities. Moreover, while the information on crowding-in or crowding-out of grants is mixed, it largely suggests crowding-in. On the other hand, recent evidence on price elasticities suggests that the government spends more than a dollar to induce an additional dollar in charitable contributions. The government may want to seek to design policies that provide the greatest increase in revenue for nonprofit and charitable organizations with the least cost to the government. (See the discussion below for ways to increase the ―bang for the buck.‖) One advantage of subsidies that are triggered automatically (by contributions, investment income, real property, or use of the mail) is that no administrative oversight is required. Moreover, some would argue that the federal government cannot easily make judgments about the value of different options or charitable objectives, leading one to conclude that a general subsidy may be in order. It is also important to consider proposals for reform which could affect not only the level of funding, but the mix of existing funding. Since different types of charities receive different shares of their funds from different sources, policies that change incentives regarding one funding source will have a larger impact on some charities relative to others. One example would be taxing investment income for charitable organizations. Such a reform would affect

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university endowments. But would it be better to tax the returns of university endowments and use the revenue to expand aid for poor students or expand funding for university research grants? These types of questions prove very difficult to answer in practice. The consequences of new initiatives can also vary across charitable sectors, and should be considered. For example, one policy proposal mentioned above is to forgive student loans for those who work in the nonprofit sector. Is student loan forgiveness for charitable sector employees a better way to benefit charities than grants or other mechanisms? Such a policy would favor charities that are more labor intensive and that tend to employ younger, less experienced workers. Is tipping the scales in favor of charities with these types of employees a desirable outcome? A similar issue might be raised about a special health insurance credit (although the issue of parity under current health care reform proposals is different).

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An Oversight Agency in the Federal Government One proposal is to provide an oversight agency in the federal government that, for example, might be similar to the Small Business Administration. Such an agency could support the nonprofit sector in two ways: conduct research and data collection and serve as an advocacy organization. Such an agency could fulfill a number of functions that are discussed in this chapter. It could collect data, process existing data, and provide research on the nonprofit sector to guide federal policy. It could coordinate broad government initiatives including social innovation and volunteerism. It could also collect and provide information to the public. Such an agency could also provide information on foundations and advice on grant applications (information now available but typically at a cost) and information on donoradvised funds. An oversight agency could provide outreach efforts, either free or at a small charge, to assist small nonprofits with efficient and effective organization management, including training of staff and grants for such training. It could also provide low-interest loans, similar to the Small Business Administration. Finally, an organization whose mission was to make the nonprofit sector more efficient would have a very different objective from the Internal Revenue Service, whose purpose is to enforce the tax laws. In the survey of charitable organizations discussed above, 79.6% of respondents believed more research and data were somewhat or extremely useful (29.2% believed them extremely useful). 64.1% believed creating a government agency to represent nonprofits’ interests was somewhat or extremely useful (36.4% believed it extremely useful). In addition, one of the top priorities, supported by 88.2% of respondents as either somewhat or extremely useful (51.4% as extremely useful), was federal grants for training and capacity building. All of these issues along with improved oversight could be addressed with an new oversight agency. The main concern about such an agency is whether the benefits exceed the costs, a question that is difficult to answer. The cost would depend on whether the agency also provided grants and loans. In general, however, the cost would be small compared to tax subsidies and grants. The Small Business Administration’s budget was $923 million in FY2009 and much of the cost was for loan guarantees; $345 million was for disaster loans (which also cover nonprofits) while only $20 million was for general administrative overhead.101 Relative to an oversight agency for the nonprofit sector, the Small Business

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Administration serves a much larger group of small entities, and would be likely to have higher costs. Additionally, it is important to note that a government agency is not the only entity capable of providing information and data on the charitable sector. There are a number of other organizations and educational institutions that currently collect data and disseminate research on the charitable sector (much of their work is cited throughout this chapter). If other organizations and educational institutions can more efficiently collect, analyze, and report data on the charitable sector, perhaps providing more funds to these organizations, rather than creating a government agency, is an option. An alternative to an executive agency would be a congressional committee or agency. This option may be preferable if the main objective of the proposed entity is to advocate for the health of the nonprofit sector, rather than providing some of the other functions discussed above. Or, as in the case of small business, both an agency and a committee could be considered.

Proposals to Aid Nonprofits in Economic Downturns

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The nonprofit and charitable sector faces a number of challenges during economic downturns. This section addresses three issues of potential importance for the sector during periods of slow economic growth: encouraging foundations to give during downturns, encouraging states to maintain efforts and pay bills on time, and how to effectively provide funds directly to nonprofits as economic stimulus.

Foundation Grants One observation discussed in this chapter is that foundations played, or could play, a stabilizing role by making more grants during recessions (or at a minimum not reducing grants). One policy option is to remove any tax impediments to foundations temporarily increasing payouts. Currently, foundations are discouraged from making large one-time grants as the excise tax on investments increases if the payout ratio falls. Currently, if a foundation’s payout ratio falls from one year to the next, the foundation incurs an additional 1% tax on their investment income for that year. This disincentive could be eliminated by altering the excise tax treatment on foundation investment by going to a single rate, one that does not penalize large contributions. Under the current system, foundations are required to payout 5% of the average market value of total assets. Allowing foundations to carryforward excess payouts to use in the future (so that if the foundation paid out 6% rather than 5% in one year, the extra 1% could be used to satisfy part of future payout requirements) could help foundations smooth giving during slow economic times. This carryforward might only be allowed in recessions. Alternatively, foundations could be given a refundable credit for a share of payouts in excess of the required amounts during recessions. State Funding and Payments In the recent economic crisis, states reduced funding to nonprofit and charitable organizations and in some cases were delinquent on payments. To avoid this in the future,

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incentives could be put in place to encourage states to maintain funding for nonprofits. An example would be to set up a fund to head off a shortfall in nonprofit funding, with receipt of funds contingent on sustaining the current level of spending and providing payments on time. It is always risky, however, to create incentives of this nature because it requires determining the base level of funding and avoiding situations where states reduce funding in advance in anticipation of a slowdown. Having an advocacy agency in the federal government also might help address issues pertaining to state support and contract payments. If there were a spotlight on states’ behaviors, especially states not making their contract payments on time, they might be less willing to address their short-term cash flow problems in this manner. An agency in the federal government might also offer low-cost loans to either states or nonprofits for cash flow stresses of this type.

Providing Economic Stimulus Funds The principal objective of a government stimulus in a recession is to induce additional spending. Monetary expansion, which is often the first measure taken by the government, eases credit and helps to restore spending on investment goods and durable consumer goods (such as houses and cars). Fiscal policy can either provide direct spending (through government spending) or induce consumers through tax cuts. Reducing taxes increases wages and leads to spending by those working to produce the additional demand, through multiplier effects. To accomplish the objective of increasing demand, a fiscal stimulus needs to translate into increased spending and do so fairly quickly. The demand for goods and services provided by charities increases during recessions. It is unclear, however, whether stimulus money can quickly and effectively flow through charities, simultaneously meeting the increased demand for charitable services and providing economic stimulus. Information and administration issues limit what types of organizations are eligible for stimulus funds, including nonprofits. Since stimulus spending needs to work quickly, taking the time to identify specific recipients on a case by case basis would defeat the purpose. Funds are therefore often disbursed based on formulas and existing identification of potential recipients. This suggests that funds targeted to existing and established nonprofits are more likely to be effective economic stimulus, as opposed to funds targeted towards establishing new nonprofit or charitable organizations. Currently, the rules of the tax code effectively provide a formula for funding for both individuals and businesses. General attributes (such as income, family size and composition, investments) trigger tax benefits. Similarly, expansions of existing programs with recipients identified by specific characteristics (income, age, disability, unemployment, etc.) can be used for transfers. The government can rely on formulas to provide funds and can identify states and to some extent local governments. Nonprofits do not generally have these mechanisms in place and are therefore not normally the recipients of automatically distributed funds. Nonetheless, policies could be established to direct stimulus funds, via grants, to nonprofits during times of economic distress. A second object of government policy during economic downturns could be to assist those groups most impacted by the slowdown, and, indeed, programs such as expanded unemployment payments are often considered during recessions.102 Were the government able to direct funds to nonprofits, it might wish to target them in the same fashion, and direct

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them to specific nonprofit activities. Again, this would be administratively difficult to implement. Having a system in place where certain nonprofits were pre-registered with the government could expedite the grantmaking process when needs increase. Even if nonprofits cannot easily be direct recipients of funds, they benefit from economic stimulus programs. Grants to state and local governments may, in part, flow through to nonprofits, and even if state funding has fallen, it might have fallen more without stimulus funds. In addition, nonprofits benefit from the overall improvement in the economy that is aided through federal fiscal and monetary policy. Nonprofits could also be allowed investment subsidies provided to for-profit firms by providing the credit equivalent of the subsidy which they could file for using the income tax form (as was done for social security payments in 2008). Subsidies could also be provided based on number of employees or their wages. Programs could also require a certain fraction of funds to be directed to nonprofits, as is the case for the low-income housing tax credit.

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The Itemized Deduction for Charitable Contributions A number of proposals have developed over the years relating to the itemized deduction for charitable contributions. Recently, the President proposed a cap on all itemized deductions to finance health-care reform, which would have automatically affected charitable deductions and resulted in some concerns being expressed. However, a CRS report indicated the effects on charities would be small.103 This chapter reviewed the evidence on price elasticities which suggests that the response of charitable contributions to tax incentives is small. It also reviewed some survey evidence and evidence on the response to matching gifts, as well as historical data, which all point to a small response as well. As noted above, more recent evidence on price elasticities suggests that charitable contribution deductions are not very efficient, in that the government spends more than a dollar to induce a dollar of contributions. Using the elasticity of 0.5, which was identified as a central estimate, a dollar of revenue loss results in 50 cents of contributions. The itemized deduction has also been criticized because it favors the charities preferred by high-income taxpayers, who tend to be those claiming the deduction, since only about 30% of taxpayers itemize their deductions. Some have suggested allowing all taxpayers to deduct charitable contributions on top of the standard deduction or converting the deduction to a credit available to all taxpayers. Converting the deduction to a credit could be designed to be revenue neutral which would reduce the benefit for current itemizers while extending it to non-itemizers. There are other policy options that could potentially address the concern that the current system tends to direct more donations towards charities preferred by those with higher incomes. For example, a floor on charitable contributions could be imposed. Specifically, only charitable contributions in excess of 2% of adjusted gross income could be deducted, and this deduction made available for all taxpayers. Revenue gains from such a policy could be used to finance deductions from non-itemizers or to provide grants. Imposing a floor alone would likely raise revenue and increase the efficiency of the charitable deductions without having much of an effect on giving. According to the 2004 Statistics of Income Public Use File, 96% of contributions are made by taxpayers who

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contribute at least 1% of income and 88% are made by those who contribute at least 2% of income. According to the Congressional Budget Offices Options Report, a 2% floor would raise an average of $22 billion, per year, over the next 10 years.104 There is some evidence that price elasticities are smaller for lower-income individuals, although the evidence is not definitive.105 Many of these individuals’ contributions go to religious organizations where donors may not be very sensitive to price. In any case, extending the deduction for non-itemizers would likely cost more than it induced in additional deductions. Converting to a credit might also reduce charitable contributions. But it could increase the equity between charitable preferences of higher-income and lower-income individuals.

Other Tax Issues

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This section summarizes several other tax issues that relate to charitable contributions and organizations.

Channeling Benefits Through the Federal Income Tax System (Including Health Insurance Credits) The use of the tax system to provide incentives or benefits generally excludes nonprofits since they are generally exempt from federal income tax. This effect occurred for the stimulus proposals to provide investment incentives, and it is also in some versions of the health reform bills (H.R. 3200). Specifically, the use of tax credits to assist small businesses in obtaining health insurance coverage for employees provides no assistance for tax-exempt organizations. Nonetheless, it is possible to provide a separate credit (or grant) for nonprofits. The current Senate Finance Committee proposal provides a credit for small nonprofits to provide health insurance for low-income employees as it did for profitable firms, although the credit rate is 35% rather than 50%. The Senate Health, Education, Labor and Pensions proposal did not use the tax system as the mechanism for health insurance subsidy. As noted above in the discussion of economic downturns, other tax subsidies, even deductions, could be converted into equivalent credits and provided to nonprofits. Job tax credits, which have recently been proposed by some, would not automatically be available if credited against the income tax, but would be if credited against payroll taxes. For provisions that are not related to the tax structure but rather use the tax system as a convenient delivery mechanism, there might not be a reason to deny benefits to nonprofits. Restrictions on Donor-Advised Funds (DAFs), Supporting Organizations, and Endowments The two basic issues associated with donor-advised funds and supporting organizations are the possibility of receiving private benefits by donors and payout rates. While some changes were enacted, others remain possible. Although payout requirements are planned for certain type III supporting organizations, there are no payout requirements for donor-advised funds and for other supporting organizations. These issues might be revisited when Treasury completes its studies.

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The Treasury was directed to study specific issues: whether deductions for contributions to donor-advised funds and supporting organizations are appropriate given the use of the assets or benefits to the donor, whether donor-advised funds should have a distribution requirement, whether the retention of rights by donors means that the gift is not completed, and whether these issues apply to other charities or charitable donors. Thus, it is possible that results of the studies could also have implications for charities in general. As noted earlier, concerns have also been raised about college endowments, and the Senate Finance Committee received testimony on college endowments in connection with hearings held on offshore funds in 2007.106 A possible legislative change might impose payout requirements on university and college endowments.

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Gifts of Appreciated Property In past years discussions were also directed at possible abuses of gifts of appreciated property, which led to some limited changes (such as disallowing partial gifts).107 A more restrictive proposal for charitable gifts would be to allow only the basis (generally the cost of the property) rather than the fair market value to be deducted. The CBO estimates the revenue gain from that change to raise an average of $2 billion per year over the next 10 years. An alternative could be to require taxpayers to sell the asset and donate the proceeds to charity. This would likely result in a revenue loss to the government but might address valuation problems. Taxpayers could avoid payment of the capital gains tax if donations were made in a timely fashion. Other approaches for valuation have included proposals for ―baseball arbitration‖ where the court may only choose either the IRS or the taxpayer’s valuation, which would provide an incentive to the taxpayer to state a value closer to market value. Nonprofit Hospitals Some in Congress have also been interested in nonprofit hospitals. A major concern raised by some is the degree of charity care provided by these hospitals and whether they are providing benefits that justify their tax-exempt charitable status. The Congressional Budget Office released a study in 2006 that found that nonprofit hospitals overall provided only slightly more charity care than for-profit hospitals.108 The Senate Finance Committee held hearings on the topic, ―Taking the Pulse of Charitable Care and Community Benefits at Nonprofit Hospitals,‖ on September 13, 2006, and the House Ways and Means Committee held hearings on ―The Tax Exempt Hospital Sector,‖ on May 26, 2005. The following concerns have been raised about nonprofit hospitals: establishing and publicizing charity care, the amount of charity care and community benefits provided, conversion of nonprofit assets for use by for-profits, ensuring an exempt purpose for joint ventures with for-profits, governance, and billing and collection practices.109 In July 2007, the IRS released an interim report on nonprofit hospitals, where they found that the median share of revenue spent on charity care was 3.9% and almost half of hospitals spent 3% or less. The average was 7.4%.110 Another concern that has been expressed is that, since a 1969 revenue ruling issued by the Internal Revenue Service, nonprofit hospitals are no longer required to provide charity care to qualify for exempt status as a charitable organization; rather they must meet a ―community benefit‖ standard that does not require charity care and is not precisely defined.111

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Extenders As discussed above, there are several charitable provisions that are temporary, with the major one being the IRA rollover deductions.112 Whether to extend, make permanent, or expand this treatment is one policy issue. Some might argue that there is no reason for providing benefits for contributions made from IRAs, but there is a benefit in having the certainty of a permanent provision. Other provisions relate to gifts of inventory and other, largely business, issues.113 The Estate Tax A number of charitable organizations have expressed concerns about retaining the estate tax. The estate tax rates were reduced and the exemptions increased in 2001, although those tax changes are scheduled to expire in 2010, and then revert to the levels prior to the 2001 tax changes. President Obama has proposed to maintain the estate tax permanently at current rates and exemptions. The empirical evidence suggests that the response of bequests to tax incentives is larger than that of lifetime giving and that charitable contributions could fall. If so, the charitable deduction for estate taxes is an efficient method of providing benefits, but, of course depends on the retention of the estate tax and the magnitude depends on its features.114

APPENDIX. Table A-1 contains data on the sources of revenue across various sectors of charitable organizations. This data was used to generate Figure 5 in the text.

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Table A-1. Revenue by Source, 2005 (billions of dollars) Government Private Private Investment Other Grants and Total Contributions Payments Income Revenue Payments Arts, culture, and 9.62 6.61 2.83 2.09 1.52 22.67 humanities Education 23.89 106.32 23.03 32.24 4.31 189.79 Higher 16.33 86.27 16.90 28.92 3.17 151.58 education Other education 7.56 20.04 6.13 3.32 1.14 38.20 Environment and 5.04 2.50 1.28 0.78 0.93 10.51 animals Health care 16.20 379.14 245.51 19.73 11.92 672.50 Hospitals 7.55 280.85 206.38 14.62 9.56 518.96 Other health 8.65 98.29 39.13 5.10 2.36 153.53 services Human services 22.61 59.01 52.05 3.82 5.80 143.29 International 14.29 1.12 3.95 0.38 0.11 19.84 Charitable Sector

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Charitable Sector Other operating public charities Supporting public charities Total

Table A-1. (Continued) Government Private Private Investment Other Grants and Total Contributions Payments Income Revenue Payments 9.08 14.06 12.81 3.63 1.19 40.77 43.05

21.22

9.56

18.25

4.60

96.67

143.77

589.97

351.01

80.91

30.38

1196.04

Source: Wing, Pollak, and Blackwood, The Nonprofit Almanac 2008.

End Notes

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1

The White House: Office of the Press Secretary, ―President Obama to Request $50 Million to Identify and Expand Effective, Innovative Nonprofits,‖ press release, May 5, 2009. 2 Erika Lunder, Legislative Attorney, wrote this section of the report. 3 While this chapter generally uses the terms ―tax-exempt organization‖ and ―nonprofit organization‖ interchangeably, it should be noted that this might not be appropriate in other contexts. The term ―tax-exempt organization‖ refers to organizations with federal tax-exempt status. The term ―nonprofit organization‖ is often used simply to refer to an entity that is not intended to be a profit-making corporation. The term can be more precisely understood to mean an entity organized under the laws of a state, with its status and privileges determined under state law. Because the qualifications for nonprofit status vary among states, it is possible for the term ―nonprofit organization‖ to be broader than, narrower than, or identical to the term ―tax-exempt organization.‖ For a nonprofit organization to be exempt from federal income taxes, it must meet the statutory requirements found in the Internal Revenue Code and usually must file an application with the IRS. Some organizations, including small 501(c)(3) organizations and qualifying religious organizations, are exempt from the application requirement. 4 For more information on tax-exempt organizations, see CRS Report 96-264, Frequently Asked Questions About Tax-Exempt Organizations, by Erika K. Lunder and CRS Report RL30877, Characteristics of and Reporting Requirements for Selected Tax-Exempt Organizations, by Erika K. Lunder. 5 IRC § 501(c)(3) describes organizations ―organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition … or for the prevention of cruelty to children or animals.‖ Among other requirements, ―no part of the net earnings of‖ the organization may ―inure to the benefit of any private shareholder or individual.‖ 6 Organizations are required to provide some employment data on the Form 990. This data is collected at the organization level, rather than establishment level, making it difficult to make geographic distinctions for nonprofit and charitable workers. Further, a number of organizations fail to report their number of employees. The data is self-reported by the organization and may contain errors. 7 Total nonfarm payroll for all employees is collected by the U.S. Department of Labor: Bureau of Labor Statistics. 8 CRS calculations based on total nonfarm payroll for all employees, U.S. Department of Labor: Bureau of Labor Statistics. 9 Kennard T. Wing, Thomas H. Pollak, and Amy Blackwood, The Nonprofit Almanac 2008 (Washington, DC: The Urban Institute Press, 2008) explicitly discusses the methodologies used for estimating employment in the nonprofit sector. 10 Salamon and Sokolowski, Employment in America‟s Charities: A Profile, The Johns Hopkins Center for Civil Society Studies, Nonprofit Employment Bulletin Number 26, December 2006. 11 Nonprofit institutions serving households (NPISH) are tax-exempt organizations that provide services in one of the following five areas: (1) religion and welfare, including social services, grant-making foundations, political organizations, museums and libraries, and some civic and fraternal organizations; (2) medical care; (3) educational and research institutions; (4) recreation, including cultural and athletic organizations; and (5) personal business, including labor unions, legal aid, and professional associations. See Charles Ian Mead, Clinton P. McCully, and Marshall B. Reinsdorf, Income and Outlays of Households and of Nonprofit Institutions Serving Households, Bureau of Economic Analysis, April 2003, http://www.bea.gov /scb/pdf/2003/04april/0403household.pdf. 12 Examination of the data underlying Figure 3 supports the finding that the increase in NPISH’s share of GDP is representative of a trend rather than an anomaly.

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The nonprofit or charitable sector and the industrial sectors listed in Table 6 are not mutually exclusive. For example, the educational services and health care and social assistance sectors have many employees that are also counted as being employed in the charitable sector. 14 This does not include education provided by state and local governments. 15 Large nonprofit institutions, such as hospitals and educational institutions, have long used tax-exempt bonds to finance capital improvements. Recently, more smaller nonprofit organizations have taken advantage of the ability to issue tax-exempt debt to finance capital costs. For examples, see Steven Rathgeb Smith, ―Government Financing of Nonprofit Activity,‖ in Nonprofits & Government, ed. Elizabeth T. Boris and C. Eugene Steuerle, 2nd ed. (Washington, DC: Urban Institute Press, 2006), pp. 219-256. 16 There are indirect relationships between other elements of the tax code and the provision of goods and services by charitable organizations. It has been argued that both the child and dependent care credit and the Low-Income Housing Tax Credit (LIHTC) make services provided by nonprofit organizations more profitable, therefore increasing the demand for such services. See Steven Rathgeb Smith, ―Government Financing of Nonprofit Activity,‖ in Nonprofits & Government, ed. Elizabeth T. Boris and C. Eugene Steuerle, 2nd ed. (Washington , DC: Urban Institute Press, 2006), pp. 219-256. 17 John Hechinger, ―College Endowments Plunge,‖ The Wall Street Journal, January 27, 2009, p. D3. 18 Charities classified as international receive the vast majority, 72%, of their funds from private contributions. 19 Private donations may also be expected to decline when financial markets falter as potential donors’ loss of wealth corresponds to reduced giving. 20 The Center on Philanthropy at Indiana University, Giving USA 2009 (Indianapolis, IN: Giving USA Foundation, 2009), p. 210. This figure includes estimated charitable deductions on 2008 tax returns as well as an estimate of charitable giving by those who do not itemize deductions on taxes. This figure exceeds that reported above for private contributions because it includes giving to small organizations and churches, of which neither are required to file Form 990. 21 Charitable bequests include both those reported on 2008 estate tax returns and those given by estates not subject to the estate tax. 22 Corporate giving, as calculated by The Center on Philanthropy at Indiana University, Giving USA 2009, includes grants made by corporate foundations to charities but does not count giving by corporations to foundations. 23 The data presented in the revenues section is for charitable organizations filing Form 990. Therefore, these data do not include small organizations or churches. The data in this section are for all charitable gifts and do include donations given to charitable religious organizations. 24 Unallocated giving actually had the largest increase, tripling in value over the decade. 25 Wing, Pollak, and Blackwood, The Nonprofit Almanac, 2008, p. 92. 26 Individual gifts to certain types of nonprofits and gifts of specific types of assets may be further restricted. 27 The Center on Philanthropy Panel Study does not include data from very-high-income households. 28 William Randolph, ―Dynamic Income, Progressive Taxes, and the Timing of Charitable Contributions,‖ The Journal of Political Economy, vol. 103 (August 1995), pp. 703-738; Gerald E. Auten, Holger Sieg, and Charles T. Clotfelter, ―Charitable Giving, Income, and Taxes: An Analysis of Panel Data,‖ The American Economic Review, vol. 92, no. 1 (March 2009), pp. 371-382; and Jon Bakija and Bradley Heim, How Does Charitable Giving Respond to Incentives and Income? Dynamic Panel Estimates Accounting for Predictable Changes in Taxation, National Bureau of Economic Research, Working Paper 14237, Cambridge, MA, August 2008. 29 For further discussion see CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples. 30 The Center on Philanthropy at Indiana University, Giving USA 2009, p. 53. 31 For estimates of how changes in the estate tax would impact charitable giving see CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples. 32 Jon M. Bakija, William G. Gale, and Joel B. Slemrod, ―Charitable Bequests and Taxes on Inheritances and Estates: Aggregate Evidence from across the States,‖ American Economic Review, vol. 93, no. 2 (May 2003), pp. 366-370. 33 Sophia A. Muirhead, The 2006 Corporate Contributions Report, Conference Board, Report R-1399-06-RR, New York, NY, 2007. 34 Figure 5 does not report international, which is a very small charitable sector. In the international sector government grants and payments were 20% of revenues, which, comparing with the shares in Table A-1 indicates that all government support to the international sector came in the form of grants. 35 See http://www.bea.gov/scb/pdf/2008/11%20November/1108_newnipas.pdf. 36 Woods Bowman and Marion R. Fremont Smith, ―Notes on Nonprofits and State and Local Governments‖ In Nonprofits and Government, Collaboration and Conflict, ed. by Elizabeth T. Boris and C. Eugene Steuerle, Washington, D.C., Urban Institute 2006 , pp. 181-218. 37 The Center on Philanthropy at Indiana University, Giving USA 2009, p. 119.

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Lester M. Salamon, Stephanie L. Geller, and Kasey L. Spence, Impact of the 2007-2009 Economic Recession on Nonprofit Organizations, Johns Hopkins University Center for Civil Society Studies, Communique No. 14, 2009, http://www.ccss.jhu.edu/pdfs/LP_Communiques/LP_Communique_14.pdf. 39 USA Today, Giving by the Numbers, April 24, 2009, http://www.usatoday.com/news/sharing/2009-04-13numbers_N.htm?loc=interstitialskip 40 The small dip and peak around 1986 is generally attributed by most researchers to a temporary rise in deductions reflecting a timing shift as tax cuts for 1987 and 1988 were pre-announced in the 1986 tax cut. By 1989 contributions had returned to their previous levels. 41 The data on patterns of giving between 2007 and 2008 are from The Center on Philanthropy at Indiana University, Giving USA 2009, p. 210. A summary of the findings can be found at http://www .philanthropy.iupui.edu/News/2009/ docs/GivingReaches300billion_06102009.pdf. Information on the effects by sector are also summarized at http://blog.charitynavigator.org/2009/06/giving-in-2008.html. 42 Steven Lawrence, Do Foundation Giving Priorities Change in Times of Economic Stress? Foundation Center, http://foundationcenter.org/gainknowledge/research/pdf/researchadvisory_economy_200811.pdf. 43 NACUBO and Commonwealth Institute Survey, http://www.nacubo.org/documents/research/NES2008FollowupSurveyReport.pdf. 44 Asset Declines and Investment Strategy: Change by Family, Independent, and Public Foundations, Council on Foundations, http://www.cof.org/files/Documents/Conferences/09FamPhilConf/EconSurvey4.pdf. 45 See http://foundationcenter.org/findfunders/statistics/pdf/02_found_growth/2007/04_07.pdf. 46 See http://foundationcenter.org/findfunders/statistics/pdf/02_found_growth/2007/00_07.pdf. 47 See http://foundationcenter.org/findfunders/topfunders/top100assets.html. 48 Based on total endowments reported in Jane G. Gravelle, testimony before the Senate Finance Committee, September 26, 2007; the sum of endowments reported by NACUBO, http://finance.senate.gov/hearings/ testimony/ 2007test/092607testjg.pdf. 49 See http://nccsdataweb.urban.org/NCCS/V1Pub/index.php/. 50 Jane G. Gravelle, testimony before the Senate Finance Committee, September 26, 2007; the sum of endowments reported by NACUBO, http://finance.senate.gov/hearings/testimony/2007test/092607testjg.pdf. CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples. 51 See CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples. 52 See http://www.councilofnonprofits.org/files/Special%20Report%208%20-%20A-Respectful-Warning-Call-toOur-Partners-in-Government-The-Economic-Crisis-Is-Unraveling-the-Social-Safety-Net-Faster-Than-MostRealize.pdf. 53 See http://www.ctnonprofits.org/ctnonprofits/sites/default/files/fckeditor/file/policy/advocacy/ HowLatePayments Harm NonprofitProviders_0509.pdf . 54 See http://www.councilofnonprofits.org/files/Special%20Report%201%20%20 Overview%20 (Feb%2023 %20FINAL).pdf. 55 Standard economic models assume that rational individuals are selfish and utility-maximizing. 56 Jonathan Gruber, Public Finance and Public Policy (New York, NY: Worth Publishers, 2007). 57 It was shown that income redistribution could make everyone better off by Harold M. Hochman and James D. Rogers, ―Pareto Optimal Redistribution,‖ American Economic Review, vol. 59, no. 4 (September 1969), pp. 542-557. 58 Nonprofit hospitals are a highly significant portion of the charitable sector. In 2004, nonprofit hospitals held 29% of total assets and collected 42% of total revenues within the charitable sector. See Joint Committee on Taxation, Description of Present Law Relating to Section 501(c)(3) Organizations and Summary of Sections 501(c)(3)-Related Provisions of the Pension Protection Act of 2006 and Proposed Legislative Proposals, JCX53-07, July 19, 2007, http://www.house.gov/jct. 59 See CRS Report RL34605, Tax-Exempt Section 501(c)(3) Hospitals: Community Benefit Standard and Schedule H, by Erika K. Lunder and Edward C. Liu for further discussion of the charity care and community benefit standards. The report also reviews the new annual reporting requirements (Schedule H of the Form 990) placed on hospitals. Beginning in 2009, completion of Schedule H of Form 990 is mandatory. 60 In 2002, the Joint Committee on Taxation estimated that the exemption from income taxes given to nonprofit hospitals provided a tax savings of $2.5 billion while the ability to use tax-exempt bonds provided another $1.8 billion in tax savings, for an overall estimate of tax savings of $4.3 billion. If these tax preferences were removed, the federal revenue gain may be less than $4.3 billion as behavioral changes as hospitals move to minimize the tax burden are not considered. See Congressional Budget Office, Nonprofit Hospitals and Tax Arbitrage, December 2006. When the value of additional tax benefits, such as the deductibility of contributions to charitable hospitals on individual income taxes, sales tax, and property tax exemptions were included as well, the Joint Committee on Taxation estimated that the 2002 value of all tax exemptions (federal, state, and local) for nonprofit hospitals and their supporting organizations was $12.6 billion. See Congressional Budget Office, Nonprofit Hospitals and the Provision of Community Benefits, December 2006.

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Andrew Chamberlin and Mark Sussman, Charities and Public Goods: The Case for Reforming the Federal Income Tax Deduction for Charitable Gifts, Tax Foundation, No. 137, November 2005. 62 Congressional Budget Office, Nonprofit Hospitals and the Provision of Community Benefits, December 2006. A recent GAO report also finds that measuring the benefits provided by nonprofit hospitals continues to be a difficult task. The report is hopeful that new IRS reporting requirements for nonprofit hospitals will afford greater understanding of the extent to which nonprofit hospitals provide community benefit in the near future. See U.S. Government Accountability Office, Nonprofit Hospitals: Variation in Standards and Guidence Limits Comparison of How Hospitals Meet Community Benefit Requirements, GAO-08-880, September 2008, http://www.gao.gov/new.items/ d08880.pdf. 63 The federal government also provides a postal subsidy to the nonprofit and charitable sector. 64 Many of the issues addressed here are discussed in more detail in CRS Report RL34608, Tax Issues Relating to Charitable Contributions and Organizations, by Jane G. Gravelle. 65 See CRS Report RL33931, The Corporation for National and Community Service: Overview of Programs and FY2009 Funding, by Abigail B. Rudman and Ann Lordeman. 66 See http://www.whitehouse.gov/the_press_office/President-Obama-to-Request-50-Million-to-Identify-andExpand - Effective- Innovative-Nonprofits/. 67 Self-dealing rules generally prohibit direct financial interaction between a foundation and nearly all persons closely related to the foundation (disqualified persons). The IRS provides further detail regarding transactions that violate the prohibition of self dealing for private foundations at http://www.irs.gov/charities/ foundations/article/0,,id= 137679,00.html. 68 See http://edocket.access.gpo.gov/2009/pdf/E9-22866.pdf. 69 See testimony of Jane G. Gravelle, Congressional Research Service, and testimony of Lynn Munson, Center for College Affordibility and Productivity, before the Senate Finance Committee, September 26, 2007, at http://finance.senate.gov/hearings/testimony/2007test/092607testjg.pdf and http://finance.senate.gov/hearings/ testimony/2007test/092607testlm.pdf. Also, see the memorandum by Jane G. Gravelle, Congressional Research Service, analyzing endowment earnings, payouts, and uses that formed the basis for testimony, at http://finance.senate.gov/press/Gpress/2008/prg011408b.pdf. 70 Senate Finance Committee Press Release, ―Baucus, Grassley Write to 136 Colleges, Seek Details of Endowment Pay-Outs, Student Aid,‖ at http://finance.senate.gov/press/Gpress/2008/prg012408f.pdf. 71 See CRS Report R40434, Charitable Standard Mileage Rate: Considerations for the 111th Congress, by Nonna A. Noto. 72 See CRS Report RL32367, Certain Temporary Tax Provisions Expiring in 2009 (“Extenders”), by Pamela J. Jackson and Jennifer Teefy for a discussion of extenders. See also CRS Report RL34608, Tax Issues Relating to Charitable Contributions and Organizations, by Jane G. Gravelle. 73 These issues are discussed in more detail in CRS Report RL34608, Tax Issues Relating to Charitable Contributions and Organizations, by Jane G. Gravelle. 74 See CRS Report RL34608, Tax Issues Relating to Charitable Contributions and Organizations, by Jane G. Gravelle. 75 Issues surrounding supporting organizations and donor-advised funds, as well as gifts of appreciated property, are discussed in the testimony of Jane G. Gravelle, on Charities and Charitable Giving: Proposals for Reform, before the Senate Finance Committee, April 5, 2005, at http://finance.senate.gov/hearings /testimony/2005test/jgtest040505.pdf. In 2007, donor-advised funds were estimated to hold approximately $31 billion in assets. Council on Foundations, Inc., Donor Advised Funds Provide the Majority of Grant Funds Awarded by Community Foundations, January 13, 2009, http://www.foundationsonthehil l.org/docs/08donoradvisedpaper.pdf. 76 Based on data in CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples indicating that $23.2 billion was contributed, 53% of that amount was deductible, and assuming a tax rate of 45%. 77 CRS calculations based on data from The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 34, 55, 67, 74, and 210-215. 78 Based on the estimated shares of contributions in each sector going to the poor: 20% for religious, 77% for combined, 100% for basic needs, 10% for health, 16% for education, and 64% for other. The study notes that estimates of the share for religious organizations were about twice the size of some earlier estimates; if 10% were used for religious organizations, the overall share going to the poor would be about 27% and the share of those $100,000 and under would be about 40%. 79 The Center on Philanthropy at Indiana University, Giving USA 2009, pp. 55 and 67. 80 Postal Regulatory Commission, Universal Service Obligation Report, December 19, 2008, pp. 132-134, available at http://www.prc.gov. Also see CRS Report RS21025, The Postal Revenue Forgone Appropriation: Overview and Current Issues, by Kevin R. Kosar for a discussion of the provision. 81 Gruber, Public Finance and Public Policy, pp. 190-195. 82 Bruce Kigma, ―An Accurate Measurement of the Crowd-Out Effect, Income Effect, and Price Effect for Charitable Contributions,‖ Journal of Political Economy, vol. 97, no. 5 (October 1989), pp. 1197-1207 found

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crowd-out of approximately 13.5 cents for every dollar of government funding in public radio. A. Abigail Payne, ―Does the government crowd-out private donations? New evidence from a sample of nonprofit firms,‖ Journal of Public Economics, vol. 69, no. 3 (September 1998), pp. 323-345 found crowd-out of approximately 50% for shelter and human services organizations. 83 Garth Heutel, Crowding Out and Crowding In or Private Donations and Government Grants, National Bureau of Economic Research, Working Paper 15004, Cambridge, MA, May 2009. 84 Cagla Okten and Burton A. Weisbrod, ―Determinants of Donations in Private Nonprofit Markets,‖ Journal of Public Economics, vol. 75, no. 2 (February 2000), pp. 255-272. 85 Francesca Borgonovi, ―Do Public Grants to American Theatres Crowd-Out Private Donations?‖ Public Choice, vol. 126, no. 3-4 (March 2006), pp. 429-451. Care should be taken not to presume these results will hold for other charitable sectors. Nonetheless, these results do suggest that more research is needed to better understand what types of government support are susceptible to crowding out. 86 James Andreoni and A. Abigail Payne, ―Do Government Grants to Private Charities Crowd out Giving or FundRaising?‖ American Economic Review, vol. 93, no. 3 (June 2003), pp. 792-812. The authors find that crowdout of fund raising efforts is greater for arts organizations than in social service organizations. 87 James Andreoni and A. Abigail Payne, ―Crowding out Both Sides of the Philanthropy Market: Evidence from a Panel of Charities,‖ American Economic Association Annual Meeting, San Francisco, CA, 2009, http://www.aeaweb.org/annual_mtg_papers/2009/. 88 Jane K. Dokko, ―Does the NEA Crowd Out Private Charitable Contributions to the Arts?‖ National Tax Journal, vol. 62, no. 1 (March 2009), pp. 57-75. 89 It is also possible that government grants crowding out fund-raising efforts is efficiency enhancing. If the government is able to raise and distribute funds more effectively than the charity via their own fund-raising efforts, it may be more efficient to have a greater proportion of funding coming from government grants. 90 The arguments here follow those made in Dennis R. Young, ―Complementary, Supplementary, or Adversarial? Nonprofit-Government Relations,‖ in Nonprofits & Government, ed. Elizabeth T. Boris, C. Eugene Steuerle, 2nd ed. (Washington, DC: The Urban Institute Press, 2006), pp. 37-79. 91 C. Eugene Steuerle and Virginia A. Hodgkinson, ―Meeting Social Needs: Comparing Independent Sector and Government Resources,‖ in Nonprofits & Government, ed. Elizabeth T. Boris, C. Eugene Steuerle, 2nd ed. (Washington, D.C.: The Urban Institute Press, 2006), pp. 81-106. 92 While the relationship between nonprofits and government may be complementary in aggregate, this is not to say that the activities undertaken by individual charitable sectors are not crowded out by increased government spending. For example, an increased government role in providing for the elderly via Social Security and Medicare may have reduced the need for private assistance that might have occurred. While this could be interpreted as crowding-out, it has been argued that this should be interpreted as a reorientation of nonprofit activities. The government provision of these services may free privately provided charitable funds to be used for other purposes. If the proportion of personal income going to charities remains constant, there is no aggregate crowd-out of charitable contributions flowing to nonprofit and charitable organizations. 93 Francesca Borgonovi, ―Do Public Grants to American Theatres Crowd-Out Private Donations?‖ Public Choice, vol. 126, no. 3-4 (March 2006), pp. 429-451 reviewed the literature on crowding and conducted an institutional-level study exploring the impact of public funding on total funding at American theaters. His evidence suggests that when public support levels are low, additional support may have a crowding-in effect. As the level of government support increases, there is a shift from additional government support having a crowding-in effect to a having a crowding-out effect. Further, it is observed that crowding-out depends on the source of government funds (federal, state, or local). 94 For a review of the economic literature on the price elasticity of charitable donations see CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples. 95 For a review of the economic literature on the price elasticity of charitable bequests see CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples. 96 Other relevant issues not addressed here are the charitable standard mileage rate, reviewed by CRS Report R40434, Charitable Standard Mileage Rate: Considerations for the 111th Congress, by Nonna A. Noto, issues pertaining to lobbying, reviewed in CRS Report 96-809, Lobbying Regulations on Non-Profit Organizations, by Jack Maskell, as well as those related to charitable organizations involvement in political activities, as reviewed in CRS Report R40141, 501(c)(3) Organizations and Campaign Activity: Analysis Under Tax and Campaign Finance Laws, by Erika K. Lunder and L. Paige Whitaker. 97 Communique No. 11, Nonprofit Policy Priorities for the New Administration, by Lester M. Salamon and Stephanie Lessans Geller, http://www.ccss.jhu.edu/pdfs/LP_ Communiques/LP_Communique 11_pres_ sounding_FINAL.pdf. 98 Independent Sector, Policy Proposals to Strengthen the Nonprofit Community’s Ability to Serve Our Society, January 6, 2009, http://www.independentsector.org/programs/gr/2009_Nonprofit_Platform.htm.

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Testimony of Stanley Czerwinski before the Ways and Means Committee, Subcomittee on Oversight, ―Nonprofit Sector: Increasing Numbers and Key Role in Delivering federal Services,‖ GAO-07-1084T, July 24, 2007. 100 See CRS Report RL34608, Tax Issues Relating to Charitable Contributions and Organizations, by Jane G. Gravelle for a discussion of some of these proposals. 101 See CRS Report RL33243, Small Business Administration Reauthorization: A Primer on Programs, by N. Eric Weiss 102 This objective was stated in the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5). 103 CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples. 104 Congressional Budget Office, Budget Options Volume 2, August, 2009, http://www.cbo.gov/ftpdocs/102xx/ doc10294/08-06-BudgetOptions.pdf. 105 In addition to CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples, see CRS Report RL31108, Economic Analysis of the Charitable Contribution Deduction for Non-Itemizers, by Jane G. Gravelle. 106 See testimony of Jane G. Gravelle, Congressional Research Service and testimony of Lynn Munson, Center for College Affordibility and Productivity, before the Senate Finance Committee, September 26, 2007, at http://finance.senate.gov/hearings/testimony/2007test/092607testjg.pdf and http://finance.senate.gov/hearings/ testimony/2007test/092607testlm.pdf. Also, see the memorandum by Jane G. Gravelle, Congressional Research Service, analyzing endowment earnings, payouts, and uses that formed the basis for testimony, at http://finance.senate.gov/press/Gpress/2008/prg011408b.pdf. 107 These changes are discussed in CRS Report RL34608, Tax Issues Relating to Charitable Contributions and Organizations, by Jane G. Gravelle. 108 Congressional Budget Office, Nonprofit Hospitals and the Provision of Community Benefits, December 2006. 109 Tax Exempt Hospitals: Discussion Draft, at http://finance.senate.gov/press/Gpress/2007/prg071907a.pdf. 110 Internal Revenue Service, Hospital Compliance Program Interim Report, at http://www.irs.gov/pub/irs-tege/ eo_interim_hospital_report_072007.pdf. 111 See CRS Report RL34605, Tax-Exempt Section 501(c)(3) Hospitals: Community Benefit Standard and Schedule H, by Erika K. Lunder and Edward C. Liu for further discussion of the legal issues involved in defining community benefit. 112 For further information see CRS Report RS22766, Qualified Charitable Distributions from Individual Retirement Accounts: A Fact Sheet, by John J. Topoleski. 113 See CRS Report RL34608, Tax Issues Relating to Charitable Contributions and Organizations, by Jane G. Gravelle 114 This issue is discussed in CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2010 Budget Options, by Jane G. Gravelle and Donald J. Marples.

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Chapter 2

LOBBYING REGULATIONS ON NON-PROFIT ORGANIZATIONS Jack H. Maskell

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SUMMARY Public charities, religious groups, social welfare organizations and other non-profit organizations which are exempt from federal income taxation are not generally prohibited from engaging in all lobbying or public policy advocacy activities merely because of their tax-exempt status. There may, however, be some lobbying limitations on certain organizations, depending on their tax-exempt status and/or their participation as federal grantees in federal programs. Additionally, organizations (other than churches or their affiliates) which meet specified threshold expenditure requirements on lobbying activities and which engage in direct lobbying of federal officials must register employees who are paid to lobby, and must file reports on lobbying activities, under the Lobbying Disclosure Act of 1995, as amended. As to the different categories of tax-exemption: charitable, religious or educational organizations which are exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code, who may receive contributions from private parties that are taxdeductible for the contributor, may not engage in direct or grass roots lobbying activities which constitute a ―substantial part‖ of their activities if they wish to preserve this preferred tax-exempt status. ―Civic leagues or organizations not operated for profit but operated exclusively for the promotion of social welfare ....,‖ tax exempt under 26 U.S.C. § 501(c)(4), on the other hand, have no tax consequence expressed in the statute for lobbying or advocacy activities. (But note restrictions on 501(c)(4)’s receiving federal grants or loans). Labor and agricultural organizations, tax-exempt under Section 501(c)(5) of the Internal Revenue Code, and business trade associations and chambers of commerce, exempt from federal income taxation under Section 501(c)(6), also have no specific statutory limitations upon their lobbying activities as a result of their tax-exempt status. Private foundations are generally not allowed to lobby.

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A provision of the 1995 Lobbying Disclosure Act, commonly called the ―Simpson Amendment,‖ prohibits section 501(c)(4) civic leagues and social welfare organizations from engaging in any ―lobbying activities,‖ even with their own private funds, if the organization receives any federal grant, loan, or award. Because of the definitions under the Lobbying Disclosure Act, however, the ―Simpson Amendment‖ limitations do not appear to apply to any ―grass roots‖ lobbying or advocacy, nor to lobbying of state or local officials, and the amendment also exempts certain other official communications or testimony. Finally, federal contract or grant money may not be used for any lobbying, unless authorized by Congress. No organization, regardless of tax status, may be reimbursed out of federal contract or grant money for any lobbying activities, or for other advocacy or political activities, unless authorized by Congress. This applies to direct or ―grass roots‖ lobbying campaigns at the state, local or federal level (but exempts providing technical and/or factual information related to the performance of a grant or contract when in response to a documented request). The provision of law at 18 U.S.C. § 1913, as amended, as well as the so-called ―Byrd Amendment,‖ would also generally prohibit the reimbursement or payment from federal grants or contracts of the costs for ―lobby‖ activities. This chapter is intended to provide a brief overview of the various potential restrictions or regulations within federal law on the lobbying activities of non-profit organizations. Public charities, social welfare organizations, religious groups, and other non-profit, tax-exempt organizations are not generally prohibited from engaging in all lobbying or public policy advocacy merely because of their federal tax-exempt status. There may, however, be some limitations and restrictions on lobbying by certain non-profit organizations, as well as general public disclosure and reporting requirements relative to lobbying activities of most organizations. There are, in fact, several overlapping laws, rules and regulations which may apply to various non-profits which engage in lobbying activities. In some instances, the rules and restrictions that apply may be determined by the section of the Internal Revenue Code under which an organization holds its tax-exempt status. In other instances, certain rules and regulations may apply depending on the type of non-profit organization and whether it receives federal grants, loans or awards. Finally, organizations, depending on the amount and type of lobbying in which they engage, may be required to file public registration and disclosure reports under the federal Lobbying Disclosure Act of 1995, as amended. It should be emphasized that the definitions of the terms ―lobbying‖ or ―advocacy,‖ and which particular activities may be encompassed in or excluded from those terms, may vary among the different regulations, rules, and statutes.

TAX CODE STATUS AND LOBBYING Section 501(c)(3) Charitable Organizations Organizations which are exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code (26 U.S.C. § 501(c)(3)) are community chests, funds, corporations or foundations ―organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes.‖ These charitable organizations, which

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have the advantage of receiving contributions from private parties which are tax-deductible for the contributor under 26 U.S.C. § 170(a), are limited in the amount of lobbying in which they may engage if they wish to preserve this preferred federal tax-exempt status.1 The general rule for a charitable organization exempt from federal taxation under § 501(c)(3) is that such organization may not engage in lobbying activities which constitute a ―substantial part‖ of its activities.2 In 1976, a so-called ―safe harbor‖ was offered to 501(c)(3) organizations where they could elect to come within specific percentage limitations on expenditures to assure that no violations of the ―substantial part‖ rule would occur, or they could remain under the old, unspecified ―substantial part test.‖3 The specific statutory limitations upon organizational expenditures for covered lobbying activities (the ―expenditure test‖ limitations) for electing 501(c)(3) organizations are as follows:     

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

20% of the first $500,000 of total exempt-purpose expenditures of the organization, then 15% of the next $500,000 in exempt-purposes expenditures, then 10% of the next $500,000 in exempt-purpose expenditures, and then 5% of the organization’s exempt-purpose expenditures over $1,500,000; up to a total expenditure limit of $1,000,000 on lobbying activities. There is currently a separate ―grass roots‖ expenditure limit of 25% of the ―direct‖ lobbying limits.4

The activities covered under the tax code limitations on ―lobbying‖ by charitable organizations generally encompass both ―direct‖ lobbying as well as ―grass roots‖ lobbying (for which there is a separate included expense limitation). ―Direct‖ lobbying entails direct communications to legislators, and to other government officials involved in formulating legislation (as well as direct communications to an organization’s own members encouraging them to communicate directly with legislators), which refer to and reflect a particular view on specific legislation. Indirect or ―grass roots‖ lobbying involves advocacy pleas to the general public which refer to and take a position on specific legislation, and which encourage the public to contact legislators to influence them on that legislation. The definitions of and the specific exemptions from the term ―lobbying‖ are important in observing the expenditure limitations on an organization’s activities. For example, not all public ―advocacy‖ activities of an organization are considered ―grass roots lobbying.‖ As noted expressly by the IRS: ―... clear advocacy of specific legislation is not grass roots lobbying at all unless it contains an encouragement to action.‖5 Furthermore, not all communications to legislators are considered ―direct lobbying.‖ The definition of ―lobbying‖ for purposes of the tax code limitations expressly exempt activities such as: (a) making available nonpartisan analysis, study or research involving independent and objective exposition of a subject matter, even one that takes a position on particular legislation as long as it does not encourage recipients to take action with respect to that legislation; (b) technical advice or assistance given at the request of a governmental body;

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Jack H. Maskell (c) so-called ―self-defense‖ communications before governmental bodies, that is, communications on those issues that might affect the charity’s existence, powers, duties, taxexempt status, or deductibility of contributions to it; and (d) contacts with officials unrelated to affecting specific legislation, even those that involve general discussions of broad social or economic problems which are the subject of pending legislation.6

Section 501(c)(4) Civic Organizations

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Organizations which are tax exempt under section 501(c)(4) of the Internal Revenue Code are generally described as ―[c]ivic leagues or organizations not operated for profit but operated exclusively for the promotion of social welfare ....‖ If a civic league or social welfare organization is tax exempt under § 501(c)(4) of the Internal Revenue Code, there is generally no tax consequence for lobbying or advocacy activities (as long as such expenditures are in relation to their exempt function). In fact, in upholding the limitations on lobbying by 501(c)(3) charitable organizations against First Amendment challenges, the Supreme Court noted that a 501(c)(3) organization could establish a 501(c)(4) affiliate through which its First Amendment expression could be exercised through unlimited lobbying and advocacy.7 The 501(c)(4) affiliate should be separately incorporated, keep separate books, and spend and use resources which are not part of or otherwise paid for by the tax-deductible contributions to the 501(c)(3) parent organization.8 While 501(c)(4) organizations’ lobbying activities are generally unrestricted, if a 501(c)(4) organization receives federal funds in the form of a ―grant‖ or loan, then there are express restrictions on its ―lobbying activities,‖ discussed below.

Section 501(c)(5) Labor Organizations and 501(c)(6) Trade Associations Labor and agricultural organizations are tax-exempt under section 501(c)(5) of the Internal Revenue Code, and business trade associations and chambers of commerce are exempt from federal income taxation under section 501(c)(6). Neither labor or agricultural organizations, nor business trade associations or chambers of commerce, have any specific limitations upon their lobbying activities as a result of their tax-exempt status.9

Veterans’ Organizations - Section 501(c)(19) Veterans’ organizations are in a unique situation concerning lobbying, as compared to other non-profits, in that veterans’ groups may engage in unlimited lobbying activities relevant to their functions, while at the same time are able to benefit from contributions to them that are tax deductible to the donor.10 This preferred tax position available only to veterans’ groups has been justified as a policy choice of Congress to benefit those that have served the nation in its armed forces.11

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Private Foundations Private foundations (as opposed to ―public‖ charities) are generally restricted from lobbying, in a practical sense, by tax provisions which penalize expenditures by the private foundation for most forms of lobbying activities (although the law expressly exempts from the definition of lobbying such activities as issuing ―nonpartisan analysis, study or research,‖ and engaging in so-called ―self-defense‖ lobbying).12 Private foundations differ from public charities generally in the manner in which they are funded, in that private foundations receive a certain percentage of their funds from other than contributions from the general public or from the Government, and instead receive large bequests from those associated with the foundation and/or receive substantial amounts of their revenue from the investment income from the foundation’s financial holdings.13

RECEIPT OF FEDERAL FUNDS

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501(c)(4) Organizations Receiving Federal Grants Restrictions on ―lobbying activities‖ by certain non-profit groups, as a condition to receiving federal grants and loans, were enacted into law in 1995. Section 18 of the Lobbying Disclosure Act of 199514 places statutory restrictions upon the lobbying activities of nonprofit civic and social welfare organizations which are tax-exempt under section 501(c)(4) of the Internal Revenue Code. This provision, which is commonly called the ―Simpson Amendment,‖ prohibits section 501(c)(4) civic leagues and social welfare organizations from engaging in any ―lobbying activities,‖ even with their own private funds, if the organization receives any federal grant, loan, or award.15 The restrictions of the Simpson Amendment originally covered all 501(c)(4) organizations which received federal monies by way of an ―award, grant, contract, loan or any other form.‖16 The term ―contract,‖ however, was subsequently removed from the provision by P.L. 104-99, Section 129, leaving the prohibition on lobbying activities with an organization’s own funds as a condition to the receipt of federal moneys only upon 501(c)(4) grantees and those seeking an award or loan, but allowing unlimited lobbying activities with organizational funds for 501(c)(4) contractors of the federal government. The Simpson Amendment now reads: ―An organization described in section 501(c)(4) of the Internal Revenue Code of 1986 which engages in lobbying activities shall not be eligible for the receipt of Federal funds constituting an award, grant, or loan.‖ The legislative history of the provision clearly indicates that a 501(c)(4) organization may separately incorporate an affiliated 501(c)(4), which would not receive any federal funds, and which could engage in unlimited lobbying.17 The method of separately incorporating an affiliate to lobby (or to receive and administer federal grants), which was described by the amendment’s sponsor as ―splitting,‖ was apparently intended to place a degree of separation between federal grant money and private lobbying, while permitting an organization to have a voice through which to exercise its protected First Amendment rights of speech, expression and petition.18

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As stated by Senator Simpson: ―If they decided to split into two separate 501(c)(4)’s, they could have one organization which could both receive funds and lobby without limits.‖19 It may also be noted that while § 501(c)(4)s which receive certain federal funds may not engage in ―lobbying activities,‖ the term ―lobbying activities‖ as used in the ―Simpson Amendment‖ prohibition in Section 18 of the Lobbying Disclosure Act is defined in Section 3 of that legislation to include only direct ―lobbying contacts and efforts in support of such contacts‖ such as preparation, planning, research and other background work intended for use in such direct contacts.20 A ―lobbying contact‖ under the Lobbying Disclosure Act is an ―oral or written communication (including an electronic communication) to a covered executive branch official or a covered legislative branch official‖ which concerns the formulation, modification or adoption of legislation, rules, regulations, policies or programs of the Federal Government.21 Organizations which use their own private resources to engage only in ―grass roots‖ lobbying and public advocacy (including specifically any communication that is ―made in a speech, article, publication or other material that is distributed and made available to the public, or through radio, television, cable television, or other medium of mass communication‖)22 would, therefore, not appear to be engaging in any prohibited ―lobbying activities‖ under this provision. The Lobbying Disclosure Act’s definitions of ―lobbying activities‖ and ―lobbying contacts‖ exclude, and do not independently apply to activities which consist only of ―grass roots‖ lobbying and public advocacy.23 Similarly, since the term ―lobbying activities‖ relates only to the direct lobbying of covered federal officials, the ―Simpson Amendment‖ would not appear to limit in any way an organization’s use of its own private resources to lobby state or local legislators or other state or local governmental bodies or units. While direct lobbying of the Congress, or of certain high level executive branch officials, is covered under the Lobbying Disclosure Act as a ―lobbying contact,‖ and thus by definition a ―lobbying activity,‖ the acts of testifying before a congressional committee, subcommittee, or task force, or of submitting written testimony for inclusion in the public record of any such body, or of responding to notices in the Federal Register or other such publication soliciting communications from the public to an agency, or responding to any oral or written request from a Government official for information, are expressly exempt from the definition of a ―lobbying contact,‖ and thus in themselves can not qualify as a ―lobbying activity.‖24

Restrictions on Use of Federal Funds Generally Broad prohibitions on the use of federal monies for lobbying or political activities have been in force for a number of years. Express restrictions on the use of grant funds by nonprofit organizations were adopted in 1984 as part of uniform cost principles for non-profit organizations issued by the Office of Management and Budget (OMB) in OMB Circular A122, and are now incorporated into the Federal Acquisition Regulations. Under current federal provisions, no contractor or grantee of the federal government, regardless of tax status, may be reimbursed out of federal contract or grant money for their lobbying activities, or for political activities, unless authorized by Congress.25 These restrictions generally apply to attempts to influence any federal or state legislation through direct or ―grass roots‖ lobbying campaigns, political campaign contributions or expenditures, but exempt any

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activity authorized by Congress, or when providing technical and/or factual information related to the performance of a grant or contract when in response to a documented request. In addition to these restrictions of general applicability on the use of federal contract or grant money for lobbying activities, there may be specific statutory limitations and prohibitions on particular federal moneys or on particular federal programs.26 Appropriation riders, for example, may also expressly limit the use of federal monies appropriated in a particular appropriations law for lobbying, or ―publicity or propaganda‖ campaigns directed at Congress by private grant or contract recipients.27 Under the provisions of federal law commonly referred to as the ―Byrd Amendment,‖ federal grantees, contractors, recipients of federal loans or those with cooperative agreements with the federal government, are expressly prohibited by law from using federal monies to ―lobby‖ the Congress, federal agencies, or their employees, with respect to the awarding of federal contracts, the making of any grants or loans, the entering into cooperative agreements, or the extension, modification or renewal of these types of awards.28 Federal contractors, grantees and those receiving federal loans and cooperative agreements must also report lobbying expenditures from non-federal sources which they used to obtain such federal program monies or contracts.29 Agencies of the Federal Government which administer loans, grants and cooperative agreements have issued common regulations implementing the ―Byrd Amendment.‖30 The restrictions of the ―Byrd Amendment‖ apply to the making, with an intent to influence, any communications to or appearances before Congress or an agency on a covered matter. Any ―information specifically requested by an agency or Congress is allowable at any time,‖31 and certain other contacts are allowable depending on the timing and nature of the communication with respect to a particular solicitation for a federal grant, contract or agreement. In 2002 a federal statute in the criminal code concerning lobbying with appropriated funds was amended to expand its applicability and prohibition beyond merely officers and employees of the Federal Government, while substituting civil fines for the former criminal penalties for violations of the law. That provision of law, at 18 U.S.C. § 1913, prohibits the use of federal appropriations to pay for any ―personal services, advertisement, telegram, telephone, letter, printed or written matter ... intended or designed to influence‖ Members of Congress, or officials of any governmental units, on policies, legislation or appropriations.32 Originally enacted in 1919, the law had applied only to the use of federal funds by officers and employees of the Federal Government, and had extended its prohibitions only to the use of such funds for certain lobbying campaigns directed at Congress.33 However, after the 2002 amendments the law now appears to apply to recipients of all federal monies appropriated by Congress, and extends its prohibitions to activities to influence not only the Congress, but also public officials at all levels of Government.34 Contractors and grantees of the Federal Government may not seek reimbursement from a federal grant or contract for, nor charge off to a federal contract or grant, the costs of lobbying and similar public policy advocacy.

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REQUIRED DISCLOSURES OF LOBBYING ACTIVITIES

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Lobbying Disclosure Act of 1995, as Amended Organizations which engage in a particular amount of lobbying activities (which must include more than one direct lobbying contact of a covered federal official) through personnel compensated to lobby on the organization’s behalf will be required to register and to file disclosure reports under the Lobbying Disclosure Act of 1995, as amended.35 Other than for tax-exempt religious orders, churches, and their integrated auxiliaries (which are exempt from registration, reporting, and disclosure under the Lobbying Disclosure Act36), there is no general exclusion or exception from the disclosure and registration requirements for other non-profit organizations which otherwise meet the thresholds on lobbying contacts and overall expenditures for lobbying activities. The Lobbying Disclosure Act of 1995 was intended to reach so-called ―professional lobbyists,‖ that is, those who are compensated to engage in lobbying activities on behalf of an employer or on behalf of a client.37 When registration is required for organizations which engage in covered ―lobbying contacts‖ through their own staff, such registration is done by the organization, rather than by the individual employee/lobbyist. That is, the organization which has employees who qualify as ―lobbyists‖ for the organization (so-called ―in-house‖ lobbyists) must register and identify its employees/lobbyists.38 All lobbying registrations and reports are to be filed electronically, and may now be filed at a single location for both the Secretary of the Senate’s Office and the Office of the Clerk of the House.39 An organization will be required to register its employee/lobbyists when it meets two general conditions. First, it must have one or more compensated employees who engage in covered ―lobbying,‖ that is, who make more than one ―lobbying contact,‖ and who spend at least 20% of their total time for that employer on ―lobbying activities‖ over a three-month reporting period.40 A ―lobbying contact‖ (in reference to the requirement that an employee/lobbyist make more than one ―lobbying contact‖ per quarter) is a direct oral or written communication to a covered official, including a Member of Congress, congressional staff, and certain senior executive branch officials, with respect to the formulation, modification or adoption of a federal law, rule, regulation or policy.41 The term ―lobbying activities‖ (in reference to the 20% time threshold), however, is broader than ―lobbying contacts,‖ and includes ―lobbying contacts‖ as well as background activities and other efforts in support of such lobbying contacts.42 Secondly, for an organization to register its lobbyists/employees, the organization must have spent, in total expenses for such ―lobbying activities,‖ $10,000 or more in a quarterly reporting period.43 The $10,000 amount will include any money paid to an outside lobbyist to lobby on the organization’s behalf during the reporting period. If an organization hires an outside lobbyist, then that outside lobbyist or outside lobbying firm will register on behalf of that client/organization when the lobbyist or lobbying firm meets the required threshold for contacts and income, and will identify that organization as a ―client.‖44 Under the act, a ―lobbyist‖ needs to be registered within 45 days after first making a lobbying contact or being employed to make such a contact. Registration will be with the Clerk of the House who will forward such registration to the Secretary of the Senate. The information on the registrations will generally include identification of the lobbyist, or

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organization with employees/lobbyists; the client or employer; an identification of any foreign entity, and disclosure of its contributions of over $5,000, if the foreign entity owns 20% of the client and controls, plans, or supervises the activities of the client, or is an interested affiliate of the client; and a list of the ―general issue areas‖ on which the registrant expects to engage in lobbying, and those on which he or she has already lobbied for the client or employer.45 In addition to listing the ―client‖ of a lobbyist in the case of, for example, a ―coalition‖ or association which hires a lobbyist, identification must also be made of any organization other than that client-coalition which contributes more than $5,000 for the lobbying activities of the lobbyist in a three-month reporting period and ―actively participates‖ in the planning, supervision, or control of the lobbying activities.46 In addition to the registration of lobbyists, quarterly and semi-annual reports are required to be filed. The quarterly reports are to cover the periods January 1 - March 31, April 1 - June 30, July 1 - September 30, and October 1 - December 31. These reports are to be filed within 20 days of the end of the applicable period, and will identify the registrant/lobbyist, identify the clients, and provide any needed updates to the information in the registration; identify the specific issues upon which one lobbied, including bill numbers, earmarks, and any specific executive branch actions; employees who lobbied; Houses of Congress and federal agencies contacted; any covered interest of a foreign entity; and provide a good faith estimate of lobbying expenditures (by organizations using their own employees to lobby), or income from clients (estimated by outside lobbying firms/practitioners) in excess of $5,000 (and rounded to the nearest $10,000.47 The semi-annual reports are to identify the names of all political committees established or controlled by the lobbyist or registered organization; the name of each federal candidate or officeholder, leadership PAC, or political party committee to which contributions of more than $200 were made in the semi-annual period; the date, recipient, and the amount of funds disbursed: (i) to pay the costs of an event to honor or recognize a covered government official; (ii) to an entity that is named for a covered legislative branch official, or to a person or entity ―in recognition‖ of such official; (iii) to an entity established, maintained, or controlled by a covered government official, or an entity designated by such official; and (iv) to pay the costs of a meeting, conference, or other similar event held by or in the name of one or more covered government officials, unless the events, expenses or payments are in a campaign context such that the funds provided are to a person required to report their receipt under the Federal Election Campaign Act (2 U.S.C. § 434). The name of each presidential library foundation and each presidential inaugural committee to whom contributions of $200 or more were made in the semiannual reporting period must also be reported.48 Additionally, in the semi-annual reports registrants are required to provide a certification that the person or organization filing (i) ―has read and is familiar with‖ the rules of the House and Senate regarding gifts and travel, and (ii) had not provided, requested, or directed that a gift or travel be offered to a Member or employee of Congress ―with knowledge that the receipt of the gift would violate‖ the respective House or Senate rule on gifts and travel.49 The Lobbying Disclosure Act, in addition to covering only those who are compensated to lobby, as a prerequisite to coverage applies only to those whose activities may be described as ―direct‖ lobbying, that is, direct communications or contacts with covered officials. The registration and disclosure requirements of the law are not separately triggered by ―grass roots‖ lobbying by persons or organizations. That is, an organization or entity which engages only in grass roots lobbying, regardless of the amount of ―grass roots‖ lobbying activities,

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will not be required under the Lobbying Disclosure Act provisions to register its members, officers or employees who engage in such activities.50 The Lobbying Disclosure Act also exempts from the definition of ―lobbying contacts‖ the activities of lobbying state or local legislators or other state or local governmental bodies or units. Furthermore, while direct lobbying of Congress, or of certain high level executive branch officials, is covered under the Lobbying Disclosure Act as a ―lobbying contact,‖ the acts of testifying before a congressional committee, subcommittee, or task force, or of submitting written testimony for inclusion in the public record of any such body, or of responding to notices in the Federal Register or other such publication soliciting communications from the public to an agency, are expressly exempt from the definition of a ―lobbying contact,‖ and thus in themselves cannot qualify as a ―lobbying activity.‖51 Certain public charities, that is, those that have ―elected‖ the specific expenditure limit test for lobbying under 26 U.S.C. § 501(h), will have the option, under the Lobbying Disclosure Act, of using the Internal Revenue Code definitions of ―influencing legislation,‖ rather than the Lobbying Disclosure Act definitions of ―lobbying activities‖ to determine the organization’s reporting obligations.52 This option was provided so that such groups would need to have only one set of internal record controls and standards dealing with ―influencing legislation‖ under both the tax code and the lobbying disclosure law.53 Since the definition of ―influencing legislation‖ under the tax code is different than the definition of ―lobbying activities‖ under the lobbying law, an eligible organization may need to decide which definition is more advantageous to use, from both a tax and record-keeping standpoint, as well as in relation to the extent and nature of its planned public policy activities.54

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Tax Code Disclosures Most tax-exempt, non-profit organizations (other than churches) having annual gross receipts of over $25,000 must file with the IRS a Form 990 which is open to public inspection. Charitable 501(c)(3) organizations must also file Schedule A with Form 990, providing the reporting of lobbying expenditures, that is, expenses for ―influencing legislation‖ under the Internal Revenue Code definitions. ―Electing‖ organizations (electing the ―expenditure test‖ for lobbying limits under 26 U.S.C. § 501(h)) must also compute and allocate expenses attributable to ―grassroots‖ lobbying, as well as to ―direct‖ lobbying; but non-electing organizations (under the ―substantial part‖ test) must provide to the IRS a ―detailed‖ description of their lobbying activities, information not required from ―electing‖ organizations.

ADDITIONAL READING Alliance for Justice, Worry-Free Lobbying for Nonprofits: How to Use the 501(h) Election to Maximize Effectiveness, 1999, 2003. [http://www.afj.org/assets/ resources/ resources2/ Worry-Free-Lobbying-for-Nonpro fits.pdf]

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Robert A. Boisture, for Independent Sector, ―What Charities Need to Know To Comply With the Lobbying Disclosure Act of 1995,‖ in Complying With the Lobbying Disclosure Act of „95 and the New Gift Act Restrictions, pp. 185-208 (Glasser Legal Works 1996). Comment, ―Guiding Lobbying Charities Into A Safe Harbor: Final Section 501(h) and 4911 Regulations Set Limits for Tax-Exempt Organizations,‖ 61 Miss. L.J. 157 (Spring 1991). John A. Edie, Foundations and Lobbying: Safe Ways to Affect Public Policy (Council on Foundations, 1991). Bruce H. Hopkins, The Law of Tax-Exempt Organizations, Eighth Edition (2003). Bruce R. Hopkins, Charity, Advocacy and the Law (1992). Bob Smucker, The Non-Profit Lobbying Guide, Second Edition, 1999 (Charity Lobbying in the Public Interest, Independent Sector). [http://www.clpi.org/CLPI_Publications.aspx] Richard L. Winston, ―The Lobbying Disclosure Act of 1995 and the Tax Code Elections,‖ Tax Notes, 1391-1399 (June 3, 1996). U.S. House of Representatives, Office of the Clerk, ―Guide to the Lobbying Disclosure Act,‖ December 2007 (amended January 25, 2008). [http://lobbyingdisclosure.house. gov/amended_lda_guide.html]

CRS Reports

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CRS Report 96-264. Frequently Asked Questions About Tax-Exempt Organizations, by Erika Lunder. CRS Report RL31126. Lobbying Congress: An Overview of Legal Provisions and Congressional Ethics Rules, by Jack Maskell.

End Notes 1

26 U.S.C. §§ 501(c)(3), 501(h), 4911, 6033; see IRS Regulations at 55 F.R. 35579-35620 (August 31, 1990), 26 C.F.R. Parts 1, 7, 20, 25, 53, 56, and 602. 2 26 U.S.C. § 501(c)(3). The Supreme Court has upheld the loss of the special tax-exempt status of charitable, 501(c)(3) organizations if they engage in ―substantial‖ lobbying. Regan v. Taxation With Representation of Washington, 461 U.S. 540 (1983). The Court noted that although lobbying is a protected First Amendment right, and although the Government may not indirectly punish an organization for exercising its constitutional rights by denying benefits to those who exercise them, lobbying activities are not necessarily one of the contemplated ―exempt functions‖ of these charitable or educational organizations for which they have received the preferred tax status. Since contributions to the 501(c)(3) organization by private individuals are eligible for a deduction from the donor’s federal income tax, the Government is in effect ―subsidizing‖ those private contributions to the organization (through loss of tax revenue), and the Court found that Congress does not have to ―subsidize‖ such lobbying activities through preferred tax status for contributions if it does not chose to do so, as long as other outlets for the organization’s unlimited, protected First Amendment expression exist. Id. at 544-546. 3 Religious organizations are not permitted to make the election to come within the specific monetary lobbying guidelines under 26 U.S.C. § 501(h), 26 U.S.C. § 501(h)(5). See IRS Form 5768, for election to come within ―expenditure test.‖ 4 See 26 U.S.C. § 4911(c)(2). 5 1990-39 Internal Revenue Bulletin, at p. 7. A communication ―encourages a recipient to take action‖ if it (1) states that the recipient should contact legislators; (2) provides a legislator’s phone number, address, etc; (3) provides a petition, tear-off postcard, or similar material to send to a legislator; or (4) specifically identifies a legislator who is opposed, in favor, or undecided on the specific legislation, or is on the committee considering the

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legislation, if the communication itself is ―partisan‖ in nature and can not be characterized as a full and fair exposition of the issue. Id. at 7. 6 26 U.S.C. § 4911(d)(2); 26 C. F. R. § 56.4911-2(c)(1) - (4). 7 Regan v. Taxation With Representation of Washington, supra at 544-546 (Opinion of the Court), see also 552-553 (Blackmun concurring). 8 See discussion of a 501(c)(3) setting up a 501(c)(4) lobbying affiliate in Smucker, The Nonprofit Lobbying Guide, Second Edition, 68-69 (Independent Sector 1999). 9 Note, however, pass-through rules concerning reporting requirements and non-deductibility as business expenses of dues paid to associations which lobby. Omnibus Budget Reconciliation Act of 1993, 26 U.S.C § 162(e)(3), 26 U.S.C. § 6033(e)(1). See discussion in Hopkins, The Law of Tax-Exempt Organizations, 8th Edition, § 20.8 (2003). 10 26 U.S.C. § 501(c)(19) (describing veterans’ organizations); 26 U.S.C. § 170(c)(3), 2055(a)(4), 2522(a)(4)(tax deductibility of contributions to veterans’ groups). 11 Regan v. Taxation With Representation of Washington, supra at 550. 12 26 U.S.C. § 4945(d),(e). 13 26 U.S.C. § 509. 14 P.L. 104-65, 109 Stat. 691, 703-704, as amended by P.L. 104-99, Section 129, 110 Stat. 34. 15 See now 2 U.S.C. § 1611. 16 P.L. 104-65, Section 18, 109 Stat. 704 (emphasis added). 17 H.Rept. 104-339, 104th Congress, 1st Session, at 24 (1995). 18 See comments by the sponsors of provision, Senator Simpson and Senator Craig, at 141 Congressional Record 20041-20042, 20052-20053 (July 24, 1995). 19 141 Congressional Record, supra at 20045 (Senator Simpson), see also Senator Simpson’s explanation of ―splitting,‖ id. at 20052, 20053. 20 2 U.S.C. § 1602(7), P.L. 104-65, Section 3(7). 21 2 U.S.C. § 1602(8), P.L. 104-65, Section 3(8). 22 Note this express exception to the term ―lobbying contact,‖ at 2 U.S.C. § 1602(8)(B)(iii), P.L. 104-65, Section 3(8)(B)(iii). 23 Broader limitations on public ―advocacy‖ and lobbying by organizations receiving federal grant money, and on entities wishing to do business with federal grantees, which had been considered by the House as appropriations riders in the 104th Congress (commonly known as the ―Istook Amendment,‖ e.g., H.R. 2127, 104th Congress, H.J.Res. 114, 104th Congress), were not enacted into law. 24 See 2 U.S.C. 1602(8)(B), for list of 18 exceptions to the term ―lobbying contacts.‖ 25 Federal Acquisition Regulations (FAR), 48 C.F.R. §§ 31.205-22; 31.701 et seq., encompassing principles in OMB Circular A-122, ¶B21, as added 49 F.R. 18276 (1984). 26 See, e.g, 42 U.S.C. § 2996(f)(a)(5), re Legal Services Corporation contractors and grantees. 27 Note discussion of anti-lobbying appropriations provisions and grant funds in Government Accountability Office, Principles of Federal Appropriations Law, Vol. I, at 4-219 to 4-227 (Third Ed. January 2004). 28 31 U.S.C. § 1352(a). 29 31 U.S.C. § 1352(b). 30 55 F.R. 6735-6756 (February 26, 1990). 31 55 F.R. 6739. 32 18 U.S.C. § 1913, as amended by P.L. 107-273, § 205(a); 116 Stat. 1778, November 2, 2002. 33 See Section 6 of the Third Deficiency Appropriations Act, FY1919, 41 Stat. 68, chapter 6, § 6, July 11, 1919. As to its applicability only to federal employees, see Grassley v. Legal Services Corporation, 535 F.Supp. 818, 826 n.6 (S.D. Iowa 1982). While the new law eliminates the criminal penalties and substitutes civil fines, there is no indication that anyone had ever been indicted under the provision from its enactment in 1919 to its amendment in 2002. 34 Certain exceptions are provided for federal employees communicating directly to officials concerning the need for legislation or appropriations, and the possibility of a national security or defense exemption. 35 P.L. 104-65, 109 Stat. 691, December 19, 1995, as amended by the Lobbying Disclosure Technical Amendments Act, P.L. 105-166, April 6, 1998, and the ―Honest Leadership and Open Government Act of 2007,‖ P.L. 11081, 121 Stat. 735, September 14, 2007. 36 See exemptions from definition of covered ―lobbying contact,‖ 2 U.S.C. § 1602(8)(B)(xviii), for churches and religious orders that are exempt from filing federal income tax returns under 26 U.S.C. § 6033(a)(2)(A). 37 H.Rept. 104-339, 104th Cong., 1st Sess. at 2 (1995). 38 2 U.S.C. §1603(a)(2). If an organization hires an outside lobbyist or lobbying firm, then that outside lobbyist, if meeting the income and activities thresholds, must register as a lobbyist and list the organization as a ―client.‖ 2 U.S.C. § 1603(a)(1), (3). 39 For instructions and forms, see [http://lobbyingdisclosure.house.gov/index.html]. 40 2 U.S.C. § 1602(10). 41 2 U.S.C. § 1602(8)(A).

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2 U.S.C. § 1602(7). 2 U.S.C. § 1603(a)(3)(A)(ii). The threshold amount is adjusted every four years, 2 U.S.C. § 1603(a)(3)(B). 44 An outside lobbyist needs to register for a particular client when it makes more than one lobbying contact with a covered official, and when its total income from that client for lobbying related matters exceeds $2,500, in a three month (quarterly) filing period. 2 U.S.C. § 1603(a)(3)(A)(i). 45 2 U.S.C. § 1604(b). 46 2 U.S.C. § 1603(b)(3), as amended by P.L. 110-81, Section 207. There are certain exceptions to listing separately participating organizations if such groups are listed publicly on the coalition’s website (unless the organization plans, supervises or controls the activities of the coalition, and then it must be listed in the registration statement). 47 2 U.S.C. § 1604(a)-(c), as amended by P.L. 110-81, Sections 201(a) and 202. 48 2 U.S.C. § 1604(d), as added by P.L. 110-81, Section 203. 49 2 U.S.C. § 1604(d)(1)(G), as added by P.L. 110-81, Section 203. 50 Specifically excluded from the definition of a ―lobbying contact‖ is any communication ―made in a speech, article, publication or other material that is distributed and made available to the public, or through radio, television, cable television, or other medium of mass communication.‖ 2 U.S.C. § 1602((8)(B)(iii). 51 See 2 U.S.C. 1602(8)(B), P.L. 104-65, Section 3(8)(B) for list of 18 express exceptions to the term ―lobbying contacts.‖ 52 2 U.S.C. § 1610(a),(c). 53 H.Rept. 104-339, supra at 23. 54 For a discussions of several considerations, see Richard L. Winston, ―The Lobbying Disclosure Act of 1995 and the Tax Code Elections,‖ Tax Notes, 1391-1399 (June 3, 1996); and Robert A. Boisture, Independent Sector, ―What Charities Need to Know To Comply With the Lobbying Disclosure Act of 1995,‖ in Complying With the Lobbying Disclosure Act of „95 and the New Gift Act Restrictions, 185-208 (Glasser Legal Works, 1996).

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In: Nonprofit and Charitable Sectors: Background and Issues ISBN: 978-1-61122-027-8 Editor: William E. Perkins © 2011 Nova Science Publishers, Inc.

Chapter 3

NONPROFIT SECTOR: TREATMENT AND REIMBURSEMENT OF INDIRECT COSTS VARY AMONG GRANTS, AND DEPEND SIGNIFICANTLY ON FEDERAL, STATE, AND LOCAL GOVERNMENT PRACTICES United States Government Accountability Office

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WHY GAO DID THIS STUDY Nonprofits are key partners in delivering federal services yet reportedly often struggle to cover their indirect costs (costs not readily identifiable with particular programs or projects). This raises concerns about fiscal strain on the sector. To provide information on nonprofits’ indirect cost reimbursement, especially when funding flows through entities such as state and local governments, GAO was asked to review, for selected grants and nonprofits, (1) how indirect cost terminology and classification vary, (2) how indirect costs are reimbursed, and (3) if gaps occur between indirect costs incurred and reimbursed, steps taken to bridge gaps. GAO selected six Departments of Health and Human Services and Housing and Urban Development grants and 17 nonprofits in Louisiana, Maryland, and Wisconsin. GAO selected these agencies for their historical relationship with nonprofits. GAO reviewed policies and documents governing indirect costs and interviewed relevant officials. GAO also reviewed research on nonprofits’ indirect costs.

WHAT GAO RECOMMENDS GAO recommends that the Director of the Office of Management and Budget (OMB) bring together federal, state, local, and nonprofit representatives to help clarify and improve understanding of how nonprofits’ indirect costs should be treated, particularly for grants passed through state and local governments to nonprofits. OMB agreed with GAO’s recommendation.

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United States Government Accountability Office

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WHAT GAO FOUND Depending on the grant program, nonprofits may be reimbursed for indirect costs (generally costs such as rent or utilities), administrative costs (generally cost activities such as accounting or personnel), both, or neither. OMB officials said costs can be classified as either indirect or direct, and administrative cost activities are usually, but not always, classified as indirect costs. However, inconsistencies in the use and meaning of the terms indirect and administrative, and their relationship to each other, has made it difficult for state and local governments and nonprofits to classify costs consistently. This has resulted in varying interpretations of what activity costs are indirect versus administrative. As OMB guidance on cost principles for nonprofits recognizes (2 CFR Part 230), because nonprofit organizations have diverse characteristics and accounting practices, it is not possible to specify the types of costs that may be classified as indirect in all situations. This increases the challenges of administering federal grants and, in some cases, makes it difficult for recipients to determine those activities eligible for indirect cost reimbursement under a particular federal grant and those that are not. GAO found differences in the rate in which state and local governments reimburse nonprofits for indirect costs. These differences, including whether nonprofits are reimbursed at all, largely depend on the policies and practices of the state and local governments that award federal funds to nonprofits. Federal grants often provide wide latitude in setting cost reimbursement policies and practices, and some state and local governments do not reimburse these costs at all. Those that do can often choose the reimbursement rate. As a result, GAO found that variations in indirect cost reimbursement exist not only among different grants, but also within the same grant across different states. GAO found that nonprofits fund indirect costs with a variety of federal and nonfederal funding sources, and that when indirect cost reimbursement is less than the amount of indirect costs nonprofits determine they have incurred, most nonprofits GAO interviewed take steps to bridge the gap. They may reduce the population served or the scope of services offered, and may forgo or delay physical infrastructure and technology improvements and staffing needs. Because many nonprofits view cuts in clients served or services offered as unpalatable, they reported that they often compromise vital ―back-office‖ functions, which over time can affect their ability to meet their missions. Further, nonprofits’ strained resources limit their ability to build a financial safety net, which can create a precarious financial situation for them. Absent a sufficient safety net, nonprofits that experience delays in receiving their federal funding may be inhibited in their ability to bridge funding gaps. When funding is delayed, some nonprofits said they either borrow funds on a line of credit or use cash reserves to provide services and pay bills until their grant awards are received. Collectively, these issues place stress on the nonprofit sector, diminishing its ability to continue to effectively partner with the federal government to provide services to vulnerable populations.

ABBREVIATIONS ACF CPD

Administration for Children and Families Office of Community Planning and Development

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Congressional Research Service Emergency Shelter Grants Department of Health and Human Services Housing Opportunities for Persons with AIDS Internal Revenue Service Department of Housing and Urban Development National Center for Charitable Statistics National Taxonomy of Exempt Entities Office of Management and Budget Promoting Safe and Stable Families American Recovery and Reinvestment Act of 2009 Substance Abuse and Mental Health Services Administration

May 18, 2010

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The Honorable John M. Spratt, Jr. Chairman Committee on the Budget House of Representatives Dear Mr. Chairman: Nonprofit organizations have increasingly become key partners with the federal government in delivering important federal services throughout the nation, including health care, education, housing, and human services. One study estimates that nonprofits received approximately $317 billion from the federal government in fiscal year 2004 for service delivery.1 The Congressional Research Service (CRS) estimates that government grants and payments to the nonprofit sector increased almost 53 percent from 1995 to 2005,2 demonstrating governments’ increased reliance on this sector to deliver public services. The breadth and diversity of nonprofits allow them to tailor services to the specific needs of communities and individuals. However, funding is often limited for the indirect costs associated with providing these services (indirect costs are generally costs such as rent or utilities that cannot be readily identified with a particular service or product). Sometimes costs that would normally be classified as indirect costs are covered in other ways; other times they are not covered at all. As such, we have reported that nonprofits often struggle to cover the costs of doing business, which raises concerns about the long-term financial health and durability of the sector and its ability to effectively deliver federal services and programs.3 Congress recently took steps toward addressing these challenges. For example, the Serve America Act4 increases the limit on nonprofits’ use of program funds for administrative costs from 5 to 6 percent for some federal education grant programs, and the American Recovery and Reinvestment Act of 2009 (Recovery Act)5 makes $50 million available through the Department of Health and Human Services’ Strengthening Communities Fund to help build the capacity of nonprofit organizations. Further, if enacted, the Nonprofit Capacity Building Act of 20096 would establish a nonprofit capacity-building program to award grants for organizational development assistance to small and midsize nonprofit organizations facing resource hardship challenges.

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United States Government Accountability Office

Our prior work identified the need for more information on various aspects of the federalnonprofit relationship, particularly funding received from federal sources.7 Responding to your request for more information on indirect cost reimbursement, especially when federal funding is passed through to nonprofits from other entities such as state and local governments, we reviewed, for selected federal grant programs and nonprofits, (1) how indirect cost terminology and classification vary, (2) how indirect costs are reimbursed, and (3) if gaps occur between indirect costs incurred and reimbursed, steps nonprofits take to bridge the gaps. To achieve our objectives, we selected six federal social services and housing grants from two federal agencies: the Department of Health and Human Services (HHS) and the Department of Housing and Urban Development (HUD). We selected HHS and HUD as our two primary agencies of focus because of their familiarity and historical relationship with nonprofit organizations. Within these agencies, we selected grants based on their design to fulfill a range of housing and social service needs. The selected grants are 



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

Promoting Safe and Stable Families (PSSF) grant and Family Violence Prevention and Services/Grants for Battered Women’s Shelters administered by HHS’s Administration for Children and Families (ACF), Block Grants for Community Mental Health Services and Block Grants for Prevention and Treatment of Substance Abuse administered by HHS’s Substance Abuse and Mental Health Services Administration (SAMHSA), and Emergency Shelter Grants8 (ESG) and Housing Opportunities for Persons with AIDS Grant (HOPWA) administered by HUD’s Office of Community Planning and Development (CPD).

We reviewed federal statutes for the six grants we studied, as well as Office of Management and Budget (OMB), HHS, and HUD documents, guidance, and policies governing the treatment of indirect costs. We also interviewed budget and program officials at these agencies. We selected three states—Louisiana, Maryland, and Wisconsin—and more than 20 local government and nonprofit organizations to which these states award federal funding under some or all of the six grants. These states and nonprofits were selected based on criteria such as amount of HHS and HUD funding received, population, and geographic dispersion. We reviewed documents, guidance, and policies governing the treatment of indirect costs from these states, local governments, and nonprofits, and interviewed budget and program officials in these organizations. Further, we interviewed officials from nonprofit associations, such as the National Council of Nonprofits and the Nonprofit Finance Fund. We also conducted a literature review of research on nonprofits’ indirect costs, and determined that the studies we included in our work are methodologically sound. This research is referenced throughout our report, where applicable. We conducted this performance audit from October 2008 to May 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Although the illustrative examples in this review cannot be generalized to all federal grant programs, state and local governments, or nonprofit organizations, we believe

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they provide valuable insight into the challenges of indirect cost classification and the funding relationship between the federal government and the nonprofit sector. Appendix I contains more details on our scope and methodology.

BACKGROUND Federal grants are forms of financial assistance from the government to a recipient for a particular public purpose that is authorized by law. Federal grant funds flow to the nonprofit sector in various ways, as shown in figure 1. Some grant funds are awarded directly to nonprofits, while others are first awarded to states, local governments, or other entities and then awarded to nonprofit service providers.9 Federal laws, policies, regulations, and guidance associated with federal grants apply regardless of how federal grant funding reaches the final recipients. Some federal grant programs contain statutory limits on administrative cost reimbursement for state and local government grantees. Additionally, some federal grant programs predetermine a limit for subgrantees (see table 1 for the statutory limits on the six grants we reviewed). OMB circulars A-87 and A-12210 provide guidance to state and local governments and nonprofits on classifying costs as direct or indirect and direct state and local governments to employ the necessary management techniques in order to efficiently and effectively administer federal awards. OMB circulars A-87 and A-122 generally define direct and indirect costs as follows:

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

Direct costs are those that can be identified specifically with a particular final cost objective, that is, a particular award, project, service, or other direct activity of an organization.

Source: GAO. Figure 1. Examples of How Federal Funds Flow to Nonprofit Organizations

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Table 1. Statutory Limits on Administrative Costs for Selected HHS and HUD Grants Federal agency HHS

Operational division/ subcomponent SAMHSA

Grant

Percentage limit

Block Grants for Substance Abuse Prevention and Treatment

Five percent limitation on reimbursement for administrative expenses for states Five percent limitation on reimbursement for administrative expenses for states Ten percent limitation on reimbursement for administrative costs for states Five percent limitation on reimbursement for administrative costs for states A recipient may use up to 5 percenta for administrative purposes; a recipient state shall share this amount with local governments funded by the state Grantees can receive up to 3 percent for administrative costs; Project sponsorsb can receive up to 7 percent for administrative costs

HHS

SAMHSA

Block Grants for Community Mental Health Services

HHS

ACF

Promoting Safe & Stable Families Grant

HHS

ACF

HUD

CPD

Family Violence Prevention Services/Battered Women’s Shelters Grant Emergency Shelter Grants (ESG)

HUD

CPD

Housing Opportunities for Persons with AIDS Grant (HOPWA)

Federal statute authorization Part B of Title XIX of the Public Health Service Act, 42 U.S.C. § 300x-31 Part B of Title XIX of the Public Health Service Act, 42 U.S.C. § 300x-5 Promoting Safe and Stable Families Act, 42 U.S.C. § 629-629e Family Violence Prevention and Services Act 42 U.S.C. § 10401 McKinney-Vento Homeless Assistance Act, Title IV, Subtitle B, 42 U.S.C. § 11378

AIDS Housing Opportunity Act, 42 U.S.C. § 12901

Source: GAO analysis of applicable program statutes and regulations. a The Homeless Emergency Assistance and Rapid Transition to Housing Act of 2009 increased the percentage limit for administrative purposes from 5 percent to 7.5 percent effective November 20, 2010, or 3 months after the Secretary of HUD issues final regulations implementing the act. Pub. L. No. 111-22 (2009). b Project sponsors are nonprofit organizations or state or local government housing agencies that contract with a grantee to provide HOPWA assistance.

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Indirect costs are those that have been incurred for common or joint objectives and are not readily assignable to the cost objectives specifically benefited, without effort disproportionate to the results received. A cost may not be allocated to an award as an indirect cost if any other cost incurred for the same purpose, in like circumstances, has been assigned to an award as a direct cost. Direct costs of minor amounts may be treated as indirect costs under certain conditions. Recognizing that nonprofit organizations have diverse characteristics and accounting practices, the guidance states that it is not possible to specify the types of cost that may be classified as indirect costs in all situations. Whether a nonprofit classifies costs as direct or indirect is often a result of the organization’s ability to link costs to a particular program.

OMB Circular A-122 guidance to nonprofits further divides indirect costs into two broad categories: facilities and administration. 



Facilities costs generally include costs related to the ―depreciation and use allowances on buildings and equipment, as well as operations and maintenance expenses.‖ Administration costs generally include ―general administration and expenses such as the director’s office, accounting, personnel, library services and all other expenses not listed under facilities.‖

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OMB Circular A-133 provides general guidance on the roles and responsibilities of the federal awarding agencies and primary recipients of government funds regarding audit requirements of grantees.11 It sets forth standards for obtaining consistency and uniformity among federal agencies for the audit of states, local governments, and nonprofit organizations expending federal awards totaling $500,000 or more annually. Among other responsibilities, it gives 



federal awarding agencies the responsibility to advise recipients of requirements imposed on them by federal laws, regulations, and the provisions of contracts or grants and primary recipients the responsibility to identify grant awards; advise subrecipients of requirements imposed on them by federal laws, regulations, and the provisions of contracts or grant agreements as well as any supplemental requirements; and monitor the implementation of the grants.

Awarding agencies and all recipients and subrecipients of federal grant funds must comply with certain data collection, record-keeping, and reporting requirements to help monitor grant implementation. These requirements differ across grants and are determined by the federal awarding agency, federal law, or both. State and local governments sometimes impose additional requirements on their subgrantees.

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INCONSISTENCIES IN TERMINOLOGY LEAD TO CHALLENGES IN COST CLASSIFICATION, WHICH CAN RESULT IN UNEVEN TREATMENT OF COSTS Understanding OMB guidance regarding the relationship between indirect and administrative costs is particularly challenging for state and local governments and nonprofits. According to OMB officials, the terms ―direct‖ and ―indirect‖ can be thought of as ways to classify costs; that is, they are ―cost buckets.‖ In contrast, the term ―administrative‖ refers to a cost function or activity—such as accounting, procurement, personnel, or budgeting. On the one hand, OMB Circular A-122 cost guidance to nonprofits indicates that administrative costs are usually but not always indirect costs; on the other hand, that same guidance lists ―administration‖ costs as one of two categories of indirect costs. Further, OMB Circular A-87 cost guidance to state and local governments uses the terms indirect and administrative interchangeably in certain places. Taken together, the OMB guidance can be viewed as ambiguous. Guidance is most useful when it is clear and well understood. OMB officials told us that given the uncertainty and confusion with respect to these definitions and their application, it may be helpful to bring federal, state, and local officials together with representatives from nonprofit organizations to discuss these issues. Doing so, they acknowledge, could help clarify and improve understanding of how indirect costs should be treated. Classifying similar costs differently can make it difficult to determine how much money grantees receive for cost activities typically thought of as indirect, and at what rate. For example, the ESG program provides states or local government grantees up to 5 percent for administrative costs. As the primary recipients of ESG funds, states are required to share at least a portion of this funding with local government subgrantees; however, there is no such requirement for cost sharing with nonprofits. Thus, on its face it may appear as if ESG provides no administrative cost reimbursement for nonprofits. However, the ESG statute allows some emergency shelter costs, such as rent and utilities, which are typically thought of as indirect costs, to be claimed as a direct cost under ESG’s ―operating costs‖ activity—one of five direct program activities for which subgrantees may be reimbursed.12 In another example, the statute for the HOPWA grant program limits administrative cost reimbursement for project sponsors to 7 percent. Because administrative costs can either be charged as direct or indirect costs depending on the circumstance, and because HOPWA has no explicit limit on indirect costs, it is difficult to accurately characterize cost reimbursement for activities commonly thought of as indirect. When grants and grantees classify similar costs differently it can also result in the same cost activity being covered for some nonprofits but not others, and can increase the complexity of administering the grants. Nonprofit association officials told us that because grant award packages and federal guidance contain unclear or conflicting information on how to allocate costs, nonprofits sometimes unknowingly exclude eligible expenses in their calculation of administrative costs and, as a result, limit their own reimbursement potential.13 Further, some of the nonprofit and association officials we spoke with said that because grant programs have different definitions of indirect costs, they must take care to reconcile their own accounting systems with the requirements of each grant they receive to ensure that they properly account for the funds. They also said that this is time consuming and resource

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intensive, and that more consistent classifications and treatment across federal grants would simplify grant administration and may reduce costs. We and others have previously reported that federal grant programs sometimes classify similar or identical costs differently. In 2006, we reviewed seven programs from HHS, and the Departments of Agriculture and Labor, and found that the legal definitions of and the federal funding rules for administrative costs varied even though many of the same activities were performed to administer the programs.14 The report noted that the statutes and regulations that define administrative costs for these programs differ in part because the programs evolved separately over time and have different missions, priorities, services, and clients. Further, the report noted that a number of state budget officials said that varying definitions of administrative costs create challenges for them. For example, one said that it can be difficult to develop coding for accounting and budgeting that can be used across programs and, as a result, it can be difficult to monitor costs accurately; another shared this concern and said that consistent definitions of and caps for administrative costs would make it easier to allocate costs across programs and, therefore, might reduce costs. This concern is not new; in a 2002 report on tax-exempt organizations, we reported that different approaches for charging expenses, as well as different allocation methods, can result in charities with similar types of expenses allocating them differently.15 Even though the terms indirect costs and administrative costs are not synonymous, we found that some nonprofit, state, and local government officials we spoke with use them interchangeably. A national nonprofit association official made a similar observation, noting that terminology varies throughout the nonprofit sector. State and local government and nonprofit officials we spoke with also reported using other terms, such as overhead, general operating expenses, or management and general expenses, synonymously with indirect and administrative costs. A 2007 report on nonprofits’ overhead costs also discussed widespread confusion about indirect costs throughout the sector, and identified ―variations in definitions of overhead and the overhead cost rate‖ as areas of concern among nonprofit researchers and practitioners.16 The report also concluded that there is a substantial difference between indirect costs and administrative costs, noting that not all indirect costs are administrative, such as the costs of a telemarketing campaign, which is a programmatic or fundraising function. The report also said that there are administrative costs that are direct costs, such as those for the computers and office supplies used by the finance department.17 Inconsistencies in guidance in grant award packages and across federal programs add to the challenge of administering federal grants. For example, officials from a Louisiana nonprofit said that one federal contract may allow them to charge rent as a direct cost, while another federal contract states that it is to be charged as an indirect cost. These officials told us that they should be able to ―call an apple, an apple….every time.‖ In another example, HUD’s supplemental guidance for HOPWA recipients advises that in reviewing administrative and indirect costs, recipients should keep in mind that ―all administrative costs are indirect costs, but not all indirect costs are administrative costs.‖ Conversely, in describing HHS’s PSSF grant and the Family Violence Prevention Services/Battered Women’s Shelter grant, ACF officials explained that administrative costs can be either direct or indirect costs.

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Source: GAO analysis of HHS , state and local government, and nonprofit information. Note: These examples depict how funds flow to the specific nonprofit subrecipients included in our sample; other pass-through relationships also exist in these states for this particular grant. Figure 2. Examples of How Reimbursement for Nonprofits’ Indirect and Administrative Costs for the Promoting Safe and Stable Families Grant (PSSF) Varies across States

NONPROFITS’ REIMBURSEMENT FOR INDIRECT COSTS LARGELY DEPENDS ON FEDERAL, STATE, AND LOCAL GOVERNMENT PRACTICES For the majority of grants in our review, we found that state and local government grantees are allowed to decide whether or not and how much they reimburse nonprofit subgrantees for their administrative or indirect costs. In all three states we reviewed, we found differences in the rates at which state and local governments reimburse nonprofits for indirect costs. These differences, including whether nonprofits are reimbursed at all, largely depend on the policies and practices of the state and local governments that award federal funds to nonprofits. State and local governments may apply the same indirect cost limit to all subgrantees or may choose to apply different indirect cost limits to different subgrantees. For example, for all subgrantees who receive funds under the Block Grants for Community

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Mental Health Services and the Prevention and Treatment of Substance Abuse, the Louisiana Department of Health and Hospitals limits indirect cost reimbursement to 12 percent. Other state and local government agencies, such as the Wisconsin Department of Health Services, work with individual subgrantees to determine an indirect cost reimbursement rate. Officials from the department told us that they often assist subgrantees in determining how to classify costs; this helps to determine what costs to reimburse as indirect, and at what rate. The amount of funding passed through to nonprofits can also be affected by the amount of funding a state or local government uses for its own administrative costs. For example, according to a Dane County, Wisconsin official, Dane County receives 10 percent for administrative and indirect costs for the PSSF grant from the state of Wisconsin and passes the entire amount on to its nonprofit service providers; this increases the amount of funds available to nonprofits. However, some state and local governments we spoke with interpret statutory limitations on their own administrative costs as necessarily limiting the administrative and indirect costs allowable by the grant for all subgrantees. Although states often enjoy wide latitude in determining the administrative and indirect reimbursement rates of their subgrantees, applying a more specific interpretation of federal statute potentially limits the amount of funds available to nonprofits. Variations in cost coverage exist not only among different grants across different states, but also within the same grant across different states. For example, for the PSSF grant, states may retain up to 10 percent of the grant award to pay for their own costs to administer this grant, or they may pass this amount through to the nonprofit service providers to which they award PSSF grants. In addition, states may determine the allowable level of indirect cost reimbursement for the nonprofit service providers to whom they award PSSF grants. As shown in figure 2, three nonprofits that receive funding under the PSSF grant in Louisiana, Maryland, and Wisconsin are reimbursed for their indirect costs, administrative costs, or both at different rates (9.4 percent, 0 percent, and 14 percent, respectively). The differences among reimbursement rates for these nonprofits may in part be due to the presence or absence of an indirect cost rate agreement. Primary recipients of federal funds are required to have a federal indirect cost rate agreement in order to be reimbursed for indirect costs. There is no such requirement for recipients that receive federal funds that first flow through entities such as state and local governments. Five of the 17 nonprofits in our sample have federal agreements. However, state and local governments are not required to consider or honor federal indirect cost rate agreements when awarding federal funds. Some state and local governments negotiate a similar indirect cost rate agreement directly with subrecipients; others do not.

WHEN NONPROFITS REPORT DIFFERENCES BETWEEN INDIRECT COSTS INCURRED AND REIMBURSED, THEY TAKE A VARIETY OF STEPS TO BRIDGE GAPS Nonprofits Fund Indirect Costs from a Variety of Sources To help cover their indirect costs, nonprofits reported using funding from a variety of sources in addition to federal funds, such as capacity-building grants, private donations,

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fundraising, endowment funds, and business income generated from services provided.18 For example, some of the nonprofits we spoke with operate fee-for-service furniture restoration, repair shop, and batterers’ treatment programs. A Wisconsin nonprofit official said that the United Way recognizes the challenges nonprofits face in receiving reimbursement for indirect costs and provides unrestricted funding to help cover them. Other nonprofit officials we spoke with, however, reported that these grants can be difficult to secure. A November 2009 CRS report noted, perhaps not surprisingly, that charitable giving declined during the recent recession.19 For some nonprofits the decline comes at a time when their services may be in greater demand, which can further strain resources. Nonprofits also rely on in-kind donations and volunteer labor to help cover costs. For example, nonprofits reported receiving food donations from local restaurants, furniture donations, and facilities repairs by nonprofit board members. One Louisiana nonprofit official said that in-kind and volunteer labor is essential for her organization’s ability to provide services, and it received $160,000 in volunteer labor in 2008. However, nonprofit officials also noted that while the use of volunteer labor is valued, it is not ―free,‖ as volunteers may require additional supervision and training.

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Nonprofits Take Steps to Bridge Reported Funding Gaps Fifteen of the 17 nonprofits in our sample reported that funding received for indirect costs does not cover their actual indirect costs.20 A nonprofit official whose organization receives a HUD grant from the state of Wisconsin said that his organization is authorized to claim 5 percent for administrative costs associated with delivering supportive housing program services, but that amount does not cover the costs of administering the program. In another example, recipients of the Family Violence Prevention Services/Grants for Battered Women’s Shelters grants in all three states reported receiving no indirect cost reimbursement, but their overall organizational indirect costs ranged from about 8 to 11 percent.21 Similarly, nonprofit subrecipients of ESG funding across all three states reported no indirect cost reimbursement from state and local governments. The overall organizational indirect costs for these nonprofits ranged from 1.8 to 20 percent. These self-reported levels are generally in line with an Urban Institute study that analyzed the 1999 tax returns of approximately 160,000 healthrelated and human services nonprofits,22 and reported average management and general expenses of 17 and 16 percent, respectively. Although nonprofits’ fiscal challenges are not limited to indirect cost funding, as noted above, funding sources that can be used to cover indirect costs can be difficult to come by. As such, it is particularly important to understand steps nonprofits take to bridge gaps when they report gaps between indirect costs incurred and reimbursed. We found that nonprofits often respond by reducing service levels, compromising infrastructure and staff investments, or both, and that these cost-cutting measures can limit nonprofits’ ability to build a financial safety net.

Reduced Service Levels Several nonprofits we spoke with said at the time of our interviews they had reduced the size of their programs and populations served as a result of gaps in funding for direct and

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indirect costs. For example, a Louisiana nonprofit official said that his organization scaled back its housing and shelter services 10 to 15 percent even though its mission is to serve all at-risk youth in need of these services. As a result, he said, the nonprofit now has a waiting list for its residential services. A Maryland nonprofit official told us that the organization’s psychiatric rehabilitation program was one of the largest in the state. However, according to this official, the level of reimbursement his organization received from government sources led to the nonprofit reducing the program’s size in order to remain viable. A 2008 study that examined several nonprofits also discussed negative effects on nonprofits’ capacity to provide services due to funding gaps, noting that as a result of funding gaps in the short term, staff members struggle to provide more services but with fewer resources.23 Nonprofits we spoke with also reported reducing the range of services they offered. An official from a Maryland nonprofit whose mission includes providing housing, employment services, and job referrals, said that the organization once provided a computer lab with a part-time computer instructor for its clients as part of its General Education Development services. The official said that in an effort to more closely align costs incurred with costs reimbursed, the nonprofit eliminated the instructor position because it was not directly related to the organization’s primary mission of providing supportive housing and housing placement. Officials from a Maryland drug and alcohol rehabilitation nonprofit told us that they discontinued a vocational education program for similar reasons.

Compromised Infrastructure Investments Many nonprofits compromise vital facilities maintenance and ―back-office‖ support functions, such as information technology systems, to avoid reducing their services. Almost half of the nonprofits we spoke with reported making such trade-offs. For example, a Louisiana nonprofit said that it does not have an updated security system that adequately protects the victims of domestic violence that it serves, which directly affects the nonprofit’s ability to fulfill its mission—providing a safe space for victims of domestic violence. We also observed ceilings that were in disrepair when we toured this nonprofit’s facility. An official from a Maryland nonprofit said that her staff makes personal sacrifices to sustain services, such as working in dark offices to conserve electricity costs or bringing supplies from home. Wisconsin nonprofit officials reported that their medical and dental appointment systems are not integrated, inhibiting their ability to better serve their patients. The experiences of these nonprofits are consistent with other studies’ findings that tradeoffs in facility maintenance can hinder nonprofits’ ability to effectively carry out their mission in the long term. A 2007 study on the financial health of the human service providers in Massachusetts said that providers may defer routine costs, such as facility maintenance and other critical infrastructure investments, when they lack indirect cost funding.24 A 2008 study suggested that funders have unrealistic expectations for nonprofits’ indirect costs, which can lead nonprofits to underinvest in infrastructure that is needed to maintain or improve standards for service delivery.25 A 2008 study on the administrative management capacity of 16 select nonprofit programs noted that many organizations cite a lack of resources for information technology infrastructure needs and that some organizations in the study reported that they cannot meet technology needs beyond a basic level of functionality.26 The study also reported that these organizations lack sufficient strategic and long-term planning for future information technology needs and equipment and software updates.

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Compromised Staff Investments Nonprofits often report that they forgo staff investments or reduce or freeze salaries to avoid reducing services. Officials from 10 of 17 nonprofits we spoke with said that at the time of our interviews they had delayed filling vacant positions or have eliminated positions to cover costs. For example, officials from a Maryland nonprofit eliminated a development position and trained a receptionist to assume other responsibilities. As a result, the organization lacked a dedicated receptionist during business hours, which makes it more challenging to respond to clients’ needs. A Wisconsin nonprofit said that it has not hired a medical coder—a position that would allow the doctors in the organization to devote more time to seeing patients instead of on administrative paperwork. Another Wisconsin nonprofit official reported instituting a voluntary leave without pay program during the summer months to reduce salary costs. Another Maryland nonprofit official explained that because she cannot attract qualified staff at the salary she is able to offer, she usually hires people with very little experience who require a significant amount of training and supervision. Similarly, officials from a third Maryland nonprofit said that they are unable to provide salary increases or costof-living adjustments for their staff and have had to cut benefits. Other studies have shown that nonprofits may also leave positions vacant to realize savings, which can have adverse quality implications. A 2008 study found that program staff at the 16 nonprofits in the study often take on administrative tasks, such as recruitment processes and site maintenance, to bridge gaps in administrative infrastructure and support; as a result, program staff devote less time to activities more directly tied to service delivery and quality programming.27 A 2004 study on nonprofit overhead costs reported that limited or no staff for administrative functions limited nonprofits’ ability to manage and monitor finance, development, and other important functions.28 A 2007 study noted that staff salaries and benefits of the human service providers in Massachusetts do not appear to keep pace with increases in the overall cost of living. It further noted that the relatively low wages can limit the qualifications and level of experience of many direct care workers and can lead to rapid staff turnover.29 A 2004 study on nonprofit overhead costs discussed how challenges in recruiting and retaining qualified staff compromised nonprofits’ effectiveness, noting that key positions are filled by individuals with little relevant experience and training, and once staff gain relevant experience, they seek employment at organizations with higher salaries, leading to high turnover for nonprofits.30 Limited Ability to Build a Financial Safety Net Nonprofits’ strained resources also limit their ability to build financial reserves for unanticipated expenses. Officials at a Louisiana nonprofit said that their ability to build a financial safety net is limited because they struggle to cover their costs and do not have money left over to save. A nonprofit association official said that nonprofits sometimes cannot set aside sufficient cash reserves to cover unforeseen costs, such as a broken boiler. To address unexpected costs, nonprofits often draw from their program costs where possible, which can lead to a decline in program quality. Other studies also reported on financial sustainability challenges for nonprofits. Nonprofit financial management experts have recommended that nonprofits maintain cash reserves sufficient to fund 3 months of operating expenses. A 2009 study on the operating reserves of over 2,000 Washington, D.C. area nonprofits reported that in 2006, 57 percent of the operating public charities in the Greater

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Washington area had operating reserves of less than 3 months; 28 percent of these organizations reported no operating reserves.31 A 2008 study on the administrative management capacity of select nonprofit programs reported that half of the nonprofits in the study do not maintain the recommended level of reserves.32 Finally, a 2007 study reported that one-third of the more than 600 Massachusetts providers in its sample had less than 15 days’ cash at the ends of their fiscal years; another quarter have only 3 to 4 weeks of cash at the ends of their fiscal years.33 Given recent economic conditions, the need for sufficient cash reserves may be particularly important.

Untimely Reimbursements and High Grant Administration Costs Exacerbate Nonprofits’ Reported Funding Gaps

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A November 2009 CRS report noted that (1) in addition to funding cuts, states apparently have been delaying payments for services they have contracted with nonprofits to provide; and that (2) it appears that governments, particularly state governments, may be contributing to the financial difficulties of nonprofit organizations.34 During the course of our work, we spoke with nonprofits that made similar observations. Factors such as untimely reimbursements and high grant administration costs can place stress on the nonprofit sector, diminishing its ability to continue to provide services to vulnerable populations. OMB officials acknowledged that building nonprofits’ capacity to manage may help nonprofits better contend with these issues and continue to meet their missions.

Untimely Reimbursements Untimely receipt of government grant and contract payments contributes to financial strain on nonprofits. Six of the 17 nonprofits in our study reported that their reimbursements from federal, state, and local governments are delayed at times, which can cause cash flow problems and undermine their sustainability. For example, an official from a Maryland nonprofit said that her organization was awarded an HHS grant from the state of Maryland in October 2008 but did not actually receive the funding until May 2009. Maryland nonprofit officials said they sometimes experience 15- to 30-day delays in reimbursement from the state of Maryland. One Maryland nonprofit official said delays such as these create a ―cash-flow nightmare‖ for her organization. The nonprofit has a line of credit it can draw on to tide it over until it receives grant payments, but this increases costs because it incurs interest and fees on the line of credit, which are not reimbursed. Three of the nonprofits in our study said that smaller nonprofits without cash reserves or lines of credit rely on timely payments to sustain their operations. They said that even small delays put these nonprofits at risk of failure. Some state and nonprofit association officials we spoke with, however, said that reimbursement delays also occur when nonprofit staff are so busy operating programs that they do not keep up with filing invoices in a timely manner; as a result, when nonprofits most need the money, it is not available. We and others have also cited challenges nonprofits face as a result of delayed reimbursements from federal, state, or local governments. In 2006 we reported that recipients of selected federal grants reported that delayed awards create significant burden on them and limit their ability to plan for and efficiently execute grant programs.35 Grant recipients noted

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that they often received award notifications significantly later than they had anticipated, sometimes months after the expected award date provided in the opportunity announcement. These uncertainties and delays caused significant problems in planning for and executing grant projects. Grant recipients in this study suggested that agencies should award grants in a more timely way or provide more precise information on when an award could be expected. A 2007 study on the financial health of the human service providers in Massachusetts noted that when an organization with limited cash experiences unexpected delays in the receipt of income, a crisis situation can occur.36 A 2002 study that reviewed prior research on this topic noted that when government agencies are delayed in approving contracts or grant payments, recipient organizations often experience cash flow problems.37 Consistent with comments from the nonprofits we interviewed, this chapter suggested that payment delays are especially difficult for smaller and new organizations because they do not have established mechanisms to withstand delayed or unpredictable funding.

Costs of Administering Grants The high costs of grant administration sometimes discourage nonprofits from applying for grant funds. Three nonprofits we interviewed reported that they do not seek additional government grants or may not reapply for grants they currently receive for this reason. For example, a Maryland nonprofit official stated that her organization is eligible for a Recovery Act grant program that provides services to youth, but she is hesitant to take on the project because the grant’s administrative reimbursement rate is 3 percent, which would not cover the cost of administering the grant.38 Over half of the nonprofits in our study said that administrative reporting requirements make it challenging to administer grants they receive. Officials from a Louisiana nonprofit told us that complying with reporting requirements for the more than 20 federal grants they manage requires a significant amount of staff resources. A Maryland nonprofit official explained that some of the nonprofits’ federal grants are ―big, complex, and complicated‖ to acquire and manage because it does not have a dedicated grants management team and establishing one would redirect resources away from other areas. Likewise, officials from a Wisconsin nonprofit said that complying with the county’s challenging bureaucratic process requires a significant amount of time that could otherwise be spent on mission-related activities, and that the organization regularly loses money as a result of these requirements. We and others have previously reported on the challenges facing nonprofits in administering grants. In July 2007, we testified that practitioners and researchers alike acknowledged the difficulty that nonprofit organizations, particularly smaller entities, have in responding to the administrative and reporting requirements of their diverse funders.39 We said that although funders need accountability, the diverse requirements of different funders make reporting a time-consuming and resource-intensive task. For example, meeting the increasing expectations that nonprofits measure performance, given the size of grants and the evaluation capabilities of the staff, can be difficult. One researcher said that performance evaluation is one of the biggest challenges they face. A 2002 study, which included an analysis of Internal Revenue Service (IRS) Forms 990 from 1,172 nonprofit organizations from 1985 to 1995, found that for some nonprofits, an increase in government funding is positively correlated with an increase in the share of administrative expenses the following year, which could be the result of the costs associated with obtaining contracts and the challenges of meeting accountability and reporting requirements.40 Similarly, a 2004 study on

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nonprofit overhead costs of 9 nonprofit organizations reported that the nonprofits with the weakest organizational infrastructures received half or more of their revenue from public sector sources, and that the public sector practice of providing little support for overhead costs was directly associated with the organizational weaknesses at these nonprofits.41

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CONCLUSIONS Federal, state, and local governments rely on nonprofit organizations as key partners in implementing programs and providing services to the public, such as health care, human services, and housing-related services. Nonprofits’ ability to determine and manage their indirect costs is affected by inconsistencies in terminology and guidance across federal programs on how to classify costs. Further, varying reimbursement practices by state and local governments that award federal funds affect the rate at which indirect costs are covered. Absent a clear understanding among federal, state, local, and nonprofit officials about how to interpret OMB’s indirect cost guidance and consistently classify activities typically thought of as indirect costs, nonprofits will likely continue to struggle with accurately and consistently reporting on their indirect and administrative costs of doing business, and a clear picture of the true gap between actual and reimbursed indirect costs will remain elusive. As the federal government increasingly relies on the nonprofit sector to provide services, it is important to better understand the implications of reported funding gaps, such as compromised quality of important administrative functions, including information technology, human resources, legal, and accounting operations. Such gaps further limit nonprofits’ capacity to correctly determine how indirect costs should be treated. Collectively, these challenges potentially limit the sector’s ability to effectively partner with the federal government, can lead to nonprofits providing fewer or lower-quality federal services, and, over the long term, could risk the viability of the sector. Given OMB’s role in federal grants management, OMB is in a unique position to convene stakeholders to review these issues.

RECOMMENDATION FOR EXECUTIVE ACTION GAO recommends that the Director of OMB bring together federal, state, and local governments, and nonprofit representatives to propose ways to clarify and improve understanding of how indirect costs should be treated, particularly for grants passed through state and local governments to nonprofits by  

clarifying the definitions of indirect costs and administrative costs and their relationship to each other and considering ways to help nonprofits improve their understanding and ability to better capture, categorize, report, and recover indirect and administrative costs.

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APPENDIX I: OBJECTIVES, SCOPE, AND METHODOLOGY

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Our objectives were to provide information for selected federal grant programs and nonprofits on (1) how indirect cost terminology and classification vary, (2) how indirect costs are reimbursed, and (3) if gaps occur between indirect costs incurred and reimbursed, steps nonprofits take to bridge the gaps. To address our objectives and obtain information on federal grants initially awarded to state and local governments and passed through to nonprofit service providers and the impact of indirect cost funding on nonprofits, we used several approaches. These included selecting a nonprobability sample42 of federal grants, states, and nonprofits to serve as case studies and conducting a literature review to analyze published work related to this topic. The scope of the third objective was broader to include the perspectives of nonprofits that receive any federal funding, direct or pass-through. We also interviewed nonprofit association officials. First, we selected six federal grant programs—four from the Department of Health and Human Services (HHS) and two from the Department of Housing and Urban Development (HUD)—of 26 grant-making federal agencies that offer over 1,000 grant programs annually. We selected HHS and HUD as our two primary agencies of focus because of their familiarity and historical relationship with nonprofit organizations. HHS and HUD grants address many of the National Taxonomy of Exempt Entities (NTEE) classifications related to social and housing services. The NTEE classification system for nonprofits was devised by the Urban Institute’s National Center for Charitable Statistics (NCCS), which is a national clearinghouse of data on the nonprofit sector in the United States. NTEE classifications are widely referenced by the Internal Revenue Service and nonprofit researchers and practitioners. HUD and HHS grants address NTEE categories such as:        

Human Services Housing and Shelter Agriculture, Food, Nutrition Community Improvement, Capacity Building Youth Development Health Care Mental Health/Crisis Intervention Civil Rights, Social Action, Advocacy

As shown in table 2, the six grants selected are designed to fulfill missions consistent with most of the NTEE categories listed above. Second, we selected three states for our case study—Louisiana, Maryland, and Wisconsin—as well as local governments within those three states, as appropriate. As part of our criteria for selecting states, we considered the following: 

Levels of HHS and HUD funding: We included states that receive varying levels of HHS and HUD funding to observe how indirect cost funding needs may be related to the amount of grant funding received by a state.

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Population: We included states with different population sizes to allow us to examine potential implications for states that need to provide services to larger numbers of persons. Geographic dispersion: We included states that were geographically dispersed to allow for regional representation across the country and diversity with respect to the population receiving services; the economic climate of the area; and other regional, cultural, and demographic characteristics.

Third, we selected 17 501(c)(3) nonprofit organizations from Louisiana, Maryland, and Wisconsin that receive at least one of the six grants we selected. 501(c)(3) organizations are public charities that are eligible to receive federal funding to support their missions of providing for the public benefit. The nonprofits we selected had varying missions and represented a wide range of operating budgets, from less than $1 million to more than $25 million.

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Table 2. Description of Selected Grants for Our Study Grant name Promoting Safe and Stable Families

Agency HHS

Division Administration for Children and Families

Purpose To prevent the unnecessary separation of children from their families; improve the quality of care and services to children and their families; and ensure permanence for children by reuniting them with their parents, by adoption or by another permanent living arrangement

Family Violence Prevention and Services/Grants for Battered Women’s Shelters

HHS

Administration for Children and Families

To support intervention and prevention of domestic violence

Block Grants for Community Mental Health Services Block Grants for Prevention and Treatment of Substance Abuse

HHS

Substance Abuse and Mental Health Services Administration

To enable states to provide comprehensive community mental health services

HHS

Substance Abuse and Mental Health Services Administration

To support the development and implementation of prevention, treatment, and rehabilitation activities related to alcohol and drug abuse

Emergency Shelter Grants

HUD

Office of Community Planning and Development

To provide homeless persons with basic shelter and essential supportive services

Housing Opportunities for Persons with AIDS

HUD

Office of Community Planning and Development

To provide housing assistance and supportive services to persons with AIDS

Source: GAO analysis of HHS and HUD information.

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Once we selected our case study grants, states, and nonprofits, we reviewed Office of Management and Budget (OMB), HHS, and HUD documents, guidance, and policies governing the treatment of indirect costs, and interviewed budget and program officials at the three agencies. Further, we reviewed documents, guidance, and policies governing the treatment of indirect costs from the selected states, local governments, and nonprofits. We also interviewed budget and program officials from state and local government entities as well as from nonprofit organizations. To further corroborate the information obtained from our case studies, we reviewed existing research related to nonprofits’ indirect costs and overall financial health. We used several search strategies to identify existing studies. Through snowball sampling techniques, we identified research and received study referrals from numerous nonprofit researchers and other nonprofit groups. We conducted searches of several automated databases, including Checkpoint, the Government Printing Office’s Catalog, ProQuest, Lexis Nexis, Academic OneFile, and FirstSearch. We also searched the OMB website, Congressional Research Service website, and the Federal Audit Clearinghouse. We searched on various combinations of the following terms: nonprofit, indirect cost, administrative cost, cost, overhead funding, nonprofit funding, overhead, administrative, pass through, grant, grantee, federal, fund, gap, and tradeoffs. Finally, search results were limited to studies published after 1995. Through our referrals and literature searches, we identified eight studies and reports that were relevant to our work. We reviewed the studies we included in our work to ensure that they were methodologically sound.

End Notes

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1

A. Abramson, L. Salamon, and C. E. Steurle, ―Federal Spending and Tax Policies: Their Implications for the Nonprofit Sector,‖ Nonprofits and Government, 2nd Edition, eds. E. Boris and C. E. Steurle (Washington, D.C.: The Urban Institute Press, 2006), p. 118. 2 Congressional Research Service, An Overview of the Nonprofit Charitable Sector, R40919 (Washington, D.C.: Nov. 17, 2009). 3 GAO, Nonprofit Sector: Increasing Numbers and Key Role in Delivering Federal Services, GAO-07-1084T (Washington, D.C.: July 24, 2007). 4 Pub. L. No. 111-13 (2009). 5 Pub. L. No. 111-5 (2009). 6 S. 609, 111th Cong. (1st Sess. 2009). 7 GAO-07-1084T, and GAO, Nonprofit Sector: Significant Federal Funds Reach the Sector through Various Mechanisms, but More Complete and Reliable Funding Data Are Needed, GAO-09-193 (Washington, D.C.: Feb. 26, 2009). 8 The Homeless Emergency Assistance and Rapid Transition to Housing Act of 2009 changed the name of this program from the Emergency Shelter Grants to the Emergency Solution Grants effective November 20, 2010, or 3 months after the Secretary of Housing and Urban Development issues final regulations implementing the act. Pub. L. No. 111-22 (2009). 9 Federal grant funding may also be awarded to nonprofit subgrantees through contracts. 10 OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments (2 CFR Part 225), and OMB Circular A-122, Cost Principles for Non-Profit Organizations (2 CFR Part 230). 11 OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. 12 The other four eligible activities are renovation/rehabilitation or conversion, social services, homeless prevention, and grant administration. 13 Nonprofit association officials also told us that some nonprofits intentionally request no or low reimbursement for indirect costs to show that they are operating efficiently and on a lean budget. Further, they said that some nonprofits do not include their accounting department, human resources department, or building furnishings in their operating costs.

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GAO, Human Service Programs: Demonstration Projects Could Identify Ways to Simplify Policies and Facilitate Technology Enhancements to Reduce Administrative Costs, GAO-06-942 (Washington, D.C.: Sept. 19, 2006). 15 GAO, Tax-Exempt Organizations: Improvement Possible in Public, IRS, and State Oversight of Charities, GAO02-526 (Washington, D.C.: Apr. 30, 2002). 16 E. Keating, Reshaping the Overhead Debate: Getting to Mu (Hauser Center on Nonprofit Organizations, Harvard University: 2007): p. 6. Analysis for this chapter included synthesizing prior research, convening nonprofit and foundation roundtables, and conducting additional interviews with nonprofit executives. 17 The report also noted that the confusion is not limited to nonprofits’ relationships with government entities. Some foundations develop their own definitions of overhead for grant applications that often mixes the concepts of indirect costs and administrative costs, while others leave the definition unclear. A frustration voiced by many was that fully funding efficient operations is made difficult by the inconsistent definitions of overhead costs. 18 Capacity-building grants are designed to supplement program funding and support efforts to expand an organization’s ability to provide services. 19 CRS, An Overview of the Nonprofit Charitable Sector. 20 As previously discussed, nonprofits classify costs differently; therefore, we lacked reliable data with which to confirm this gap. 21 Management and general expenses as reported on the recipient organizations’ 2007 Internal Revenue Service (IRS) forms. IRS Form 990 is an annual reporting return that certain federally tax-exempt organizations must file with IRS. It provides information on the filing organization’s mission, programs, and finances. IRS defines management and general expenses as expenses that relate to the organization’s overall operations and management rather than to fundraising activities or program services. Indirect costs are generally equivalent to management and general expenses. Some researchers have questioned the quality of IRS Form 990 data, as they are self-reported. 22 T. Pollack, P. Rooney, and M. Hager, Understanding Management and General Expenses in Nonprofits (Urban Institute Center on Nonprofits and Philanthropy and Indiana University Center on Philanthropy: 2001): pp. 2429. Researchers reported in a working paper that of the 19,786 health-related organizations in their study, the average management and general expenses level was approximately 17 percent. Of the 43,988 human services organizations whose IRS Forms 990 were reviewed in that study, the average management and general expenses level was approximately 16 percent. 23 W. Bedsworth, A. G. Gregory, and D. Howard, Nonprofits Overhead Costs: Breaking the Vicious Cycle of Misleading Reporting, Unrealistic Expectations, and Pressure to Conform (The Bridgespan Group, April 2008), pp. 4-7. 24 DMA Health Strategies, Financial Health of Providers in the Massachusetts Human Service System (Massachusetts: Commonwealth of Massachusetts Executive Office of Health and Human Services, October 2007), pp. 1-2. This study consisted of providers who were recipients of federal funds. 25 W. Bedsworth, A.G. Gregory, and D. Howard, pp. 4-7. 26 Fiscal Management Associates, Administrative Management Capacity in Out-of-School Time Organizations: An Exploratory Study (New York: The Wallace Foundation, December 2008), pp. 51-55. 27 Fiscal Management Associates, pp. 1-6. 28 Urban Institute Center on Nonprofits and Philanthropy and Indiana University Center on Philanthropy, ―Getting What We Pay For: Low Overhead Limits Nonprofit Effectiveness‖ Nonprofit Overhead Cost Project Brief No. 3 (2004), pp. 1-4. The Nonprofit Overhead Cost Project is a study that had three phases: analysis of over 250,000 IRS Forms 990, in-depth case studies of nine organizations, and 1,500 responses to a survey of U.S. nonprofits. The project defines overhead costs as an organization’s infrastructure, including accounting, fundraising, information technology, human resources, physical plant, and other common organizational elements that stand behind and support a nonprofit’s mission and program. The definition of overhead costs is consistent with our definition of indirect costs. 29 DMA Health Strategies, p. 2. 30 Urban Institute Center on Nonprofits and Philanthropy and Indiana University Center on Philanthropy, pp. 1-4. 31 A. Blackwood and T.H. Pollak, ―Washington-Area Nonprofit Operating Reserves,‖ The Urban Institute: Charting Civil Society No. 20 (July 2009): pp. 1-12. 32 Fiscal Management Associates, pp. 18-20. 33 DMA Health Strategies, pp. 14-15. Although the conclusions from these studies are nongeneralizable and often include a small number of cases, these reports illustrate how organizations can have trouble covering nearterm operating expenses, as well as replacing aging infrastructure. 34 CRS, An Overview of the Nonprofit Charitable Sector. 35 GAO, Grants Management: Grantees‟ Concerns with Efforts to Streamline and Simplify Processes, GAO-06-566 (Washington, D.C.: July 28, 2006). 36 DMA Health Strategies, p. 21. 37 P. Frumkin and M.T. Kim, The Effect of Government Funding on Nonprofit Administrative Efficiency: An Empirical Test (Harvard University: 2002), p. 6; S.R. Bernstein, Managing Contracted Services in the

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Nonprofit Agency, 1st ed. (Philadelphia, PA: Temple University Press, 1991), pp. 30-31; and K. Grønbjerg, Understanding Nonprofit Funding, 1st ed. (San Francisco, CA: Jossey-Bass Publishers, 1993), pp. 219-240. 38 For more information on Recovery Act funds and related administration challenges, see GAO, Recovery Act: One Year Later, States‟ and Localities‟ Uses of Funds and Opportunities to Strengthen Accountability, GAO-10437 (Washington, D.C.: Mar. 3, 2010). 39 GAO-07-1084T. 40 P. Frumkin and M.T. Kim, pp. 11-15. This study presented the analysis of IRS Forms 990 from 1,172 nonprofit organizations from 1985 to 1995. 41 Urban Institute Center on Nonprofits and Philanthropy and Indiana University Center on Philanthropy, pp. 1-4. 42 Results from nonprobability samples cannot be used to make inferences about a population because in a nonprobability sample, some elements of the population being studied have no chance or an unknown chance of being selected as part of the sample.

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Chapter 4

NONPROFIT SECTOR: SIGNIFICANT FEDERAL FUNDS REACH THE SECTOR THROUGH VARIOUS MECHANISMS, BUT MORE COMPLETE AND RELIABLE FUNDING DATA ARE NEEDED United States Government Accountability Office

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WHY GAO DID THIS STUDY Increasingly, the federal government relies on networks and partnerships to achieve its goals, and many of these involve nonprofit organizations. GAO was asked to assess (1) the mechanisms through which federal dollars flow to nonprofits and (2) what is known about federal dollars flowing through them to nonprofit organizations in fiscal year 2006. To address these objectives, GAO conducted a literature review of funding; analyzed data from several sources, including the Federal Procurement Data System—Next Generation (FPDSNG) and the Federal Awards and Assistance Data System (FAADS); and analyzed nonprofit organizations’ roles in 19 federal programs.

WHAT GAO RECOMMENDS To ensure that accurate information on federal funding provided to nonprofit entities is available, GAO recommends that the Office of Management and Budget (OMB), which is responsible for a searchable Web site called USAspending.gov that includes federal assistance and contract awards, ensure that its funding information in USAspending.gov is categorized with a consistent definition of nonprofit organizations. OMB commented that while GAO’s recommendation would likely ensure more consistent data, it could be burdensome for states tracking subaward data. As USAspending.gov is developed, GAO believes this is an opportune time to explore ways to improve reliability of subaward data.

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WHAT GAO FOUND The federal government uses a variety of funding mechanisms to achieve national priorities through partnerships with nonprofit organizations, and the relationships are sometimes complex and multidirectional. Nonprofit organizations receive federal grant and contract funds both directly and through other entities, such as states, for performing activities or providing services to particular beneficiaries. Federal funds paid to nonprofit organizations as fees for services follow a somewhat more complex path. Credit through loan and loan guarantee mechanisms facilitate nonprofit organizations’ access to capital. Similarly, some tax policies result in benefits to nonprofit organizations by either reducing their costs or increasing their revenues. With direct federal grants and contracts, and with some loans and loan guarantees, federal agencies generally select the nonprofit participant, directly control the amount of funding provided, and monitor nonprofit performance. With other mechanisms, such as tax expenditures and fee-for-service programs, the federal government sets criteria for acceptable recipients but does not directly select or monitor nonprofit performance. Due to limitations and reliability concerns with tracking systems’ data, the data presently collected provide an incomplete, unreliable picture of the federal government’s funds reaching the nonprofit sector through various mechanisms, although they suggest these funds were significant. No central source tracks federal funds passed through an initial recipient, such as a state, and the nonprofit status of recipients was not reliably identified in FPDS-NG or FAADS. Factors contributing to data limitations include the nonprofit status of recipients being self-reported and no consistent definition of nonprofit across data systems. The development of a system to report funding through subawards, currently underway, may enable more complete estimates of funding to the sector in the future. However, until the accuracy of nonprofit status is improved, accurately determining the extent of federal funds reaching the sector is not possible, leaving policy makers without a clear understanding of the extent of funding to, and importance of, key partners in delivering federal programs and services. Funding data sources identified the following as the approximate amounts of federal funds flowing to nonprofits in 2006 under different mechanisms, although most sources did not reliably classify nonprofit status of recipients:     

$135 billion in fee-for-service payments under Medicare; $10 billion in other types of fee-for-service payments; $25 billion in grants paid directly to nonprofits; $10 billion paid directly to nonprofits for contracts; and $55 billion in federal funds paid to nonprofits by states from two grant programs, including Medicaid. (GAO could not assess other programs.)

In addition, approximately $2.5 billion in loan guarantees and $450 million in loans were issued to nonprofits, and approximately $50 billion in federal tax revenues were foregone due to tax expenditures related to nonprofits.

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ABBREVIATIONS ACF APPS CCR CMS DHS DOD DOE DOL Education ETA FAADS FFATA FNS FPDS-NG FSA GSA HHS HPMS HUD IRS NIH OMB POS SCHIP Treasury USDA

Administration for Children and Families Automated Plan Payment System Central Contractor Registration Centers for Medicare & Medicaid Services Department of Homeland Security Department of Defense Department of Energy Department of Labor Department of Education Employment and Training Administration Federal Assistance Award Data System Federal Funding Accountability and Transparency Act of 2006 Food and Nutrition Service Federal Procurement Data System—Next Generation Office of Federal Student Aid General Services Administration Department of Health and Human Services Health Plan Management System Department of Housing and Urban Development Internal Revenue Service National Institutes of Health Office of Management and Budget Provider of Service State Children’s Health Insurance Program Department of the Treasury Department of Agriculture

February 26, 2009 The Honorable John M. Spratt, Jr. Chairman Committee on the Budget House of Representatives Dear Mr. Chairman: Increasingly, the federal government relies on networks and partnerships to achieve its goals, and many of these involve nonprofit organizations. These organizations are involved in a wide array of missions including healthcare, education, poverty alleviation, and economic development, and their missions can align with or complement the objectives of federal programs. Federal and nonprofit entities often partner with one another as they work toward the same or similar goals. The relationships are sometimes categorized and analyzed according to the various policy issues they address, but another useful analysis involves the funding relationships, particularly as they vary across different federal funding tools used to

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accomplish agencies’ missions. These tools dictate how the relationships between federal agencies and nonprofit organizations operate, the roles that these entities and others (including other levels of government) play, and the degree of control, oversight, and influence that exists between the federal government and nonprofit organizations. To examine the extent and structure of the partnering between the federal government and the nonprofit sector, you asked us to focus on the funding relationships between the two sectors. Therefore, our objectives in this chapter are to provide information on (1) the mechanisms through which federal dollars flow to nonprofit organizations (which we define as those entities that are federally tax-exempt), and how federal involvement varies across them, and (2) what is known about federal dollars flowing through these mechanisms to nonprofit organizations in fiscal year 2006 (the most recent year for which we could obtain data from all sources).1 To better understand how funds to nonprofit organizations are tracked and how mechanisms operate, we reviewed 19 federal programs selected to provide information on a variety of direct and indirect mechanisms and services across a variety of policy areas and sectors, and to include some of the more highly funded programs involving nonprofit organizations. The information obtained from this review is not generalizable to all programs involving nonprofit organizations. Our steps included reviewing previous related GAO reports and meeting with program officials. For each program, we analyzed the roles of nonprofit organizations and how federal involvement with and influence on these organizations varied across funding mechanisms. To assess federal funding reaching nonprofit organizations through various mechanisms, we conducted a literature review of funding to nonprofit organizations, assessed the suitability of various potential data sources, and analyzed data from several sources. Our data sources included the Federal Procurement Data System—Next Generation (FPDS-NG), Federal Awards and Assistance Data System (FAADS), several systems at the Centers for Medicare & Medicaid Services, the Department of the Treasury’s (Treasury) estimates of the revenue loss of tax expenditures, and the Office of Management and Budget’s (OMB) collection of information on federal credit programs. Although we did not validate all of the data provided by these sources, we took several steps to assess data quality. Overall, we determined that the data were sufficiently reliable for our engagement purposes. However, we identified significant reliability concerns regarding data from two systems, FPDS-NG and FAADS, which limit the precision of our estimates. We also reviewed research by others that provided perspective on the sector as a whole. A detailed description of our scope and methodology can be found in appendix I, and our findings on the reliability of nonprofit identification in key data systems are detailed in appendix II. We conducted this performance audit from January 2008 to February 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

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RESULTS IN BRIEF Federal agencies use a wide range of funding mechanisms in partnering with nonprofit organizations—defined in this chapter as federally tax-exempt entities—to carry out agencies’ missions, and the relationships are sometimes complex and multidirectional. The most direct mechanisms are grants to, cooperative agreements with, and contracts for nonprofit organizations to provide particular services, such as research or services to particular beneficiaries. In fiscal year 2006, grants were provided to nonprofit organizations directly under almost 700 different programs. Federal grants and contracts may also reach nonprofit organizations by passing through levels of government as intermediaries, particularly with grant funds provided to states or other government levels that are often passed through to nonprofit organizations that provide services. Federal funds paid to nonprofit organizations as fees for services follow a somewhat more complex path, as exemplified by federal health insurance programs that reimburse nonprofit organizations for services they provide to individuals. Federal loans facilitate nonprofit organizations’ access to capital by, for example, financing the construction of systems to improve electric service in rural areas. Further, other mechanisms, such as loan guarantees, while not directly providing federal funds to nonprofit organizations, increase access to other sources of funds for nonprofit organizations. For example, student loans, while provided to individual students, make funds available that result in revenues to nonprofit higher-education institutions. Similarly, some tax policies (known as ―tax expenditures‖) result in benefits to some nonprofit organizations by either reducing their costs or increasing revenues. For example, they may be able to borrow funds at lower interest rates because of access to tax-exempt bond financing or may receive more contributions because the tax code provides an incentive for taxpayers to give. Each of these mechanisms provides the federal government with differing levels of influence and oversight over nonprofit selection and performance. With direct federal grants and contracts, and with some loans and loan guarantees, federal agencies generally select the nonprofit recipient, directly control the amount of funding provided, and generally monitor nonprofit performance. With other mechanisms, such as tax expenditures and fee-for-service programs, the federal government sets criteria for acceptable recipients but does not directly select or monitor nonprofit performance. Due to limitations and reliability concerns with tracking systems’ data, the funding data presently available leave policy makers without a complete, accurate understanding of the amount of funding flowing to these key partners, although they suggest these funds were significant in fiscal year 2006. The federal government collects information on federal funding through several governmentwide and program-specific data systems. However, we identified significant limitations and reliability concerns with the data contained in these systems that led us to conclude that they provide an incomplete and unreliable picture of the federal government’s funding to nonprofit organizations. For example, there is no central source that tracks federal funds that are passed through an initial recipient, such as a state, to a nonprofit subrecipient. In addition, the nonprofit status of recipients was not reliably identified in two key data systems. Several factors contribute to these data limitations. In particular, the nonprofit status of recipients is often self-reported and not always verified, and there is no consistent definition of a nonprofit across these systems. Some changes are currently underway that may enable more complete estimates of funding to nonprofit

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organizations in the future, including the development of USAspending.gov, a searchable Web site overseen by OMB that includes funding through subawards.2 However, until the accuracy of nonprofit status is improved, it will not be possible to accurately determine the extent of federal funds reaching the nonprofit sector, leaving policy makers without a precise understanding of the extent of funding to, and importance of, key partners in delivering federal programs and services. Despite these limitations, the sources identified the following approximate amounts of federal funds flowing to nonprofit organizations in fiscal year 2006 under different mechanisms:

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   

about $145 billion in fee-for-service payments, mostly through Medicare; approximately $25 billion in direct grants; about $55 billion in grants that flow through states; and approximately $10 billion in contracts.

These data suggest that federal funds represented a sizable portion of nonprofit organizations’ total annual revenues, reported to be $1.6 trillion.3 Additional funding was available related to other federal policies. Nonprofit organizations received about $450 million in outstanding direct loans and $2.5 billion in loans guaranteed by the federal government. Additionally, nonprofit organizations benefited from about $50 billion in tax expenditures. We are recommending that OMB take action to ensure that a consistent definition to categorize nonprofit organizations is identified and used in USAspending.gov. In commenting by e-mail on a draft of this chapter, OMB wrote that using the Central Contractor Registration (a database used to support agency procurement) would likely offer a consistent way to validate IRS tax-exempt status. It noted, however, the increased resource burden on states to ensure compliance of those receiving subawards with any requirement to register in such a system. We recognize this additional responsibility, but believe that this is the appropriate time for OMB to consider approaches that could be effective in improving the reliability of this information, given that the development of the subaward data portion of USAspending.gov is now underway. The Department of Housing and Urban Development concurred, by e-mail, with our findings and conclusions. The Departments of Agriculture, Education, Health and Human Services, and Labor did not provide formal comments.

BACKGROUND The Nonprofit Sector The nonprofit sector is diverse and has a significant presence in the U.S. economy.4 Of the estimated 1.8 million tax-exempt organizations in fiscal year 2007, about 63 percent were public charities or foundations that benefited the broad public interest, and were referred to as 501(c)(3) organizations,5 and about 8 percent were social welfare organizations. Nonprofit organizations provide services in a wide variety of sectors, including policy areas such as health care, education, and human services. Approximately three-quarters of the revenues of 501(c)(3) entities that filed IRS Form 990 in 2005 were from entities within two subsectors.

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Public charities within the health subsector reported about $672.1 billion, or approximately 59 percent of the revenues reported, and nonprofit organizations within the education subsector reported about $188.2 billion, or approximately 16 percent.6 While the majority of nonprofit organizations individually have relatively small operating budgets, as a whole the nonprofit sector has a significant presence in the U.S. economy, according to researchers of the nonprofit sector. In 2005, nonprofit organizations that submitted Form 9907 to the Internal Revenue Service (IRS) held an estimated $3.4 trillion in total assets and received $1.6 trillion in revenues.8 As we reported in 2007, in addition to representing a significant portion of the U.S. economy, the sector grew substantially from May 2000 to May 2006.9 Specifically, researchers indicated that the number of registered public charities, a large subset of all nonprofit organizations, grew over 30 percent from about 646,000 to about 851,000, although organizations that have gone out of existence may have been included in those numbers. In 2005, we reported that the nonprofit sector accounted for over 9.6 million employees in 2002, which was about 9 percent of the civilian workforce.10 As we have previously reported, the federal government is increasingly partnering with nonprofit organizations because nonprofits bring many strengths, such as flexibility to respond to needs and access to those needing services.11 Federal agency officials we spoke with reported that they may target nonprofit organizations when authorized by program regulations or when nonprofit organizations are the best source of a particular service, but they generally do not focus on the profit-making status of partners when distributing funding. For example, the Department of Labor is authorized by law to provide grants to public and nonprofit private organizations as part of its Senior Community Service Employment Program. Further, while the Department of Housing and Urban Development does not specifically target Emergency Shelter Grant Program funding to nonprofit organizations, a large portion of this funding reaches nonprofits because these organizations play a prominent role in delivering emergency shelter services for the homeless.

Federal Funding Mechanisms The federal government uses a variety of funding mechanisms to achieve national priorities through partnerships with nonfederal parties such as nonprofit organizations. Federal grants and cooperative agreements are forms of assistance authorized by statute in which a federal agency transfers something of value, such as money or property, to a party for a purpose, undertaking, or activity of the grantee that the government has chosen to assist.12 Federal contracts are mutually binding legal relationships obligating the seller, in this case the nonprofit entity, to furnish the supplies or services, and the buyer, in this case the government, to pay for them. The federal government typically uses contracts (rather than grants) as a mechanism when the principle purpose of the funded activity is to provide something for the direct benefit of the federal government. For example, contracts can be used to procure independent evaluations of programs, to conduct research for agency missions, or to buy information technology services for an agency. Federal credit and insurance programs, which include direct loans and loan guarantees, provide an alternative to direct spending and can fill market gaps when private lending and insurance companies cannot meet economic demands. Tax expenditures are reductions in tax liabilities that result

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from preferential provisions, such as exclusions, credits, and deductions. They result in revenue forgone by the federal government and create incentives for certain behaviors, such as making charitable donations to nonprofit organizations. Fee-for-service, or voucher-type, mechanisms provide funding to organizations through the ultimate recipient of services. For example, under a fee-for-service mechanism, physicians may receive payments for each service provided (such as an office visit). Several cross-governmental databases provide information on federal funding through the mechanisms described above. The Federal Assistance Award Data System (FAADS) provides financial data on grants and other forms of assistance that are made by the federal government, whereas the Federal Procurement Data System—Next Generation (FPDS-NG) collects federal procurement data. OMB is responsible for USAspending.gov, a Web site mandated by the Federal Funding Accountability and Transparency Act of 200613 (FFATA) that establishes a single searchable location for financial information on grants, contracts, credit, and fee-for-service payments. Also, the IRS Form 990 provides detailed financial information on tax-exempt entities with annual gross receipts greater than $25,000. In addition, the Federal Audit Clearinghouse provides information on nonprofit organizations and other nonfederal entities that spend more than $500,000 a year in federal awards.14 Treasury’s Office of Tax Analysis lists tax expenditures and estimates their cost, as reported by OMB in the President’s Budget submission.

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FUNDING MECHANISMS ARE VARIED AND RELATIONSHIPS CAN BE COMPLEX Federal agencies partnering with nonprofit organizations use several different funding mechanisms, and relationships between nonprofit organizations and federal agencies vary. The type of funding mechanism used determines the level of federal influence over nonprofit selection and oversight of performance.

Grants and Contracts Provide Both Direct and Indirect Funds to Nonprofit Organizations Nonprofit organizations sometimes work directly with federal agencies as grantees and contractors, in a relatively straightforward relationship. Our analysis of the 2006 data on federal funding to nonprofit organizations indicated that grants were provided to nonprofits directly under about 700 different programs. Types of activities funded through direct grants to nonprofit organizations included social services and research. For example: 



The National Institutes of Health provide grants for extramural research to accomplish its mission related to public health needs. About 84 percent of its budget in fiscal year 2007 supported extramural research by researchers at various entities, including nonprofit higher-education institutions, research institutes, and hospitals.15 The Administration for Children and Families in the Department of Health and Human Services provides Head Start grants to nonprofit as well as for-profit entities.

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Public and private nonprofit and for-profit agencies can receive direct grants to provide educational, health, nutritional, and other services to low-income children and families. The Senior Community Service Employment Program, funded by the Department of Labor’s Employment and Training Administration, provides grants to nonprofit organizations to provide subsidized, part-time work-based training to older workers through employment in the community service sector. Under this program, nonprofit organizations can also be the beneficiary of this subsidized labor.

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Federal agencies also contract directly with nonprofit organizations to provide goods or services for the direct benefit of the federal government. Contracts are tracked in FPDS-NG, which we found to be somewhat unreliable in categorizing entities as nonprofit, although suitable for providing some order of magnitude. (See results of our reliability analysis in app. II.) It showed that of the federal contracts provided to nonprofit organizations in fiscal year 2006, about two-thirds were awarded by the Department of Energy and the Department of Defense and about one-tenth by the Department of Health and Human Services. Even so, the percentage of dollars contracted to nonprofit organizations within these agencies is relatively small. For example, nonprofit contracts constituted only 1 percent of the Department of Defense’s total 2006 contract dollars, while about 10 percent of the Department of Health and Human Services’ contract dollars were awarded to nonprofit organizations. Some programs contract with nonprofit organizations to help administer programs. For example, the Centers for Medicare & Medicaid Services contract with quality-improvement organizations, which can be nonprofit organizations, to monitor provider performance. Nonprofit organizations also receive grants indirectly through other levels of government, or as subgrantees of other grantees, and are sometimes subcontractors to other federal contractors. Some federal programs are set up as large grants to states, with the expectation that they will then be further disbursed for local program implementation, and nonprofit organizations are sometimes used for further service delivery. For example: 



The Department of Health and Human Services’ Administration for Children and Families oversees the Social Services Block Grant, providing funds to states to furnish social services to residents. Depending on the state, nonprofit organizations compete with other organizations for these funds to provide a wide range of social services, which can include daycare, protective services, adoption, case management, health-related services, and transportation. Similarly, the U.S. Department of Agriculture’s Food and Nutrition Service provides grants to state agencies under its Child and Adult Care Food Program. States reimburse institutions and organizations that provide nutritious meals and snacks to eligible children and adults enrolled for care at participating child and adult day care homes and centers, emergency shelters, and after-school care programs. Both the sites providing the nutrition service and the organizations that manage site operations, keep records, and submit claims are sometimes nonprofit organizations.

Nonprofit organizations can also be subcontractors to other federal contractors. For example, a nonprofit university performing research under a federal contract could

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subcontract with another nonprofit university to complete a portion of the research where its researchers have a particular specialty.

Nonprofit Organizations Obtain Federal Funds through Fees and Direct Payments for Services Federal funds also reach nonprofit organizations through other more complex routes, such as through reimbursement for fees that they charge their clients. The Medicare program is a significant example of such a program. Individuals aged 65 and older as well as certain disabled individuals seek health care at various facilities, some of which are nonprofit hospitals, nursing facilities, and managed care organizations. The facility is then paid by the Medicare program. Other programs involving direct payments for services in which nonprofit organizations can be recipients include voucher programs. These allow the beneficiary of a program to choose the source of services, while the services are paid by the program. The Pell Grant program, for example, operates under this principle. It provides need-based grants to lowincome students to promote access to postsecondary education. Students may use their grants at any of about 5,400 participating postsecondary institutions, many of which are nonprofit. In these cases, the nonprofit institution acts as an intermediary between the student and the Department of Education.

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Nonprofit Organizations Provided Access to Additional Funds through Federal Loans and Loan Guarantees Nonprofit organizations are involved in credit relationships with the federal government, in some cases as the recipient of funds loaned or guaranteed by federal agencies, and in some cases as the guaranty agency. In general, the federal government loans money and guarantees others’ loans as a way of increasing the availability of funding for borrowers or activities it considers important. The Rural Development Electric Program, operated by the U.S. Department of Agriculture’s Rural Development, Utilities Programs, is an example of a program where loans and loan guarantees are provided directly, in this case to electric utilities to serve customers in rural areas.16 The loans and loan guarantees help finance the construction of electric distribution, transmission, and generation facilities; system improvements; and other activities, including energy conservation programs. In this program, nonprofit organizations can also be intermediaries, issuing loans that are guaranteed by the federal government. Similarly, the Hospital Mortgage Insurance Program, implemented by the Department of Housing and Urban Development’s Federal Housing Administration, operates a loan guaranty program that insures loans. These federally guaranteed loans finance the construction, modernization, equipping, or refinancing of acute-care hospitals. The program facilitates affordable financing of nonprofit, for-profit, and government-owned hospitals by protecting lenders against losses they might incur if hospitals fail to make their mortgage payments. The program generally targets hospitals deemed too risky to obtain private bond insurance but

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able to pass certain agency underwriting tests. In addition, the program serves as a credit enhancement and improves the credit rating of the hospital, resulting in a lower interest rate for the loan. Finally, some federal programs use loans and loan guarantees to encourage activities that indirectly result in increased revenues to nonprofit organizations. For example, within student loan programs, the federal government both guarantees loans and provides loans directly to students for postsecondary education, often at nonprofit institutions. The various loans available within the Federal Family Education Loan Program are set up to provide incentives to lenders (such as banks, credit unions, and savings and loan associations) to make loans to students enrolled at eligible postsecondary institutions. Guaranty agencies, which are state or nonprofit organizations, administer several portions of the program by providing technical assistance and training to schools and lenders on procedures, providing counseling to borrowers, reimbursing lenders with federal funds when borrowers default on their loans, and initiating collections. Conversely, with the Federal Direct Student Loan program, the federal government provides loans directly to vocational, undergraduate, and graduate postsecondary school students and their parents, rather than through private lenders. In both cases, nonprofit higher-education institutions benefit from the availability of funds.

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Nonprofit Organizations Benefit from Federal Tax Policies Federal tax policies provide significant financial benefits to nonprofit organizations while resulting in revenue forgone by the federal government. Unlike some of the other mechanisms discussed above, they do not provide federal funds but rather either reduce taxes needing to be paid, reduce other costs, or increase revenues. Classification as section 501(c) type organizations provides these entities exemption from paying federal income tax.17 Further, certain types of organizations are specifically exempted from paying income taxes; for example, credit union income is exempt from income taxes. Nonprofit organizations also benefit indirectly from tax expenditures that are aimed at encouraging certain kinds of behavior by taxpayers when those behaviors involve nonprofits.18 For example, tax expenditures encourage charitable giving, stimulate economic development in disadvantaged areas, finance postsecondary education, and encourage adequate healthcare coverage. In some cases, these behaviors primarily involve nonprofit organizations, such as with charitable contributions.19 In other cases, nonprofit organizations are significant providers of services being targeted, although these services are also provided by for-profit and government-operated entities. For example, individuals deducting education and health care expenses could incur those expenses at all three types of entities. Some tax expenditures have more complex interrelationships between nonprofit organizations and governmental units. For example, tax-exempt bonds are used to finance the construction of facilities used by 501(c)(3) organizations. These bonds are issued by state and local governments. Interest income from these bonds is exempt from federal income tax, the alternative minimum tax, and, in general, state income taxes. The tax exemption lowers the bond issuer’s borrowing costs as investors require lower returns than they otherwise would. In addition, state and local governments can create other entities, including nonprofit entities to issue bonds on behalf of a governmental unit. Similarly, the low-income housing tax credit

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also involves multiple parties. Nonprofit and other types of developers of low-income rental housing receive the federal tax credits from state agencies to develop or rehabilitate lowincome housing. Developers then sell these credits to investors to raise capital (or equity) for their projects, which reduces the debt that the developer would otherwise have to borrow. In addition, a few large nonprofit organizations also provide technical assistance to nonprofit developers and serve as intermediaries for facilitating the sale of tax credits to investors.

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Type of Funding Mechanism Generally Determines the Level of Oversight and Influence That Federal Agencies Have over Nonprofit Organizations The amount of federal involvement in selecting and overseeing nonprofit performance varies across funding mechanisms. With some funding mechanisms, federal agencies generally select nonprofit recipients, determine how much funding nonprofit organizations will receive, and monitor nonprofit performance. With direct contracts and grants, agencies select nonprofit organizations by soliciting requests for proposals and holding open competitions. The National Institutes of Health, for example, competitively awards grants by using a system of peer review that assesses applications on scientific merit and agency funding priorities. Also, with direct contracts and grants, federal agencies evaluate nonprofit performance and can under certain circumstances choose to terminate contracts or may choose not to renew contracts and grants when nonprofit organizations perform poorly. For example, in the Head Start Program, the Administration for Children and Families conducts on-site monitoring reviews of grantee programs every 3 years and administers an extensive annual survey of grantees to evaluate performance. If a nonprofit grantee is not meeting program requirements, the agency has authority to remove the grantee from the program. With some credit programs, federal agencies also select nonprofit organizations and monitor performance, but their opportunity to evaluate performance occurs before they provide funding to the nonprofit. The Department of Housing and Urban Development, for example, uses a variety of financial criteria to determine nonprofit organizations’ future performance before providing hospital mortgage insurance to hospitals. After it has awarded insurance to a hospital, the department monitors a hospital’s performance while using the loan and can require poorly performing hospitals to hire consultants to improve performance. In programs using other funding mechanisms, the federal agency sets eligibility standards for nonprofit recipients but relies on other government entities to select nonprofit organizations and monitor performance. For example, with indirect grant programs such as the Social Services Block Grant, the federal government provides funding to states, which have broad discretion to determine the services provided, define individual beneficiary requirements, and allocate funding to recipients.20 While the federal agency does not monitor the performance of individual nonprofit and other recipients receiving this grant funding, states are required to monitor the performance of nonprofit recipients. With fee-for-service programs such as Medicare, states determine service provider eligibility, but individuals choose their providers. While the federal agency has overall responsibility for administering Medicare, state agencies—typically state health departments—monitor, survey, and inspect health care service providers.21 Additionally, some tax expenditure programs, such as the low-income housing tax credit, leverage state or

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local governments to select or monitor nonprofit performance, or both. With the low-income housing tax credit, nonprofit developers compete for the credits, and states allocate them based on broad federal guidelines. While the IRS issues regulations for the program, it relies on state authorities to monitor and certify which projects remain eligible to receive tax credits. The IRS may then recapture taken credits or deny issuance of further credits for reported noncompliance with low-income housing tax credit laws. In other programs, individuals select nonprofit organizations, and federal oversight of nonprofit performance is limited. With student loan programs, for example, the Department of Education determines institutions’ eligibility to participate in the programs, while the institutions’ funding is dependent on the number of students that choose to matriculate and the financial need of those students. The Department of Education monitors the performance of nonprofit postsecondary institutions through reviewing their default rates, which measures the extent students are defaulting on their loans, and performing periodic program reviews. Further, with charitable deductions, agencies do not select nonprofit organizations or monitor nonprofits’ performance. Instead, individuals providing contributions determine which nonprofit will receive funding, and the IRS’s role is limited to determining 501(c)(3) eligibility, monitoring certain filing requirements, and revoking section 501(c)(3) status. While the IRS may revoke the 501(c)(3) status of nonprofit organizations in certain circumstances, it does not assess whether nonprofit organizations use the revenues from charitable contributions to meet the goals of the contribution, although some information is publicly available to individuals.

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DATA LIMITATIONS LEAVE DECISION MAKERS WITHOUT COMPLETE INFORMATION ON FUNDING TO NONPROFIT ORGANIZATIONS, ALTHOUGH DATA SUGGEST THAT SIGNIFICANT FEDERAL FUNDS REACHED NONPROFIT ORGANIZATIONS IN 2006 The federal government tracks and provides information on funding in order to provide decision makers and the public with accurate information on the sources and uses of federal funds, among other reasons. The Federal Managers’ Financial Integrity Act of 1982 requires that agencies establish controls to ensure that expenditures applicable to agency operations are properly recorded and accounted for to permit the preparation of accounts and reliable financial and statistical reports.22 In fulfilling this responsibility, federal agencies collect a range of information on funding mechanisms and recipients, and this information is consolidated and reported to a few governmentwide data systems that consolidate data across most of the federal government. With the development of USAspending.gov—a publicly available Web site of federal spending, mandated by the FFATA, that provides information on entities awarded federal grants, loans, contracts, and other forms of federal assistance— such data are readily available to the public. In addition, in conjunction with performance data, this information can be used as a tool for reexamining federal roles and the efficiency and effectiveness of various mechanisms and partners in the pursuit of federal objectives. These data are also used as inputs for the development of economic analyses such as the Consolidated Federal Funds Report, which analysts use to measure and assess federal expenditures in state and substate areas.

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Data Limitations and Reliability Concerns Contribute to an Incomplete and Unreliable Picture of Federal Funding The data presently collected provide an incomplete and, for portions, unreliable picture of federal funding to nonprofit organizations. First, information on funding reaching nonprofit organizations through indirect mechanisms is generally not available, though we present some estimates for some programs in table 1. Therefore, we cannot conduct a comprehensive assessment of how much federal money reaches nonprofit organizations through subcontracts, subgrants, or through fee-for-service payments to for-profit enterprises that are subsequently spent on nonprofit organizations or through other mechanisms. Nonprofit organizations may receive considerable funding through indirect mechanisms, in particular through indirect grants to state and local governments. According to OMB, federal grant outlays to state and local governments amounted to $434 billion in 2006, and one study estimated that about 26 percent of such funds reached nonprofit organizations in fiscal year 2001.23 Second, nonprofit entities are not reliably identified, which limits the reliability and completeness of reported funding amounts in two key data systems, FPDS-NG and FAADS. These systems are the only governmentwide systems for obtaining detailed information on federal procurement and assistance, and their data are used to populate USAspending.gov. However, in developing the funding information outlined above, we found that nonprofit organizations are not reliably identified in either of these systems. For example, based on our testing of a sample of records, we estimate that 8 percent of the records in FAADS coded as nonprofit organizations are actually other entity types, and that 5 percent of records coded as other entities are actually nonprofits. (See app. II for further details on our approach and results of reliability testing.) Similarly, 27 percent of the vendors in FPDS-NG with nonprofit contract actions also had contract actions where they were classified as not being nonprofit organizations. This represents 1,768 vendors, who constituted a majority of reported nonprofit obligations ($8 billion of $12 billion total). We have previously reported concerns about the accuracy and completeness of data in FPDS-NG and FAADS.24 For example, we reported in February 2006 that data submitted for inclusion in FAADS on financial assistance awards related to economic development were often inaccurate and incomplete.25 During the course of our current review we identified one program that FAADS data indicated provided almost $1 billion to nonprofit organizations. However, program officials told us that the program only provided a total of around $150 million to all recipients. According to OMB, figures in FAADS and FPDS-NG have, in the past, been incomplete, untimely, and inaccurate. For example, agencies have reported loan guarantee amounts only when a default occurs. In addition to these overall concerns about the reliability and integrity of the databases, several ways in which the data are captured and stored prevented us from distinguishing funding to nonprofit organizations from funding to other groups. For example: 

Nonprofit institutions of higher education in FAADS are classified along with other private higher-education institutions. Based on a sample of these records, we estimate that 95 percent of the records in this category were actually nonprofit organizations. (See app. II for further details.)

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Similarly, tax expenditure estimates in various areas include benefits to nonprofit as well as other entities. For example, though Treasury estimates that the low-income housing tax credit cost the federal government $4.4 billion in 2006 in forgone revenues, the portion of that total that is related to projects developed by nonprofit organizations is not systematically assessed.

Limitations and Reliability Concerns Caused by Various Factors Limitations in the data presently collected may be caused by several factors including a reliance on data that are not verified and a lack of clear guidance defining a ―nonprofit‖ organization. Agency officials told us that the nonprofit status of organizations can be selfreported by recipients or entered by agency officials and not verified in most data systems we examined including FPDS-NG, FAADS, and Medicare’s Health Plan Management System (HPMS) which provides information on Medicare managed care and prescription drug plan payments. Furthermore, there is no consistent, governmentwide definition of ―nonprofit.‖ Guidance for registrants in the Central Contractor Registration, which agencies may use to identify the nonprofit status of entities for federal assistance and contracts in FAADS, FPDSNG, and USAspending.gov, asks registrants simply to identify whether they are ―for profit‖, ―non profit‖, or ―other not for profit.‖26 Similarly, HPMS provides no guidance for recipients. These concerns are not new, as we have previously reported that data in FPDS-NG and FAADS can be improved. For example, we have recommended automating data checks and improving knowledge among program officials about reporting requirements.27

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Efforts to Improve Data Collection May Improve Information on Federal Funding to Nonprofit Organizations, Though Concerns Will Likely Remain Efforts are underway to improve the funding data collected by the federal government and may, if appropriately implemented, provide further and more accurate information on federal funding to nonprofit organizations. In March 2008, OMB issued a memo with new guidelines, emphasizing the need to report timely, accurate, and complete data for FAADS and FPDS-NG, as prescribed by the Federal Funding Accountability and Transparency Act of 2006 (FFATA). The act, and OMB’s efforts to implement it, may improve data collected on grants, contracts, credit, and fee-for-service payments. First, the act requires data on subawards such as subcontracts and subgrants to be collected and reported. These indirect mechanisms are likely to be a major way nonprofit organizations receive federal assistance and this will represent the first time data will be collected to address it. Second, the act requires the use of unique identifiers for entities receiving certain types of federal assistance. It is currently very difficult to assess the nonprofit status of a single recipient across federal funding databases or over time because these databases do not have a unique entity identifier. Having unique identifiers could facilitate agency and outside analysts’ verification and tracking of nonprofit organizations and their status and therefore could facilitate the identification of errors and improve the data. Third, recognizing that data in the past have been incomplete, untimely, and inaccurate, OMB has issued guidance for agency data

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submissions under FFATA that specifies more exactly how agencies are to report credit assistance (loans and loan guarantees) and requires agencies to ensure that they provide appropriate oversight for the accuracy of data and validate all data submissions. If appropriately pursued, such validation could encourage agencies to implement policies and processes to improve the quality of data they submit to federal funding sites. Officials from the General Services Administration (GSA) and OMB indicated they have considered an approach to verify the nonprofit status of nonprofit organizations receiving grants. A GSA official indicated that GSA is considering using the Central Contractor Registration (CCR)28 to validate information on these recipients’ nonprofit status. While using the CCR to verify nonprofit status presents challenges, such as there being no central registry for state nonprofit designations and having a time lag with data from IRS’s publicly available master file of federally tax-exempt organizations, an OMB official noted that this is potentially a source for validating nonprofit status.

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Data Sources Suggest Significant Federal Funds Reach Nonprofit Organizations Our analysis of data presently collected suggests that significant federal funds reached nonprofit organizations in 2006, as shown in table 1. Although we identified a number of data limitations and reliability concerns with several key data sources as discussed above, we nevertheless found the data overall to be sufficiently reliable to provide an approximate indication of the general magnitude of federal assistance across these mechanisms. Available data, and our estimates based on these sources, suggest that federal funding made up a significant portion of nonprofit organizations’ total revenues. The Urban Institute estimated that nonprofit organizations that submitted Forms 990 to the IRS received $1.6 trillion in revenues in 2005. (See app. I for specific information on data sources and analysis.) .  Fee-for-Service and Vouchers—Data from the Medicare program and the Federal Award and Assistance Data System (FAADS) indicate that federal fee-for-service or voucher programs provided nonprofit organizations with about $145 billion in 2006.29 Medicare was the largest source of such funds, having paid nonprofit health care providers and managed care plans about $135 billion in calendar year 2006.30 Other fee-for-service or voucher programs, such as federal Pell Grants and the Federal Work-Study program, obligated about $10 billion to nonprofit organizations in 2006. Together, these data suggest that nonprofit organizations received about one-third of total federal fee-for-service funding.  Direct Grants—A large number of direct grant programs provided about $25 billion to nonprofit organizations in 2006, about 5 percent of total grant funding.  Contracts—About $10 billion was obligated in actions with nonprofit organizations, representing less than 3 percent of total contract obligations in 2006.

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Table 1. Amounts and Limitations of Data on 2006 Federal Funds Involving Nonprofit Organizations Mechanism

Approximate amount of total funds to nonprofits

Federal funds provided Fee-for-service and $135 billion through Medicare vouchers

$10 billion in additional payments to nonprofits

Centers for Medicare & Medicaid Services (CMS) Automated Plan Payment System, Health Plan Management System, Provider of Services files, and Health Care Information System Federal Award and Assistance Data System (FAADS)

Direct grants

$25 billion

FAADS

Contracts

$10 billion

Federal Procurement Data System—Next Generation (FPDS-NG)

Indirect grants and contracts Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Data source

$55 billion from Medicaid and State Children’s Health Insurance Program (SCHIP) reached nonprofits Data from other programs not readily available. Additional funds available due to federal policies Credit (loans and loan $450 million in direct loans guarantees) and $2.5 billion in loan guarantees

CMS Financial Management Report

Limitations and data reliability concerns Includes payments to some Blue Cross/Blue Shield plans that are not nonprofits.

Nonprofit status not reliable, funding amounts potentially unreliable and incomplete. Nonprofit status not reliable, funding amounts potentially unreliable and incomplete. Nonprofit status not reliable, funding amounts potentially unreliable and incomplete. Estimate based on limited program data.

Not applicable

Grant and contract funds passed on to nonprofits generally not tracked.

FAADS

Amounts may not be consistently captured, nonprofit status not reliable, funding amount potentially unreliable and incomplete.

018625.

Table 1. (Continued) Mechanism Tax expenditures (federal revenues forgone)

Approximate amount of total funds to nonprofits $50 billion specifically related to nonprofits and additional funds for activities that involve nonprofit as well as other entities

Data source OMB, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2008

Limitations and data reliability concerns Unclear how much of the value of these tax expenditures reach nonprofits.

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Source: GAO analysis of data sources outlined above. Note: Amounts are for fiscal year 2006 except for Medicare and tax expenditures, which are for calendar year 2006. Tax expenditures and credit amounts are not directly comparable to other funding amounts. Also, we rounded our estimates to the nearest 5 billion. Additional information on the methods used to calculate these amounts are found in app. I.

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Indirect Grants—Comprehensive data on grant funds that indirectly reach nonprofit subrecipients are not available. We examined two specific programs that make up a large portion of total funding to states, Medicaid and the State Children’s Health Insurance Program (SCHIP), and estimate that around $55 billion was passed on by states to nonprofit organizations based on program-reported expenditures and the share of nonprofit organizations in the health care sector overall. There are a number of other programs for which federal funds flow through states to nonprofit organizations but we did not attempt to estimate that funding. We did attempt to identify information on federal funds flowing through the three states that, according to FAADS, received the highest amount of federal financial assistance—California, New York, and Texas. However, state officials indicated that none of these states collected data across agencies on federal funding provided to nonprofit organizations, although we did identify some individual state agencies that maintained these data. For example, the Texas Department of State Health Services’ records indicated that over $280 million in federal funds were encumbered on active contracts with nonprofit organizations during the state’s fiscal year 2007. Since we were unable to comprehensively assess such funding to nonprofit organizations, we believe that total funding to nonprofits through indirect grants was likely more than $55 billion in 2006. Indirect Contracts—We did not identify any information on which to assess the funding nonprofit organizations received indirectly through other contractors.

Further, some federal policies result in additional funds being available to nonprofit organizations.

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



Credit—Available data from FAADS indicates that about $450 million in direct loans and $2.5 billion in loan guarantees were issued directly to nonprofit organizations in 2006, though OMB has raised concerns with how some of these data are reported.31 For example, we found that these data do not include one of the largest federal credit programs, the Federal Family Education Loan program. Based on data from OMB, we estimate that in 2006, the federal government had about $120 billion in outstanding loans or guarantees involving nonprofit organizations through four key credit programs. This includes our estimate of student loans that were used at nonprofit institutions of higher education.32 Based on OMB’s estimates of the future costs to the federal government of these credit programs, the future costs of credit involving nonprofit organizations is likely to be about $15 billion.33 Tax Policies and Tax Expenditures—Though more difficult to assess and not directly comparable to funding through other mechanisms, federal tax policies provide significant financial benefits to nonprofit organizations. As described above, federal tax policy benefits nonprofit organizations by (1) exempting nonprofits from having to pay federal income taxes on activities substantially related to the purpose that led to the nonprofits’ tax exemption, and (2) through specific tax expenditures, or tax provisions that grant special tax relief for certain behaviors by taxpayers or for taxpayers in special circumstances. Researchers have estimated the amount of revenue the federal government may forgo by not taxing nonprofit income, and the Treasury’s Office of Tax Analysis annually compiles a list of tax expenditures and

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United States Government Accountability Office estimates of their cost.34 There has been no comprehensive research on the revenue lost from not taxing nonprofit organizations, although existing research offers estimates for specific portions of the nonprofit sector. One study estimated that the value of the federal and state income tax exemption for charitable nonprofit organizations was about $10 billion in 2002.35 In 2005, the Joint Committee on Taxation estimated that taxing large credit unions similarly to the way that other thrift institutions are taxed would raise $6.5 billion between 2006 and 2010. However, in their assessment of the consequences of taxing nonprofit organizations more broadly, the Congressional Budget Office found that taxing nonprofits would likely yield less tax revenues than their size and share of economic activity might suggest because nonprofits were likely to reduce their taxable income by lowering prices and increasing compensation and other costs.36

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Various specific tax expenditures also benefit nonprofit organizations. Table 2 presents five tax expenditures that involve nonprofit organizations and which Treasury estimated to represent $49 billion in forgone revenue in 2006, primarily through the deductibility of charitable contributions.37 The deductibility of charitable contributions creates an incentive for corporations and individuals to provide support for charitable activities, and the availability of tax-exempt bond financing can enable certain nonprofit organizations to borrow funds at lower interest rates. Other tax expenditures indirectly benefit nonprofit organizations by increasing the demand for services provided by nonprofits as well as other entities. For example, the exclusion of employer contributions for health care insurance and various education-related tax expenditures are aimed at broad health and education objectives and not particularly targeted at nonprofit provision of those services. However, since nonprofit organizations provide a large portion of health care and educational services to the nation, some of the value of these tax expenditures reaches nonprofits. Table 2. Revenue Loss Estimates for Select Tax Expenditures Affecting Nonprofit Organizations Reported for Fiscal Year 2006, with Budget Function

Tax expenditure Tax expenditures involving nonprofits Deductibility of charitable contributions, other than education and healtha Deductibility of charitable contributions (education) Deductibility of charitable contributions (health) Exclusion of interest on bonds for private nonprofit educational facilities Exemption of credit union income Total

Revenue loss estimate (dollars in billions) 37.1

Budget function

4.2

Training, employment and social services Education

4.2

Health

2.1

Education

1.3

Financial institutions and insurance

48.9

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Table 2. (Continued) Revenue loss estimate Tax expenditure Budget function (dollars in billions) Examples of tax expenditures involving nonprofits as well as others Exclusion of employer contributions for 125 Health medical insurance premiums and medical care Credit for low-income housing 4.4 Housing investments HOPE tax credit 3.9 Education Exclusion of interest on hospital 3.4 Health construction bonds Lifetime learning tax credit 2.5 Education Empowerment zones and renewal 1.2 Community and regional communities development Various other education-related tax 3.4 Education expendituresb Various other health-related tax 8.0 Health expendituresc Source: GAO analysis of OMB data. Notes: Data are from Analytical Perspectives, Budget of the United States Government, Fiscal Year 2008. From year to year, revenue loss estimates may change because Treasury updates its estimates for each new budget to reflect legislation enacted, prevailing economic conditions, and the latest taxpayer data available. Although there are substantial revenues forgone for these tax expenditures, the estimated amount of federal spending that would be required to provide equivalent assistance is frequently larger than the revenue forgone because this spending could be subject to income tax. For example, the so-called ―outlay equivalent‖ estimate for the income tax exclusion of employer contributions for medical insurance premiums and medical care is $126.7 billion for fiscal year 2004. a Some charitable deductions may also reach federal, state, and local governments. b Includes education individual retirement accounts, deductibility of student-loan interest, deduction for higher education expenses, state prepaid tuition plans, and the exclusion of interest on student-loan bonds. c Includes self-employed medical insurance premiums, Medical Savings Accounts/Health Savings Accounts, and the deductibility of medical expenses.

CONCLUSIONS The federal government interacts with nonprofit organizations and a wide range of other partners to accomplish mutual goals—providing health care, ensuring that youth are educated, providing job training, increasing the supply of low-income housing, and many other goals. Much of this interaction is tied to federal funding available to nonprofit and other recipients, or funding made available as a result of federal policies. The available data indicate that these sources represent a significant portion of the nonprofit organizations’ total revenues. Such funds come in many forms, each with varying ways in which the federal government is able

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to monitor and influence recipients’ performance. As a result, the federal government’s ability to influence which nonprofit organizations are involved and the quality of their services varies, and the involvement of other parties—states, local government, and individual contributors—varies. The significant extent and diversity of the federal government’s partnering with the nonprofit sector should be better understood, but this opportunity is being missed, in part, because of the absence of complete and accurate data on federal funding reaching recipients of different types. Although available data indicate that significant federal funding reaches the nonprofit sector, the precise extent of that funding is not known because of data limitations. As a result, the extent of the federal government’s dependence on various sectors for delivering services also is unknown. Some efforts are underway to improve information on the funding reaching nonprofit organizations and other types of organizations. One of the areas that is hard to measure is the funding reaching nonprofit organizations through indirect grants and contracts. The changes in FFATA should improve the availability of this information. However, as we found in reviewing data collected by agencies, there are concerns about the quality of those data, particularly the type of entity, a data element that is critical to accurately understanding the amount of federal funding reaching nonprofit organizations. We have reported our concerns on the quality of the data and recommended improvements in the past, but this additional problem—that nonprofit status is sometimes incorrect and defined differently across the federal funding data—has additional implications. It prevents the federal government from accurately assessing the extent to which it uses this sector and the potential effect of the sector’s strength as a key partner in delivering federal services.

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RECOMMENDATION FOR EXECUTIVE ACTION To better ensure the accuracy of information on federal funding provided to nonprofit entities in the data available under FFATA, we recommend that the Director, OMB, ensure that a consistent definition is identified and used to categorize nonprofit organizations in USAspending.gov.

APPENDIX I: DETAILED SCOPE AND METHODOLOGY To identify the direct and indirect mechanisms through which nonprofit organizations receive federal funds, we reviewed academic and professional literature, met with experts on the nonprofit sector, reviewed previous GAO reports on federal programs that involve nonprofit organizations, reviewed 19 different programs (see table 3), and met with agency officials. We judgmentally selected these programs using three criteria: they (1) utilized a variety of direct and indirect mechanisms, (2) provided services across a variety of policy areas and sectors, and (3) represented programs among the higher dollar values of all federal programs that involve nonprofit organizations. Although the information obtained from this review cannot be generalized as representative of all nonprofit programs or funding

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mechanisms, we believe it provides valuable insight into how these funding mechanisms operate and the relationship between the federal and nonprofit sectors. To assess federal funding reaching nonprofit organizations through various mechanisms, we reviewed the literature on funding to nonprofits, assessed the suitability of various potential data sources, and analyzed data from those sources we determined to be most appropriate. We did not validate all of the data provided through these various sources. However, we took several steps to assess data quality. Specifically, in sources where individual recipient-level data were available, we tested a sample of records with the Internal Revenue Service’s (IRS) Master File listing of all tax-exempt organizations and other sources. (For more information, see app. II.) To assess the reliability of funding figures in these data sources, we interviewed agency officials, performed various quality checks, reviewed available documentation, and where possible compared data to that from other sources. Overall, we determined that the data were sufficiently reliable for our engagement purposes. However, we identified significant reliability concerns regarding data from two systems, Federal Procurement Data System—Next Generation (FPDS-NG) and Federal Awards and Assistance Data System (FAADS), which we highlight in the body of the report and in appendix II. We used the following data sources to estimate federal funding to nonprofit organizations: 

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

FPDS-NG—We assessed federal contract funding to nonprofit organizations by summing the funding for all contract actions involving vendors identified as nonprofits in the FPDS-NG in fiscal year 2006. FAADS—To assess federal grant, fee-for-service or voucher, and credit assistance to nonprofit organizations, we used data from FAADS. We compiled quarterly files for all of fiscal year 2006 and removed any actions reported during fiscal year 2006 that are corrections to data from previous fiscal years. We did not include corrections to fiscal year 2006 data that were reported in subsequent quarterly files. During the course of our analysis, we identified a set of records with action obligation dates outside of fiscal year 2006 and removed those we determined did not relate to fiscal year 2006 actions. FAADS contains several assistance types, and we considered grants to include those actions coded as being block grants, formula grants, project grants, and cooperative agreements. Direct payments for specified use include payments under Medicare, and we consider these to be fee-for-service or voucher programs. FAADS also reports data on direct loans and loan guarantees. We did not comprehensively assess the accuracy of the assistance types in FAADS. FAADS funding amounts are primarily based on obligations.

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Table 3. Summary of Targeted Programs Discussed in the Report

Grants provided directly to the nonprofit sector

Program title Head Start

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National Institutes of Health (NIH) Research Grants

Indirect grants provided to the nonprofit sector through state governments or other entities

Agency Health and Human Services (HHS) / Administration for Children and Families (ACF) HHS/NIH

Senior Community Service Employment Program

Department of Labor (DOL) / Employment and Training Administration (ETA)

Child and Adult Care Food Program

U.S. Department of Agriculture (USDA) / Food and Nutrition Service (FNS)

Emergency Shelter Grants Program

Housing and Urban Development (HUD) / Office of Community Planning and Development HHS / Centers for Medicare & Medicaid Services (CMS)

Medicaid

Description Provides grants to public and private nonprofit and for-profit agencies that help prepare low-income children for kindergarten by providing comprehensive early childhood development services—including educational, health, nutritional, and social services— to children and their families. Provides grants to public and private, nonprofit and for-profit organizations to support the advancement of high-caliber, unique, and investigator-initiated research that promotes public health. Funds nonprofit organizations and state and territorial governments to provide subsidized, part-time work- based training to older workers through employment in a variety of community-service oriented jobs in nonprofit and public facilities, including hospitals and day care services. Provides grants to states that reimburse institutions and organizations that provide nutritious meals and snacks to eligible children and adults who are enrolled for care at participating child care centers, day care homes, adult day care centers, emergency shelters, and after-school care programs. Provides funding to states, large cities, urban counties, and U.S. territories to provide homeless persons with basic shelter and essential supportive services. A state-administered program jointly funded by the federal and state governments to provide medical assistance, including acute and long-term care for low-income, aged, or disabled individuals.

018625.

Program title Social Services Block Grant

Temporary Assistance to Needy Families

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Workforce Investment Act Youth Programs

Contracts

Federally Funded Research and Development Centers

Fee-for-service payments

Medicare Pell Grant

Tax expenditures

Low-Income Housing Tax Credit

Tax-Exempt 501(c)(3) Bonds

Table 3. (Continued) Agency Description HHS/ACF Provides funding to states to furnish social services including daycare, protective services, adoption, health-related services, transportation, or any other social services found necessary by the state. HHS/ACF Provides grants to states for a range of benefits and services, including providing cash assistance to needy families with children. DOL/ETA Provides formula grants to states to support training and related services—including mentoring, leadership development, support services such as childcare, and counseling—for certain low-income, at risk youth ages 14-21. Many federal departments Privately owned but government-funded entities with long-term and agencies, including the contractual relationships with one or more federal agencies Departments of Defense conducting research in areas such as military space programs, (DOD), Energy (DOE), nanotechnology, microelectronics, nuclear warfare, and HHS, and Homeland biodefense countermeasures, among other areas. Security (DHS) HHS/CMS Provides health insurance to individuals aged 65 and older as well as certain disabled individuals. Department of Education Provides need-based grants to low income undergraduate and (Education) / Office of certain postbaccalaureate students to promote access to Federal Student Aid (FSA) postsecondary education. Internal Revenue Service Promotes lower, more affordable rents by providing federal tax (IRS), HUD, and credits to developers of qualified low- income housing projects, Department of Justice who can either use the credits or sell them to investors to raise capital (or equity) for real estate projects. IRS Tax-exempt bonds issued by state and local governments, the proceeds of which are used to finance property owned by 501(c)(3) charitable organizations or a governmental unit.

018625.

Credit programs

Program title Charitable Contribution Deduction Federal Direct Student Loans Federal Family Education Loans

Hospital Mortgage Insurance

Rural Development, Utilities Programs—Electric Program

Table 3. (Continued) Agency Description IRS Provides an incentive for individual and corporate taxpayers to donate to nonprofits. Education/FSA Provides loans directly to vocational, undergraduate, and graduate postsecondary school students and their parents. Education/FSA Provides guarantees to encourage private lenders to make loans to vocational, undergraduate, and graduate students enrolled at eligible postsecondary institutions to help pay for educational expenses. HUD / Federal Housing Insures nonprofit and for-profit hospitals’ loans that finance the Administration construction, modernization, equipping, or refinancing of acute care hospitals. USDA / Rural Provides financing to electric utilities serving rural Development, Utilities communities to construct electric distribution, transmission, Programs and generation facilities.

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Source: GAO analysis of program data from agencies.

018625.

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





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Medicare—To assess Medicare program funding to nonprofit organizations, we analyzed data from Centers for Medicare & Medicaid Services (CMS) data systems and assessed information provided by CMS officials. For Medicare Part A and B payments to nonprofit organizations, we combined data on payments to providers in CMS’ Health Care Information System (HCIS) with the nonprofit status of those providers in the Provider of Services (POS) files. We divided entity types in the POS into nonprofit and other categories based on our review of documentation and, where documentation was lacking, tests of some recipients. We did not consider entities coded as combined types, such as combined government and voluntary home health facilities, to be nonprofit organizations. CMS officials provided data on Medicare Part C (managed care) and D (prescription drug benefit) payments to nonprofit and other plan types, which officials told us represent nonprofit status from CMS’ Health Plan Management System (HPMS) and payment figures to those plans from the Automated Plan Payment System (APPS). All figures on Medicare payments are for the calendar year 2006. Medicaid and State Children’s Health Insurance Program—We estimated the amount of federal funds that may have reached nonprofit institutions through Medicaid and the State Children’s Health Insurance Program (SCHIP) by examining program expenditure reports and assessing a share of expenditures in select categories that may have reached nonprofit organizations. Our calculations are based on a preliminary version of CMS’ Financial Management Report for fiscal year 2006 that was provided to us by CMS and is subject to revisions. We combined federal Medicaid and SCHIP expenditures in fiscal year 2006 in select service categories that we identified during our review as significantly involving nonprofit organizations. We then used nonprofit organizations’ share of total health care sector revenues from the Census Bureau’s Service Annual Survey 2006 as a proxy for the portion of federal expenditures in these categories that may reach nonprofit organizations.38 The actual amount of funds reaching nonprofit organizations through Medicaid and SCHIP could be greater or less than our estimate for several reasons including how similarly the programs rely on nonprofit organizations compared with the health care sector overall. To assess the reasonableness of our estimate, we discussed our approach and findings with internal GAO experts, officials at CMS, and compared our results with those of other researchers. Other Indirect Grants through States—For perspective on the extent to which states collect data on federal funding passed through to nonprofit organizations, we spoke to officials from the three states obtaining the most federal assistance funds in 2006, based on the FAADS data from that year—California, New York, Texas—as well as two states suggested by others as developing information systems to track those funds—Michigan and Maryland. We discussed their present and planned activities to track these funds and, when available, obtained limited information that they collected. Credit—In addition to using data from FAADS, we assessed federal funding to nonprofit organizations through credit programs by examining the Office of Management and Budget’s (OMB) compilation of data on federal credit programs in the President’s Budget.39 OMB reports on the face value of federal credit outstanding as well as the estimated future cost of outstanding federal credit.

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Tax Policy—To assess the costs of tax policies that benefit nonprofit organizations, we reviewed the literature on nonprofits and taxes and reviewed estimates of the value of nonprofits’ tax exemption and the revenue loss estimates associated with various specific tax expenditures. In particular, we assessed estimates of the costs of several specific tax expenditures that benefit nonprofit organizations in the Department of the Treasury’s Office of Tax Analysis list of tax expenditures and estimates of their cost as reported by OMB in the President’s Budget submission.40 We had analyzed the development of these estimates extensively for recent work.41 We did not attempt to identify all tax expenditures that involve nonprofit organizations. In several cases, estimates of the cost of tax expenditures include tax expenditures involving nonprofit and other entities. For example, the exclusion of interest for hospital construction bonds benefits nonprofit and other hospitals. We were unable to distinguish the portion of these tax expenditures that involved nonprofit organizations.

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APPENDIX II: NONPROFIT IDENTIFICATION IN KEY DATA SYSTEMS To assess how reliably nonprofit organizations are identified within key data systems for our purposes, we tested random samples of populations from various segments of these databases against alternative sources. We tested samples of records in the Federal Awards and Assistance Data System (FAADS), Federal Procurement Data System—Next Generation (FPDS-NG), and Medicare’s Provider of Services (POS) and Health Plan Management System (HPMS).42 For FAADS, our testing is based on a sample of 96 records coded as nonprofit organizations and 97 records coded as other entity types. For FPDS-NG, we tested 95 vendors that were consistently coded as nonprofit organizations, and 96 vendors of all other types. For the POS, we tested 96 providers including nonprofit and other types. We tested 87 HPMS plans. For each of these samples, we compared the nonprofit status of records with organizations’ status in several sources including the Internal Revenue Service’s Business Master File,43 the 2002 Census of Governments,44 the 2005 Higher Education Directory,45 the American Hospital Association’s 2007 Guide,46 and information from the Department of Housing and Urban Development (HUD) that is compiled by the National Housing Trust on housing developments. Since we relied on matching organizations by name and location across these data sources, we used our professional judgment based on the preponderance of the evidence across multiple data sources in assessing whether a given organization was a nonprofit or other entity type. Because of limitations involved with name searches and the lack of comprehensive sources for entities that are not nonprofit organizations, we were unable to verify the status of a significant portion of sampled records in many of these data sources, as shown in table 4 below. We also estimate that a significant portion of records in FAADS and vendors in FPDS-NG are miscoded for the purposes of our assessment. These are not necessarily errors since these databases use various definitions of nonprofit organizations in their systems, none of which align exactly with our definition of a nonprofit.

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Table 4. Estimated Reliability of Nonprofit Identification in Key Data Systems Based on Samples of Records

Database and segment of records FAADS Nonprofits All other recipientsb FPDS-NGc Nonprofits All other recipients

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Medicare Provider of Services (POS) Medicare Health Plan Management System (HPMS)d

Percent estimated Percent unable to to be correctly verify (with 95 identified (with 95 percent percent confidence confidence interval) interval)

Percent estimated to be miscoded for our purposes (with 95 percent confidence interval)a

70 (60-79) 59 (48-69)

22 (14-31) 36 (27-46)

8 (4-16) 5 (2-12)

74 (64-82) 100 (97-100) 91 (83-96) 82 (72-89)

11 (5-19) 0 (0-3) 8 (4-16) 2 (0-8)

16 (9-25) 0 (0-3) 1 (0-6) 16 (9-26)

Source: GAO analysis of Census Bureau, CMS, General Services Administration, and OMB data. Notes: GAO analysis of Federal Awards and Assistance Data System (FAADS), Federal Procurement Data System—Next Generation (FPDS-NG), Medicare Provider of Services (POS) and Health Plan Management System (HPMS) data. a Though miscoded for the purposes of our assessment, these are not necessarily errors because databases use various definitions of nonprofit organizations in their systems none of which align exactly with our definition of a nonprofit. b This includes those records in FAADS that are not labeled as nonprofit organizations or private institutions of higher education. c FPDS-NG samples were drawn from the set of vendors who were consistently labeled in FPDS-NG. This assessment excludes 1,768 vendors in FAADS with some contract actions where they are labeled as nonprofit organizations and other contract actions where they are labeled as other recipient types. d Most entities that we labeled as miscoded in the HPMS system were due to Blue Cross/Blue Shield plans that were listed as nonprofit organizations. Because these organizations are not federal taxexempt organizations, we did not include them in our definition of nonprofit organizations.

We used the same approach and sources to assess the portion of records in FAADS labeled as private institutions of higher education that were nonprofit organizations. Based on our tests of a sample of 96 records, we estimate that 95 percent are nonprofit organizations (with a 95 percent confidence interval of 88-98 percent).

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End Notes 1

Except where otherwise noted, we use 2006 to refer to the federal 2006 fiscal year. The Federal Funding Accountability and Transparency Act of 2006 (FFATA) requires the federal government to collect and report data on subawards. 3 The Urban Institute, ―The Nonprofit Sector in Brief: Facts and Figures from the Nonprofit Almanac 2008‖ (2008), http://nccs.urban.org/statistcs/quickfacts.cfm (downloaded Oct. 24, 2008). Data only include nonprofits with gross receipts greater than $25,000 that filed Form 990 with the Internal Revenue Service (IRS). Also, revenues from certain religious organizations, such as churches, may not be included because they are not required to register with the IRS, although some have chosen to do so. 4 For the purposes of this review, we define nonprofit organizations as any organization having federal tax-exempt status as approved by the IRS under section 501(a) of the Internal Revenue Code. This includes all organizations covered under section 501(c) of the Internal Revenue Code, such as charities, social welfare organizations, and chambers of commerce. 5 U.S. Internal Revenue Service, Data Book, http://www.irs.gov/pub/irs-soi/07dbexemptact.pdf (downloaded June 11, 2008). 6 These figures only include revenues from charities classified as 501(c)(3) organizations and do not include 501(c)(3) private foundations and other tax-exempt organizations, such as trade organizations and labor unions. Also, revenues from certain religious organizations, such as churches, may not be included because they are not required to register with the IRS, although some have chosen to do so. 7 After receiving tax-exempt recognition, many nonprofit organizations must annually file an information return, Form 990 (or 990-EZ), to report their financial transactions and activities. In 2005, certain religious organizations and entities with gross receipts of $25,000 or less were not required to file annual information returns. 8 Amy Blackwood, Kennard T. Wing, and Thomas H. Pollak, ―The Nonprofit Sector in Brief—Facts and Figures from the Nonprofit Almanac 2008: Public Charities, Giving, and Volunteering‖ (Urban Institute, 2008), http://nccs.urban.org/statistics/quickfacts.cfm (downloaded Oct. 24, 2008). 9 See GAO, Nonprofit Sector: Increasing Numbers and Key Role in Delivering Federal Services, GAO-07-1084T (Washington, D.C.: July 24, 2007), 4. Data from National Center for Charitable Statistics (using the IRS Business Master File, May 2006), http://nccsdataweb.urban.org/NCCS/Public/index.php (downloaded Dec. 18, 2006). 10 GAO, Tax-Exempt Sector: Governance, Transparency, and Oversight Are Critical for Maintaining Public Trust, GAO-05-561T (Washington, D.C.: Apr. 20, 2005), 10. 11 GAO-07-1084T. 12 The Federal Grant and Cooperative Agreement Act of 1977 discusses the use of grant relationships versus procurement contracts. The act’s provisions are intended to prescribe criteria for executive agencies in selecting appropriate legal instruments to achieve uniformity in grant and cooperative agreement use, a clear definition of the relationships they reflect, and a better understanding of the responsibilities of the parties to them. The distinction between these two forms of assistance is that substantial involvement is expected between the executive agency and the state, local government, or other recipient when carrying out the activity contemplated in a cooperative agreement, whereas such involvement is not expected in carrying out a grant agreement (see 31 U.S.C. § 6304-05). Cooperative agreements are useful where federal project management would be helpful due to the novelty or complexity involved, where collaborative research is desirable, or federal involvement is needed in early stages where standards are being developed. Given the similarity between these two forms of assistance, we refer to grants and cooperative agreements as grants in the remainder of this chapter. 13 Pub. L. No. 109-282, 120 Stat. 186 (Sept. 26, 2006). 14 The Single Audit Act requires nonfederal entities that expend $500,000 or more annually in federal awards to undergo an audit. 31 U.S.C. § 7502. However, entities spending less than $500,000 in federal awards are not required to undergo an audit and therefore information on these entities is not provided in the Federal Audit Clearinghouse. 15 See GAO, Temporomandibular Joint and Muscle Disorders: NIH Supports a Wide Range of Research, GAO-08454R (Washington, D.C.: Apr. 4, 2008). 16 Although electricity cooperatives may not be traditionally considered nonprofit organizations, they fall under the definition of ―nonprofit‖ used in this chapter because they are classified as tax-exempt entities under the tax code. 17 However, exempt organizations are subject to tax on income earned through activities that are unrelated to their tax-exempt purpose, commonly referred to as unrelated business income tax. 26 U.S.C. § 501(b). 18 For additional information on tax expenditures, see GAO, Government Performance and Accountability: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined, GAO-05-690 (Washington, D.C.: Sept. 23, 2005).

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Individuals may also deduct charitable contributions to federal, state, and local governments if the contribution is solely for public purposes. 20 Depending on the state, nonprofit organizations may compete with for-profit entities for state-allocated Social Services Block Grant funds. 21 An official from the Centers for Medicare & Medicaid Services stated that oversight over nonprofit and for-profit contract providers is the same within the managed care and part B components of Medicare, which cover hospital insurance and insurance coverage for physician visits. 22 Pub. L. No. 97-255, 96 Stat. 814 (Sept. 8, 1982), codified at 31 U.S.C. § 3512(c); see also Office of Management and Budget, Revisions to OMB Circular A-123, Management‟s Responsibility for Internal Control (Washington, D.C.: Dec. 21, 2004). 23 Woods Bowman and Marion Fremont-Smith, ―Nonprofits and State and Local Governments,‖ in Nonprofits and Government: Collaboration and Conflict (Washington, D.C.: The Urban Institute Press, 2006), 193. 24 See GAO, Reliability of Federal Procurement Data, GAO-04-295R (Washington, D.C.: Dec. 30, 2003); Improvements Needed to the Federal Procurement Data System-Next Generation, GAO-05-960R (Washington, D.C.: Sept. 27, 2005); Alaska Native Villages: Recent Federal Assistance Exceeded $3 Billion, with Most Provided to Regional Nonprofits, GAO-05-719 (Washington, D.C.: Aug. 2, 2005). 25 GAO, Rural Economic Development: More Assurance Is Needed That Grant Funding Information Is Accurately Reported, GAO-06-294 (Washington, D.C.: Feb. 24, 2006), 23. 26 Central Contractor Registration, CCR Handbook (March 2008), p. 12. 27 See GAO-04-295, 5; GAO-05-960R, 5; and GAO-06-294, 32. 28 CCR is the primary registrant database used by the federal government to collect, validate, store, and disseminate data in support of agency procurement activities. Currently, organizations must register in CCR to be awarded contracts by the federal government. 29 Figures from these two data systems are not entirely comparable because (1) funding in FAADS is primarily obligations, whereas Medicare figures refer to outlays; and (2) FAADS refers to the federal fiscal year while Medicare figures are for the calendar year. 30 Figures for Medicare managed care and prescription drug care plans, totaling $26 billion in calendar year 2006, include some payments to Blue Cross/Blue Shield plans that are not federal tax-exempt organizations. 31 According to the FAADS reporting manual, amounts in FAADS for direct loans are ―the gross amount of the loan‖ and guaranteed loans are the ―amount of the Federal Government’s contingent liability.‖ OMB and U.S. Dept of Commerce, Bureau of the Census, Federal Assistance Award Data System Reporting Manual for Federal Fiscal Year 2006 (2006), 25. However, OMB has reported that FAADS only includes loan guarantee information when a default claim payment has been made. 32 According to data from FAADS, 20 percent of Federal Direct Student Loans went to nonprofit organizations in 2006. We therefore estimated that 20 percent of total outstanding direct and guaranteed federal student loans were used at nonprofit schools. 33 The future costs are the subsidy cost and estimated uncollectible principal and interest for direct loans, and estimated liabilities for loan guarantees. The subsidy cost, as defined by the Federal Credit Reform Act of 1990, is the government’s estimated net long-term cost, in present value terms, of direct or guaranteed loans over the entire period the loans are outstanding. 34 Generally, tax expenditure costs are estimated by comparing the revenue raised under current law with revenue that would have been raised if a given provision did not exist, assuming all other parts of the tax code remain constant and taxpayer behavior is unchanged. These revenue loss estimates are intended to provide information about the value of tax expenditures. However, tax expenditure estimates do not incorporate any behavioral responses and thus do not necessarily represent the exact amount of revenue that would be gained if a specific tax expenditure were repealed. In addition, the value of the tax expenditure depends on baselines used and various other assumptions. 35 Evelyn Brody and Joseph J. Cordes, ―Tax Treatment of Nonprofit Organizations: A Two-Edged Sword?‖ in Nonprofits and Government: Collaboration & Conflict, 2nd ed. (Washington, D.C.: The Urban Institute Press, 2006), 141-180. 36 Congressional Budget Office, Taxing the Untaxed Business Sector (Washington, D.C., July 2005). 37 Aggregate tax expenditure estimates must be interpreted carefully because of inherent limitations in the meaning of the summed estimates. The sum of the individual tax expenditure estimates is useful for gauging the general magnitude of revenue forgone through provisions of the tax code but does not take into account interactions between individual provisions. 38 The Service Annual Survey 2006 includes revenues at government-operated hospitals along with revenues at taxexempt establishments. Therefore, in order to get revenues at private tax-exempt institutions corresponding to our definition of nonprofit organizations, we subtract revenues to government hospitals from total revenues at tax-exempt firms. 39 Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2009 (Washington, D.C.: 2008).

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40

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Generally, tax expenditure costs are estimated by comparing the revenue raised under current law with revenue that would have been raised if a given provision did not exist, assuming all other parts of the tax code remain constant and taxpayer behavior is unchanged. These revenue loss estimates are intended to provide information about the value of tax expenditures. However, tax expenditure estimates do not incorporate any behavioral responses and thus do not necessarily represent the exact amount of revenue that would be gained if a specific tax expenditure were repealed. In addition, the value of the tax expenditure depends on baselines used and various other assumptions. 41 GAO, Government Performance and Accountability: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined, GAO-05-690 (Washington, D.C.: Sept. 23, 2005), 79-81. 42 Each of these systems was tested at different levels because of how the data are collected. We tested FAADS records at the obligation or award level such that one recipient may be associated with multiple records. FPDS-NG and Medicare data were tested at the vendor or provider level and may have multiple funding actions associated with each vendor. 43 Internal Revenue Service, Business Master File (http://www.irs.gov/taxstats/charitablestats/ article/0,, id=97186,00.html, downloaded on Aug. 6, 2008, containing data that had been updated as of July 31, 2008). 44 U.S. Census Bureau, 2002 Census of Governments: Governments Integrated Directory Public Use Files (http://www.census.gov/govs/www/cog2002.html, downloaded Sept. 18, 2008). 45 Higher Education Publications, Inc., 2005 Higher Education Directory (Falls Church, Va., 2005). 46 American Hospital Association, AHA Guide 2007 (Chicago, Ill., 2007). We considered the following control codes in the AHA Guide to be nonprofit organizations: church operated nongovernment nonprofit, other nongoverment nonprofit, church operated osteophathic, and other not-for-profit osteophathic. All other control codes were considered to be other entity types.

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Chapter 5

NONPROFIT SECTOR: INCREASING NUMBERS AND KEY ROLE IN DELIVERING FEDERAL SERVICES Stanley J. Czerwinski

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WHY GAO DID THIS STUDY The nonprofit sector is an important means through which public services are delivered and national goals addressed. The federal government increasingly relies on networks, often involving nonprofits that address many issues—health care, education, and human services, for example. Because nonprofit organizations play a key role as partners with the federal government, there is a need to better understand the sector. This testimony (1) provides a picture of the nonprofit sector—its size, composition, and role in the economy; (2) discusses how and why the federal government partners with the sector; and (3) identifies issues related to the sector as a federal partner that need to be better understood. GAO’s preliminary work on this topic focused on the intersection of nonprofit organizations and the federal government, including trends, the use of federal funding, and emerging issues. GAO interviewed key experts from relevant associations and academia, reviewed related research, and hosted roundtable discussions with key researchers and practitioners in the nonprofit area.

WHAT GAO FOUND U.S. nonprofit organizations have a significant role both in the economy as a whole and as providers of services. While the majority of nonprofit organizations have relatively small operating budgets, together their impact is large. For example, researchers estimate that the sector’s spending in recent years was roughly 11 to 12 percent of the nation’s gross domestic product and, in 2002, the sector had over 9.6 million employees, about 9 percent of the

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civilian workforce. Further, the sector has grown; the number of charitable organizations reporting almost tripled over the last two decades. The federal government increasingly partners with nonprofit organizations as they bring many strengths to these partnerships, such as flexibility to respond to needs and access to those needing services. These organizations receive significant funds from government sources to provide services. Researchers have attempted to quantify these funds. For example, one estimate is that the federal government spent about $317 billion on nonprofit organizations in fiscal year 2004. However, the lack of data makes measuring federal funds to nonprofit organizations difficult. Many funds come through indirect routes, such as through state and local government, adding to the difficulty of determining funding and measuring performance. Although IRS is generally responsible for overseeing the tax-exempt status of these organizations, there is less focus at the federal level on the comprehensive role of nonprofits in providing services using federal funds. Our preliminary look at how the federal government interacts with the nonprofit sector indicates that several policy issues have emerged; examples follow.     

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Coordination and collaboration—the increasing importance of collaboration between all levels of the government and nonprofit organizations. Internal governance issues—the need to strengthen internal governance of nonprofit organizations. Capacity—the need to improve smaller nonprofit organizations’ capacity to address weaknesses in finances, administration, and human capital. Nonprofit sector data—the need for improved data on the sector’s size, financial status, and funds from federal sources. Administrative and reporting requirements—the many requirements to be accountable, which while important and necessary, require information in different formats and with increasing complexity. Fiscal challenges for nonprofits—the instability of some nonprofits’ financial position.

At the request of the Congress, we are beginning work to examine these issues further. Mr. Chairman and Members of the Subcommittee: I appreciate the opportunity to participate in today’s hearing to discuss our preliminary work and observations on the role the nonprofit sector plays in partnering with federal, state, and local governments to deliver programs and services.1 Although the sector is an important means through which many key national goals are addressed, its role can be nearly invisible to federal policy-setting decision makers when designing and implementing programs. Broadly stated, the federal government increasingly relies on large and complex networks of nonfederal actors to carry out initiatives. In recent years, most oversight of the sector has focused on its tax-exempt status. However, because the nonprofit sector plays a key role in delivering services funded by the federal government, there is also a need to better understand the sector as a partner on which the federal government relies. The nonprofit sector is defined primarily by its tax-exempt status, a designation that occurs at both the federal and state levels of government. In addition, nonprofit organizations

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share certain other characteristics. First, they work to serve public purposes or the common goals of their members. Further, they can benefit from voluntary labor and are self-governing. In addition, they are not permitted to distribute profits to their members but must instead use them to further the organization’s charitable purpose. Beyond these commonalities, they have a diverse set of missions, and many of those missions are related to those of federal agencies. As a result, it is important to better understand the composition of the sector, its importance, and its strengths and challenges. An estimated 1.8 million organizations were recognized as federal-tax-exempt organizations as of September 2006.2 Of these, about 60 percent (see figure 1) are public charities or foundations that benefit the broad public interest, and are referred to as 501(c)(3) organizations. Our focus today is largely on charities, as they represent the majority of the sector. (See further clarification of key terms in app. I.) As you know, the Internal Revenue Service (IRS) serves as the agency that generally oversees the nonprofit sector at the federal level. IRS focuses on whether organizations meet tax-exempt requirements and comply with federal laws, such as those governing the use of funds intended for a charitable purpose. It approves organizations for federal tax-exempt status and is the recipient of annual reporting of financial data on Forms 990, which are required from organizations with gross receipts over $25,000.3 In addition, a few other federal organizations, such as the Federal Trade Commission and the Department of Justice, provide oversight of nonprofit organizations in certain specialized areas. States also play an important role in the oversight of nonprofits, as they have interests and responsibilities in areas such as the legitimacy of charitable fundraising and whether a charity is meeting the charitable purpose for which it was created. In addition, the public plays a role in oversight through its ability to review key information on individual organizations, to the extent useful information is available.

Source: GAO analysis of IRS data as of September 30, 2006. Note: The 501(c)(3) organizations are the public charities and foundations; (501)(c)(4) are social welfare organizations. Figure 1. Categories of Tax-Exempt Entities

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My testimony today will point out some of the diversity and the range of characteristics present within the sector, along with some of the issues that arise as nonprofit organizations interact with the federal government. I would like to (1) provide a picture of the nonprofit sector—its size, composition, and role in the economy; (2) discuss how and why the federal government partners so extensively with the sector; and (3) identify issues that others have raised related to the sector as a federal partner that need to better understood. My statement is based largely on some preliminary work we recently completed that focused broadly on the intersection of nonprofits and the federal government. We focused on trends in the use of federal funding and on identifying emerging issues in the nonprofit sector. We interviewed representatives from several large nonprofit member associations, research and advocacy organizations, academic researchers, foundation representatives, and nonprofit practitioners. We hosted two roundtable discussions with key researchers and practitioners in the nonprofit area. We also reviewed literature on the sector from academic centers, research institutes, foundations, and others to better understand sector trends and issues, and to identify additional experts for interviews. Our work included a review of our previous work related to nonprofits on a wide variety of topics, such as tax policy, human service programs, and executive compensation. Our work was performed in accordance with generally accepted government audit standards.

ROLE OF NONPROFIT ORGANIZATIONS IN THE ECONOMY AND AS PROVIDERS OF SERVICES IS SIGNIFICANT

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While the majority of nonprofits individually have relatively small operating budgets, as a whole, the nonprofit sector has a significant presence in the U.S. economy, according to researchers of the nonprofit sector. For example,    

In 2004, nonprofit organizations that submitted Forms 990 to IRS held an estimated $3 trillion in total assets and received $1.4 trillion in revenues.4 During the period 1998 through 2002, spending reported by tax-exempt entities was roughly 11 to 12 percent of the nation’s gross domestic product.5 The tax-exempt sector had over 9.6 million employees, about 9 percent of the civilian workforce in 2002.6 Wages and salaries paid to nonprofit sector employees comprised 8.3 percent of those paid in the U.S. in 2004.7

In addition to representing a significant portion of the U.S. economy, the sector is growing. Data indicate that from May 2000 to May 2006, the number of registered public charities has grown over 30 percent from about 646,000 to about 851,000, although organizations that have gone out of existence may be included in those numbers.8 Other data also suggest growth in the sector. As shown in figure 2, the number of 501(c)(3) organizations completing the Form 990 has almost tripled over the last two decades (from 1986 to 2006) from about 148,000 to about 427,000.

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Source: IRS, Statistics of Income Division, 1986-2002 data; National Center for Charitable Statistics (using the IRS Business Master File January, 2007), 2006 data. Note: Public charities and private foundations are both 501(c)(3) entities. Organizations that have annual gross receipts not normally in excess of $25,000, churches, and certain other exempt organizations are not required to file the annual information return. Figure 2. Growth in the Number of Reporting 501(c)(3) Organizations—1986 through 2006

Experts have identified several possible contributing reasons for this increase:

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  

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a shift in recent decades away from government providing most services directly; the expansion of service-related industries in the U.S., of which many nonprofits are a part; deinstitutionalization during the 1960s and 1970s that eliminated large, public care facilities in favor of smaller, community-based organizations, often operated by nonprofit entities; and the trend in devolution in certain policy areas such as welfare, which contributed to a lessening role of the federal government and more localized control in the hands of state, local, and nonprofit organizations.

Nonprofit organizations are found in a wide variety of policy areas such as health care, education, and human services, and include many prominent and highly visible community institutions, such as hospitals, museums, job training centers, and churches. (See a list of categories in app. 2.) These organizations also represent a diverse range of sizes. According to the Independent Sector, 73 percent had annual budgets of less than $500,000 in 2004 and only 4 percent had budgets exceeding $10 million.9 Much of the data on the sector come from the IRS Form 990, but those data have limitations. For example, returned Forms 990 are sometimes incomplete or inaccurate and are not consistently followed up on, and some nonprofit organizations required to submit Forms 990 do not do so. In addition, for certain types of funding, the Form 990 does not distinguish

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between government and private sources of support. It also does not break out the sources of government grants by federal, state, or local level. We have pointed out in the past the importance of requiring information in a more timely and user-friendly way on IRS Forms 990.10

FEDERAL GOVERNMENT INCREASINGLY PARTNERING WITH NONPROFIT ORGANIZATIONS Nonprofit organizations bring many strengths to their partnerships with the federal government. Their breadth and diversity allow the sector to address the specific needs of communities and of individuals. Researchers commenting on the advantages of nonprofits point out the provision of benefits in the public interest, often with greater flexibility and access than can be achieved by the public sector. Nonprofits often bring an indepth understanding of a particular geographic area or special population and have access to underserved populations. Nonprofit organizations play a large and increasing role in delivering services traditionally provided by the government, according to researchers. Their research indicates that nonprofit organizations receive significant funds from government sources and that over time these funds have increased. As we previously noted, data are limited but researchers have attempted to analyze data from various sources and identify trends in federal funding to nonprofits. Their work offers a glimpse into the magnitude of federal funds going to nonprofits, but does not provide a comprehensive analysis of the various funding streams. For example:

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 

Researchers have reported that the federal government provided about $115 billion directly to nonprofits in fiscal year 2001, the majority of which hospitals received through the Medicare program. Indirect federal funds through state and local governments to nonprofits were an estimated $84 billion, totaling about $199 billion, or about 15 percent of federal payments and grants.11 Data from other researchers indicate that the federal government spent an estimated $317 billion on nonprofit organizations in fiscal year 2004.12 Researchers estimate that federal support to nonprofit organizations increased more than 230 percent from fiscal year 1980 to fiscal year 2004 in adjusted dollars.13

Federal funds reach nonprofit organizations through many paths (see figure 3). Some flow directly from federal agencies to nonprofit organizations, such as research grants to universities. Some funds flow to states as grants, whose funds may flow to nonprofit organizations, or may flow to local governments that compensate nonprofit organizations for services with those funds. Also, some federal funds move to nonprofits on the basis of individuals’ decisions, that is, from federal programs to nonprofits selected by the consumer, such as for health care. In addition to direct and indirect federal funds, nonprofit organizations benefit from being tax-exempt and also from other tax policies, such as donors’ ability to deduct contributions on their taxes.

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Source: GAO. Figure 3. Examples of Paths Federal Funds Take to Nonprofit Organizations

EMERGING POLICY ISSUES AND CHALLENGES FACING THE NONPROFIT SECTOR

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The current federal oversight of nonprofits is focused on organizations’ tax-exempt status and on specific programs. However, there is less focus on understanding the overall role of nonprofits as implementers of national and federal initiatives, and how to best ensure that nonprofits have the support they need. As we spoke with researchers and practitioners, several issues emerged as needing attention in order to ensure the strength of this important partner to the federal government. We have looked at specific issues involving nonprofit organizations over the years, but our past work was largely related to specific programs. We heard several common issues while taking this more comprehensive look at nonprofit organizations’ interaction with the federal government (see figure 4).

Source: GAO. Figure 4. Emerging Policy Issues and Challenges Facing the Nonprofit Sector

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Coordination and collaboration—One theme that surfaced in our preliminary research was the importance and value of coordination and collaboration between nonprofit organizations and government at all levels. As we pointed out in our work on 21st century challenges, the government relies increasingly on new networks and partnerships to achieve critical results and develop public policy, often including multiple federal agencies, non- or quasi-government organizations, for-profit and nonprofit contractors, and state and local governments.14 A complex network of governmental and nongovernmental entities shape the actual outcomes achieved, whether it be through formal partnerships in grant programs or through independent actions of each addressing common problems. For example, our research on disaster relief efforts following September 11 and Hurricanes Rita and Katrina highlighted the role of nonprofits in providing assistance and the importance of communication and coordination of services with government entities. We pointed out that the scope and complexity of the September 11 attacks presented challenges to charities in their attempts to provide seamless social services for surviving family members and others in need of aid.15 With regards to the response to Hurricanes Katrina and Rita, we noted that charities could improve coordination among charities and the Federal Emergency Management Agency.16 We believe that many of the key practices that help enhance and sustain collaboration among federal agencies can be helpful between government and nonprofit organizations, such as when both parties collaborate to     

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define and articulate a common outcome; establish mutually reinforcing or joint strategies; identify and address needs by leveraging resources; agree upon roles and responsibilities; establish compatible policies, procedures, and other means to operate across boundaries; develop mechanisms to monitor, evaluate, and report the results of collaborative efforts; reinforce accountability for collaborative efforts through plans and reports; and reinforce individual accountability for collaborative efforts through performance management systems.17

Internal governance issues—A second theme that surfaced in our preliminary research was the need to strengthen governance of nonprofit organizations, a point made by the sector itself as well as by others. At the organization level, a sound governance structure can establish the set of checks and balances that help steer an entity toward result-oriented outcomes consistent with their purposes while also guarding against abuses. Concerns about accountability and transparency of nonprofit organizations have grown in recent years. In 2004 and 2005, the Senate Finance Committee held hearings to look more closely at practices that are illegal or not in keeping with standards typical of the charitable sector, and released a discussion draft of possible solutions. In October 2004, the Independent Sector convened a panel, whose report made several recommendations to address concerns.18 The panel continues to focus on self-regulation as a way to address these concerns, although there are mixed opinions on the potential success of self-regulation. In addition, several efforts are under way within the sector to raise awareness of ways to improve internal governance of

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Nonprofit Sector: Increasing Numbers and Key Role in Delivering Federal Services 133 nonprofits, including associations focusing on providing training or consulting, and national certification processes.19

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Capacity—Another area to which researchers suggest attention should be paid is improving the capacity that smaller nonprofit organizations have to address weaknesses in finances, administration, and human capital. Many nonprofits struggling to accomplish their mission on limited budgets lack the resources that could allow them to better manage their finances and strengthen their infrastructure. In addition, particularly in smaller nonprofit organizations, the strengths of board members may be in addressing their organization’s mission, and they may lack legal and financial knowledge or the skills necessary to oversee a nonprofit entity. One specific area identified as needing attention is the development of human capital, as these organizations need to address a complex set of issues, such as competition for service workers, leadership succession, and staff turnover. One promising change is the increase in graduate programs offering a concentration in nonprofit management from 17 in 1990 to 97 in 2001.20 While there has not been a comprehensive effort by the federal government to improve the capacity of nonprofit organizations, several federal programs provide capacity-building grant funding and technical assistance to nonprofits. Providing assistance to improve capacity may be one area where the federal government could employ a more strategic approach. Nonprofit sector data – As I mentioned earlier, there is a lack of sufficient knowledge on a key federal government partner and its role. Researchers point out that without better data on the nonprofit sector as a whole, appropriate and timely policy decisions regarding nonprofits cannot be made. Some actions under way may improve information on tax-exempt organizations. Beginning in 2008, small tax-exempt organizations that previously were not required to file Form 990 returns, with some exceptions (such as churches) will be required to file a shorter notification form electronically.21 In July 2007, IRS began mailing educational letters to over 650,000 small tax-exempt organizations that may be required to submit the notice. Further, IRS is seeking comments on a redesigned Form 990, intended to provide a realistic picture of organizations and their operations and to accurately reflect an organization’s operations and use of assets.22 In addition to the Form 990, other sources of data have also been used to better understand the sector, such as Bureau of Labor Statistics employment data, but continued access to that data has been a problem. In addition, the funds to perform the analysis generally come from the nonprofit sector, and are not consistently available. Administrative and reporting requirements—Practitioners and researchers alike addressed the difficulty that nonprofit organizations, particularly smaller entities, have in responding to the administrative and reporting requirements of their diverse funders. While funders need accountability, the diverse requirements of different funders make reporting a time-consuming and resource-intensive task. Experts report that both government and foundations have increasing expectations that nonprofits conduct performance measurement, but meeting the expectations, given the size of grants and the evaluation capabilities of the staff, can be difficult. One researcher said that practitioners report performance evaluation as one of the biggest challenges they face, given their capacity issues.

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Fiscal challenges for nonprofits—Nonprofit organizations, particularly smaller entities, often operate with limited budgets and have limited capital. As one researcher noted, the logic of the business world is ―upended‖ with nonprofit organizations.23 Researchers and practitioners have pointed out that nonprofit organizations often have inadequate funds to invest in management infrastructure and that government and private foundations have not provided them adequate overhead funding to, for example, pay salaries to attract employees with needed skills or upgrade systems that would maximize efficiency. Funders—federal, state and local governments, foundations, and private donors—are willing to pay varying amounts toward overhead, resulting in nonprofit organizations needing to sometimes turn to other sources to cover their overhead costs. We believe this is an area in which more data are needed to fully understand the implications of reimbursement for overhead charges.

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CONCLUDING OBSERVATIONS Virtually every American interacts with the nonprofit sector in his or her daily life through a broad range of concerns and activities such as health care, education, human services, job training, religion, and cultural pursuits. In addition, federal, state, and local governments rely on nonprofit organizations as key partners in implementing programs and providing services to the public. Given the way the sector is woven into the basic fabric of our society, it is essential we maintain and cultivate its inherent strength and vitality and have accurate and reliable data on the overall size and funding flows to the sector. Keys to a healthy nonprofit sector include strengthening governance, enhancing capacity, ensuring financial viability, and improving data quality without overly burdening the sector with unnecessary or duplicative reporting and administrative requirements. At the request of the Congress, we are beginning work to examine these issues further. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have.

APPENDIX I: KEY TERMS RELATED TO NONPROFIT STATUS   

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Tax-exempt organization: An entity determined to be exempt from federal income taxes. Nonprofit status: A state-law concept, in which approved entities may be eligible for exemption from sales, property, and state income taxes. Section 501(c)(3) organization: An organization that has an exempt purpose such as serving the poor; advancing religious, educational, and scientific endeavors; protecting human rights; and addressing various other social problems. IRS Form 990: An IRS information return that many tax-exempt entities, meeting certain requirements, must file annually.

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APPENDIX II: TYPES OF PROGRAMS AND SERVICES IN THE NONPROFIT SECTOR The IRS uses the National Taxonomy of Exempt Entities system to classify tax-exempt organizations by industry subsector. When an organization is initially approved as taxexempt, it is classified into one of these 10 broad categories of tax-exempt entities:  

 







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Arts, culture, and humanities Museums, performing arts centers, media and communications, historical societies Education Elementary and secondary schools, colleges and universities, libraries and educational services Environment and animals Botanical gardens, natural resources conservation and protection Health Hospitals, mental health services, medical research, home health care, substance abuse treatment Human services Homeless shelters, youth development, job training, crime prevention, soup kitchens, recreation and sports International, foreign affairs Human rights, international cultural exchange, international development, peace and security, foreign affairs Public, societal benefit Foundations, civil rights, credits unions, economic development, public transportation, veterans’ organizations Religion-related Religion-related organizations, interfaith coalitions, religious media and communications Mutual membership/benefit Insurance providers, pension and retirement funds, fraternal societies, cemeteries Unknown, unclassified

End Notes 1

The tax-exempt sector is often referred to as the nonprofit sector. GAO, Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes, GAO-07-563 (Washington, D.C.: June 29, 2007), p. 5. 3 Churches are not required to file for tax-exempt status, nor to report annually. 4 The Urban Institute, ―The Nonprofit Sector in Brief,‖ The Nonprofit Sector in Brief: Facts and Figures from the Nonprofit Almanac 2007 (Urban Institute, 2006), www.urban.org/UploadedPDF/311373_nonprofit_sector.pdf (downloaded Oct. 30, 2006). 5 GAO, Tax-Exempt Sector: Governance, Transparency, and Oversight Are Critical for Maintaining Public Trust, GAO-05-561T (Washington, D.C.: Apr. 20, 2005), p. 9. 6 GAO-05-561T, p. 10. 7 National Center for Charitable Statistics, ―NCCS Quick Facts‖ (Urban Institute, May 2006), http://nccsdataweb.urban.org/NCCS/files/quickFacts.htm (downloaded Dec. 15, 2006). 2

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8

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National Center for Charitable Statistics (using the IRS Business Master File, May 2006), http://nccsdataweb.urban.org/NCCS/Public/index.php (downloaded Dec. 18, 2006) 9 The Independent Sector describes itself as a nonprofit, nonpartisan coalition of about 600 national public charities, foundations, and corporate philanthropy programs, collectively representing tens of thousands of charitable groups in every state. 10 GAO-05-561T. 11 Woods Bowman and Marion R. Fremont-Smith, ―Nonprofits and State and Local Governments,‖ Nonprofits and Government, 2nd Edition, eds. E. Boris and C. Steurle (Washington, D.C.: The Urban Institute Press, 2006), pp. 191-194. 12 Alan Abramson, Lester Salamon, and C. Eugene Steurle, ―Federal Spending and Tax Policies: Their Implications for the Nonprofit Sector,‖ Nonprofits and Government, 2nd Edition, eds. E. Boris and C. E. Steurle (Washington, DC: The Urban Institute Press, 2006), p. 118. 13 Alan Abramson, Lester Salamon, and C. Eugene Steurle, ―Federal Spending and Tax Policies: Their Implications for the Nonprofit Sector.‖ 14 GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO-05-325SP (Washington, D.C.: February 2005). 15 GAO, September 11: More Effective Collaboration Could Enhance Charitable Organizations‟ Contributions in Disasters, GAO-03-259 (Washington, D.C.: Dec. 19, 2002), p. 3 . 16 GAO, Hurricanes Katrina And Rita: Coordination between FEMA and the Red Cross Should Be Improved for the 2006 Hurricane Season, GAO-06-712 (Washington, D.C.: June 8, 2006), p. 1. 17 GAO, Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies, GAO-06-15 (Washington, D.C.: Oct. 21, 2005). 18 Panel on the Independent Sector (Convened by Independent Sector), Strengthening Transparency, Governance, Accountability of Charitable Organizations (Washington, D.C., June 2005). 19 For example, BoardSource, National Council of Nonprofit Associations, and the Alliance for Nonprofit Management all focus to some extent on strengthening internal governance of nonprofits. An example of a national certification process is one established by the Standards for Excellence Institute. 20 Alan J. Abramson, and Rachel McCarthy. ―Infrastructure Organizations,‖ from Lester M. Salamon, The State of Nonprofit America, 1st ed. (Washington, D.C.: Brookings Institution Press, 2002), p. 337. 21 The form is entitled ―Form 990-N Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ.‖ 22 We have not evaluated the redesigned Form 990. 23 Miller, Clara. ―The Looking-Glass World of Nonprofit Money: Managing in For-Profits’ Shadow Universe,‖ The Nonprofit Quarterly, vol. 12, issue 1 (Spring 2005).

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Chapter 6

FREQUENTLY ASKED QUESTIONS ABOUT TAXEXEMPT ORGANIZATIONS Erika Lunder

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ABSTRACT This chapter answers frequently asked questions about tax-exempt organizations including how to set up a tax-exempt organization, what limits are placed on the activities of tax-exempt organizations, and the meaning of the terms "tax-exempt," "nonpro_t," and "private foundation." Several questions are intended to guide the reader to more information about tax-exempt organizations in general or about speci_c organizations. Another group of questions provides general information on how to form a tax-exempt organization, what record keeping requirements an organization might encounter, and how an organization might lose its tax-exempt status.

SUMMARY This chapter answers frequently asked questions about tax-exempt organizations. It focuses on the types of organizations described in Internal Revenue Code (IRC) § 501(c), with the main emphasis on IRC § 501(c)(3) charitable organizations. One set of questions addresses some of the primary characteristics of tax-exempt organizations, including whether they may participate in lobbying and election-related activities, and defines the terms ―taxexempt,‖ ―nonprofit (not-for-profit),‖ and ―private foundation.‖ Another group of questions provides general information on how to form a tax-exempt organization, what information must be disclosed to the IRS and the public, and how an organization might lose its taxexempt status. The report ends with questions intended to help the reader find resources that provide information on specific organizations and additional information on tax-exempt organizations in general. Although this chapter summarizes such information with respect to tax-exempt organizations, it should not be relied on for specific tax advice—such advice should be sought directly from the IRS or qualified tax professionals.

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1. WHAT IS A TAX-EXEMPT ORGANIZATION? A tax-exempt organization is an organization that is exempt from federal income taxes under the Internal Revenue Code (IRC). To become exempt, an organization must meet the IRC’s requirements and usually must file an application with the Internal Revenue Service (IRS). Although the Code describes more than 30 types of organizations that qualify for exemption, the type of organization that people often mean when using the term ―tax-exempt organization‖ is described in IRC § 501(c)(3): Corporations ... organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals....

Other types of organizations that qualify for tax-exempt status include social welfare organizations, labor unions, trade associations, social clubs, veterans’ organizations, and fraternal organizations. A list of the types of tax-exempt organizations appears at the end of this chapter.

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2. WHAT IS A NONPROFIT (NOT-FOR-PROFIT) ORGANIZATION? The term ―tax-exempt organization‖ is often used interchangeably with the term ―nonprofit organization.‖ This can be misleading. A tax-exempt organization meets the criteria in federal law (the IRC) to be exempt from federal income taxes, whereas the status and privileges of a nonprofit organization are determined under state law. The term ―nonprofit organization‖ generally means a corporation that is not intended to be a profit-making corporation. The requirements vary by state but usually take into account the fact that nonprofit corporations typically do not have shareholders or the same business motives as forprofit corporations. A nonprofit corporation is not automatically a tax-exempt organization. Because the qualifications for nonprofit status vary among states, it is possible for the term ―nonprofit organization‖ to be broader than, narrower than, or identical to the term ―tax-exempt organization.‖ For a nonprofit organization to be exempt from federal income taxes, it must meet the statutory requirements found in the IRC and usually must file an application with the IRS.

3. WHAT ARE THE DIFFERENCES BETWEEN IRC §§ 501(C)(3) AND 501(C)(4) ORGANIZATIONS? IRC § 501(c) describes many types of organizations that qualify for tax-exempt status. When an organization applies for exemption, it must tell the IRS under which paragraph of IRC § 501(c) it qualifies. In general, this is not difficult to determine because most paragraphs describe discrete categories; for example, § 501(c)(5) describes agricultural organizations, §

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501(c)(8) describes fraternal societies, and § 501(c)(14) describes credit unions. However, IRC §§ 501(c)(3) and 501(c)(4) describe organizations with some overlapping characteristics.1 Specifically, both IRC § 501 (c)(3) charitable organizations and IRC § 501 (c)(4) social welfare organizations operate for charitable purposes and are restricted so that none of the organization’s earnings may benefit a private shareholder or individual. Despite these similarities, IRC §§ 501(c)(3) and 501(c)(4) organizations differ in two significant ways. First, IRC § 501(c)(3) organizations are eligible to receive tax-deductible charitable contributions, while IRC § 501(c)(4) organizations are not. When a contribution is deductible, the donor may deduct the amount of the contribution from income, subject to the restrictions in IRC § 170. (See Question 5.) This is an important benefit for the organization because it encourages donors to contribute in order to lower their taxable income and to make larger contributions since the after-tax cost of each contribution is reduced. The second difference is that IRC § 501(c)(3) organizations are substantially limited in their ability to lobby and are prohibited from engaging in political campaigns; IRC § 501(c)(4) organizations are not so limited. (See Questions 6 and 7.) These two differences are important when an organization is choosing whether to apply for tax- exempt status as an IRC § 501 (c)(3) or IRC § 501 (c)(4) organization. If the organization’s agenda depends on influencing public opinion or the legislative process, it may be appropriate to form as an IRC § 501(c)(4) organization. For other organizations, it will usually make more sense to be an IRC § 501 (c)(3) organization in order to have the advantage of tax-deductible contributions. Finally, although an organization must identify itself as one type of IRC § 50 1(c) organization, it may be linked with another IRC § 50 1(c) organization under certain circumstances. For example, an IRC § 501(c)(3) organization may be linked with an IRC § 501(c)(4) social welfare organization or IRC § 501(c)(6) trade association. It is common to see a group that wants to lobby as well as conduct charitable activities set up both an IRC § 501(c)(4) organization and an IRC § 501(c)(3) organization. It is also not unusual for a trade association, such as the American Bar Association or the American Medical Association, to have a similarly named charitable foundation that conducts charitable activities. In these situations, the organizations must be legally separate entities and their activities and funds must be kept separate. In addition, an IRC § 50 1(c) organization may be linked with another type of tax-exempt organization, such as an IRC § 527 political organization. (See Question 7.)

4. WHAT IS A PRIVATE FOUNDATION? All IRC § 501(c)(3) organizations are either a public charity or private foundation. Public charities have broad public support and tend to provide charitable services directly to the intended beneficiaries. Private foundations often are tightly controlled, receive significant portions of their funds from a small number of donors or a single source, and make grants to other organizations rather than directly carry out charitable activities. Because these factors create the potential for self-dealing or abuse of position by the small group controlling the organization, private foundations are more closely regulated than public charities. Private foundations are subject to penalty taxes for doing things such as failing to distribute a certain

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amount of their income each year, making investments that jeopardize their charitable purpose, having excess business holdings, and failing to maintain expenditure responsibility over certain grants.2 IRC § 501(c)(3) organizations are presumed to be private foundations and must tell the IRS how they qualify for public charity status based on the support and control tests found in IRC § 509.

5. ARE CONTRIBUTIONS TO AN ORGANIZATION TAX-DEDUCTIBLE? A contribution to a tax-exempt organization may only be deducted under two circumstances: (1) it is a donation that qualifies as a charitable contribution under IRC § 170 or (2) it is dues that qualify as business expenses under IRC § 162.

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Charitable Contributions Under IRC § 170, contributions made for charitable purposes are tax deductible when made to qualifying IRC § 501(c)(3) organizations, governmental units, veterans’ organizations, fraternal organizations, and cemetery companies. The IRS determines whether an IRC § 501(c)(3) organization is eligible to receive tax-deductible contributions at the time it considers the organization’s application for exempt status. A list of the organizations eligible to receive deductible contributions is found in IRS Publication 78, Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986. This publication is available on the IRS website at http://www.irs.gov. Charitable contributions that otherwise meet the requirements of IRC § 170 are not deductible if the organization provides goods or services in exchange for the contribution. If the contribution exceeds the fair market value of the goods or services provided, then the excess may be deductible. When an organization receives more than $75 in exchange for goods or services, IRC § 6115 requires the organization inform the donor of the amount of the contribution, if any, that is tax-deductible. Even if a contribution is deductible, individual taxpayers may not be able to deduct the entire contribution. For example, only donors who itemize deductions may deduct their charitable contributions,3 and IRC § 170 may restrict the amount of the deduction depending on the size and nature of the contribution. In addition, taxpayers must comply with certain substantiation requirements, including obtaining a written acknowledgment from the organization for any contribution that exceeds $250 in value. The Pension Protection Act of 2006 (P.L. 109-280) imposes a new requirement that any cash donation be substantiated by a bank record or written communication from the organization showing its name and the date and amount of the contribution. When a charitable contribution to a tax-exempt organization is not deductible, IRC § 6113 generally requires the organization notify the potential contributor of that fact at the time of solicitation. Thus, for example, IRC § 501(c)(4) organizations must inform potential contributors that contributions may not be deducted. Under IRC § 6710, an organization that fails to provide the notification faces a fine of $1,000 for each day the failure occurs, with an

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annual cap of $10,000. The fines are higher and the cap is eliminated for organizations that intentionally disregard the notification requirement.

Dues Dues to some tax-exempt organizations, such as IRC § 501(c)(5) labor unions and IRC § 501(c)(6) trade associations, may be deductible as business expenses under IRC § 162. Individuals face restrictions in being able to claim the deduction. For example, only donors who itemize deductions may deduct the dues, and an individual must have significant business expenses (i.e., exceeding 2% of adjusted gross income) to be able to claim the deduction. In addition, if an organization conducts lobbying activities, IRC § 162(e) disallows a deduction for the portion of dues that represents lobbying expenditures. IRC § 6033(e) generally requires that an organization notify its members of the amount that is nondeductible or be subject to a proxy tax on its lobbying expenditures

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6. CAN TAX-EXEMPT ORGANIZATIONS LOBBY? Under the Internal Revenue Code, some types of tax-exempt organizations are prohibited from lobbying, others are restricted in the amount of lobbying they may do, and the rest may conduct unlimited lobbying.4 Among the organizations prohibited from lobbying are those described in IRC §§ 501(c)(2), (c)(17), (c)(18), (c)(21), (c)(22), (c)(24), and (c)(25). Most of these are trusts that must use their income exclusively for the purposes for which they are established. For IRC § 501(c)(3) organizations, ―no substantial part‖ of their activities can be lobbying. The definition of ―no substantial part‖ is unclear. Some courts have looked at the amount of expenditures or time spent on lobbying,5 whereas others have rejected this approach and instead examined the lobbying in the broad context of the organization’s purpose and activities.6 Because the ―no substantial part‖ standard is indefinite, IRC § 501(c)(3) organizations, with the exception of churches and related organizations, may elect under IRC § 501(h) to have their lobbying activities measured by a numerical limit found in IRC § 4911. Most organizations do not make this election. An IRC § 501(c)(3) organization that conducts substantial lobbying may lose its exempt status and face possible excise taxes under IRC §§ 4911 and 4912. In addition, IRC § 501(c)(3) organizations that are private foundations are taxed under IRC § 4945 on any lobbying expenditures made during the year, regardless of whether such activities are substantial. The other types of tax-exempt organizations are not subject to any tax law limits on the amount of lobbying that can be done, so long as the lobbying is related to their tax-exempt purpose. These include IRC § 501(c)(4) social welfare organizations, IRC § 501(c)(5) labor unions, and IRC § 501(c)(6) trade associations. A tax-exempt organization’s lobbying may affect the amount that its contributors would otherwise be able to deduct as dues. (See Question 5.) Although IRC § 501(c)(4) organizations may lobby under the tax laws, section 18 of the Lobbying Disclosure Act of 1995 (P.L. 104-65) prohibits them from receiving federal grants,

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loans, or other awards if they engage in lobbying activities. This prohibition applies even if the lobbying is conducted with the organization’s own funds. The Lobbying Disclosure Act also imposes registration and disclosure requirements on organizations with paid lobbyists whose lobbying activities exceed time and monetary limits. For more information, see CRS Report 96- 809, Lobbying Regulations on Non-Profit Organizations, by Jack Maskell.

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7. CAN TAX-EXEMPT ORGANIZATIONS PARTICIPATE IN ELECTION ACTIVITIES? Some tax-exempt organizations are prohibited from participating in political campaign activity, while others may participate so long as it is consistent with their exempt purposes.7 The organizations that may not engage in political campaign activity include those described in IRC §§ 501(c)(2), (c)(17), (c)(18), (c)(21), (c)(22), (c)(24), and (c)(25). Most of these are trusts that must use their income exclusively for the purposes for which they are established. In addition, IRC § 501(c)(3) organizations are prohibited from participating in, or intervening in, ―any political campaign on behalf of (or in opposition to) any candidate for public office.‖ Thus, IRC § 501(c)(3) organizations can lose their tax-exempt status for engaging in activity that is specifically linked to election periods and supports or opposes particular candidates. IRC § 501(c)(3) organizations may, however, participate in political activities that are not ―campaign activities.‖ Permissible activities under the tax laws, so long as no candidate is endorsed or opposed, include conducting public forums, publishing candidate responses to a questionnaire on a variety of subjects, issue advertising, nonpartisan public opinion polling, and non-partisan voter registration drives. Although these noncampaign political activities are not prohibited, they may be subject to tax under IRC §§ 527, 4945, or 4955 or regulated or taxed as lobbing activities. (See Question 6.) The IRC generally allows the other types of IRC § 501(c) organizations to engage in election- related activities so long as such activities are consistent with the organization’s exempt purpose and are not the organization’s primary activities. The activities may be subject to tax under IRC § 527(f). It is important to note that while the IRC may allow these organizations to participate in such activities, the organizations must still comply with applicable election laws. For example, election laws ban corporations and labor unions from making any contribution or expenditure in connection with federal elections,8 and these rules apply to tax-exempt and/or nonprofit corporations. In addition, tax-exempt organizations are generally subject to the requirements in the Bipartisan Campaign Reform Act of 2002 (P.L. 107-155) relating to the disclosure of ―electioneering communications‖ and the prohibition on incorporated entities and labor unions using general treasury funds to finance them.9 One way that corporations and labor unions participate in election campaigns without violating federal election laws is by setting up political action committees (PACs). PACs are creatures of federal election law, but they are subject to the special tax rules for ―political organizations‖ in IRC § 527.10 Other IRC § 501(c) organizations may also set up an IRC § 527 organization to avoid the tax under IRC § 527(f) on their election activities.11 In general, IRC § 527 political organizations are expected to raise money for, and to try to influence, the selection, nomination, election or appointment of candidates for public office. Although considered tax-exempt organizations, IRC § 527 organizations are subject to special tax rules

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that exempt income used for political activities from tax and that tax other types of income, such as that from investments.

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8. HOW DO YOU SET UP A TAX-EXEMPT ORGANIZATION? For many tax-exempt organizations, the first step is to incorporate the organization. Incorporation is not required for tax-exempt status from the IRS, but organizations incorporate for a variety of reasons, including to receive limited personal liability for members of the organization. Formation of the organization is achieved under state law and requirements vary by state. An organization will likely need to register with the appropriate Secretary of State to reserve that organization’s name and to enable the group to solicit charitable contributions,12 do business, and own property in the state. If the organization incorporates, it will also usually have to file articles of incorporation that include the organization’s purposes and names of incorporators. Some states do not have special nonprofit corporation status and the organization will be incorporated under regular corporation laws. Whether or not the organization incorporates, it will generally need to file for recognition of tax- exempt status from the IRS.13 Some organizations that qualify for IRC § 501(c)(3) status, including churches and small organizations, are exempt from the filing requirement. IRS Publication 557, Tax-Exempt Status for Your Organization, provides a detailed explanation of the procedures and forms for establishing tax-exempt status. Organizations seeking exemption under IRC § 501(c)(3) file IRS Form 1023, whereas other organizations file IRS Form 1024. The exemption application must usually include a statement of the organization’s activities, a copy of its articles of incorporation and bylaws, and current financial statements. The organization must also obtain an employer identification number (IRS Form SS-4), even if it does not have any employees. IRS Publication 557 and the applicable forms are available on the IRS website at http://www.irs.gov. In addition, organizations filing for recognition of tax-exempt status must also pay a filing fee with IRS Form 8718 (User Fee for Exempt Organization Determination Letter Request). For exemption applications postmarked on or after July 1, 2006, the fees for exemption applications are as follows. For an organization filing for exemption under IRC § 501 that has had annual gross receipts averaging $10,000 or less during the past four years, or for a new organization that anticipates gross receipts averaging $10,000 or less during the next four years, the application fee is $300. The application fee is $750 for an IRC § 501(c) organization with more than an average of $10,000 in gross receipts for the prior four years, as well as for a new IRC § 501(c) organization anticipating more than an average of more than $10,000 in gross receipts for the coming four years. An organization that is applying for exempt status under IRC §§ 501(c)(3), (c)(9), (17) or (20) should file its application within 27 months of its formation to ensure that the recognition of exempt status dates back to the organization’s formation. If the application is filed after that time, the general rule is that the determination will date back only to the date of the application. For other types of tax-exempt organizations, the recognition of exempt status will date back to the date of the organization’s formation so long as the organization’s activities and purposes are the same as those at the time recognition was granted. If the organization is

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required to alter its activities or substantially amend its charter to qualify for exempt status, then the recognition of exempt status will be effective as of a date determined by the IRS.

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9. HOW DOES AN ORGANIZATION LOSE ITS TAX-EXEMPT STATUS? In general, once an organization has tax-exempt status, it can continue as a tax-exempt organization unless there is a material change in its character, purposes, or methods of operation. Organizations are required to report any material changes to the IRS. An IRC § 501(c)(3) organization can lose its tax-exempt status for excessive lobbying or engaging in political campaign activities, or if its principal purpose becomes operating a for-profit business. Furthermore, the IRS may revoke an organization’s exempt status because of changes in the law or regulations or for other good causes. In 2004, the IRS was given the authority to suspend the tax-exempt status of or the application for such status by any organization that is (1) designated a terrorist organization by executive order or under authority found in the Immigration and Nationality Act, the International Emergency Economic Powers Act, or the United Nations Participation Act or (2) designated by executive order as supporting terrorism or engaging in terrorist activity.14 With the exception of organizations whose status is suspended due to terrorism issues, organizations may ask for court review of any IRS attempt to revoke their exempt status. An individual who believes that an organization should lose its exempt status may contact the IRS at Exempt Organizations Examination Division, 1100 Commerce Street, ATTN: T:EO:E, Dallas, TX 75242. The complaint should contain all relevant facts concerning the alleged violation of tax law. The complaint may cause the IRS to review the propriety of the organization’s exempt status, but the IRS cannot reveal whether it has followed up on a particular complaint because of confidentiality rules. It is not possible to bring a legal suit to challenge the IRS’s granting of an exemption to an organization. Although third parties had been successful in bringing suits to challenge IRS policies in administering the tax laws,15 the Supreme Court severely limited this practice by requiring plaintiffs to show a direct personal injury that is likely to be redressed by a favorable decision in the case.16 In United States Catholic Conference v. Baker,17 the Second Circuit Court of Appeals reviewed the standing of various parties to force the IRS to examine the tax-exempt status of the Catholic Church because of its political activities and concluded that it would be a very rare case when a third party would have standing to bring such a suit.

10. WHAT TAX RECORDS DO TAX-EXEMPT ORGANIZATIONS HAVE TO PREPARE? Under IRC § 6033, most tax-exempt organizations are required to file an annual information return (Form 990 series) that discloses such information as income, receipts, expenses and disbursements, a balance sheet of assets, liabilities and net worth, and the names and compensation of managers and highly compensated employees. Some organizations are required to report their aggregate political and lobbying expenditures. In addition, organizations must report their substantial donors, which are generally donors that have

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contributed more than $5,000 during the year. The penalty for failure to file the required information return is found in IRC § 6652(c)(1)(A). It is $20 per day for each day the failure continues. If the organization has annual gross receipts exceeding $1 million in any year, then the daily penalty is $100 per day. The maximum penalty is the lesser of $10,000 or 5% of the organization’s gross receipts. For organizations exceeding $1 million in gross receipts, the maximum penalty is $50,000. Not all organizations have to file an information return. For example, churches, certain church- related organizations, and organizations with gross receipts that are normally less than $25,000 do not have to file an annual return. There are other exceptions contained in IRC § 6033(a)(3). Sometimes, tax-exempt organizations are subject to tax and must then file a tax return. For example, an exempt organization that conducts business activities unrelated to their exempt purpose must file a Form 990-T. Any exempt organization with political organization taxable income will need to file a Form 1120-POL, and one that has been assessed a penalty tax must file Form 4720. Furthermore, exempt organizations must generally pay the same employment taxes as for-profit employers. Thus, if they have employees, exempt organizations usually must file the employment tax returns for income tax withholding and social security and medicare taxes (Form 941), income reporting (W-2, W-3, Form 1099), and unemployment taxes (Form 940). Exempt organizations are subject to the same penalties as other taxpayers for failing to file a tax return or pay their taxes, including failing to make estimated tax payments and failing to properly handle and deposit employment taxes. For more information, see IRS Publication 15, Circular E, Employer‟s Tax Guide, which is available on the IRS website at http://www.irs.gov. Finally, some organizations are subject to additional requirements. For example, under IRC § 527(j), political organizations must, with several exceptions, file periodic reports to the IRS that disclose contributions and expenditures (Form 8872). If an IRC § 527 organization fails to file a timely or accurate form, it is subject to a penalty that equals the highest corporate tax rate multiplied by the amount of contributions and/or expenditures to which the failure relates.

11. ARE TAX-EXEMPT ORGANIZATIONS REQUIRED TO DISCLOSE INFORMATION TO THE PUBLIC? Under IRC § 6104(d), the application for exempt status and the annual information return (Form 990) of a tax-exempt organization are open to public inspection.18 In addition, the Pension Protection Act of 2006 (P.L. 109-280) added a requirement that IRC § 501(c)(3) organizations also disclose their unrelated business tax returns (Form 990-T). This requirement has two parts: the organization must allow the public to inspect the documents and must provide copies upon request. For inspection purposes, the information must be made available during normal business hours at the organization’s principal office and any district office with more than three employees. With respect to providing copies, requests for copies of the documents may be made in writing or in person. The organization must furnish copies immediately if the request is made in person and within 30 days for written requests. The organization is permitted to charge a reasonable fee for reproduction

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and mailing costs. An organization is not required to provide individual copies if either (1) the organization makes these documents widely available on the internet19 or (2) the requests are part of a harassment campaign and compliance is not in the public interest.20 Certain information does not have to be disclosed. Organizations are generally not required to disclose the names and addresses of any contributors. Furthermore, the IRS is permitted to create exceptions to public disclosure of information relating to trade secrets, patents, processes, styles of work, or apparatus, if public disclosure would adversely affect the organization or if the information would adversely affect the national defense. If an organization refuses to provide a copy of its returns, the IRS suggests that the requestor write to the IRS EO Classification, Mail Code 4910, 1100 Commerce Street, Dallas, TX, 75242. The requestor should be prepared to provide the name and address of the organization. The IRS will contact the organization and arrange a time during which the return may be inspected. If the organization fails to provide the return, the IRS may assess statutory penalties under IRC § 6652. Any return or application that must be disclosed to the public by the organization must also be made publicly available by the IRS. The information may be obtained from the IRS by using Form 4506-A, Request for Public Inspection or Copy of Exempt or Political Organization. In addition, the IRS has some information submitted by IRC § 527 political organizations on its website at http://www.irs.gov. The organizations listed under Question 12 also provide information on various taxexempt organizations. In particular, GuideStar may have copies of the organization’s recent Form 990 on its website.

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12. ARE THERE ORGANIZATIONS THAT EVALUATE CHARITIES OR REPORT ON THEIR ACTIVITIES? The following are examples of organizations that report on the activities of charities. The information comes from the organizations’ websites. American Institute of Philanthropy 3450 Lake Shore Drive, Suite 2802E P.O. Box 578460 Chicago, IL 60657 Phone: (773) 529-2300 Internet: http://www.charitywatch.org The American Institute of Philanthropy (AIP) is a nonprofit charity watchdog and information service that provides ratings, opinions, and other information on the financial and managerial practices of selected charities. It publishes the Charity Rating Guide, which gives a letter grade rating and other statistics on the financial performance of about 500 major American charities in 36 different categories, including Environment, Cancer, Crime Prevention, Child Protection, Senior Citizens, and more. The Guide provides information on the percentage of funds each charity spends on its charitable purpose, its cost to raise $100, whether it holds massive asset reserves, and an overall grade from ―A+ to F.‖ The Guide is

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not free, but the website does list the charities that are included in the Guide and those that have received the highest grades.

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BBB Wise Giving Alliance 4200 Wilson Boulevard, Suite 800 Arlington, VA 22203-1804 Phone: (703) 276-0100 Internet: http://www.give.org The BBB Wise Giving Alliance was formed in 2001 with the merger of the Council of Better Business Bureaus’ Philanthropic Advisory Service and the National Charities Information Bureau. The Alliance collects information and prepares reports on several hundred national charitable organizations. The Alliance does not recommend or rate charities, but serves to report information on the organization’s background, staff and governance, financial status and fund raising practices. The report will also state whether the charity meets the Alliance’s standards for charitable solicitations. These reports are available on the Alliance’s comprehensive website or upon request. The Alliance also publishes the quarterly BBB Wise Giving Guide for its donors. GuideStar 4801 Courthouse Street, Suite 220 Williamsburg, VA 23188 Phone: (757) 229-4631 Internet: http://www.guidestar.org The GuideStar website, produced by Philanthropic Research, Inc., contains information on more than 1 million nonprofit organizations. The information can be searched by a variety of fields (e.g., organization name, state, category, or income level). The site provides information on the organization’s address, finances, employee and volunteer levels, and general activities; more in- depth information is available for a membership fee. For some organizations, the site contains a wealth of information, including the annual returns (Form 990).

13. WHAT RESOURCES PROVIDE INFORMATION ON GENERAL ISSUES INVOLVING TAX-EXEMPT ORGANIZATIONS? The following organization and books may provide further information on general topics related to tax-exempt organizations, including management, accountability, and fund-raising practices. Independent Sector 1200 Eighteenth Street, NW, Suite 200 Washington, D.C. 20036 Phone: 202-467-6100 Internet: http://www.independentsector.org The Independent Sector is a coalition of charitable organizations and others interested in the nonprofit sector. A prime focus of the group is to help nonprofit organizations implement

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effective accountability and ethical standards, and the group’s website includes various standards and models to address these issues. The group also provides information on public policy issues of interest to nonprofit organizations and conducts and publishes research on various aspects of charitable giving and volunteering in the United States.

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Federal Trade Commission: Consumer Protection CRC-240 Washington, D.C. 20580 Phone: 1-877-FTC-HELP (382-4357) Internet: http://www.ftc.gov/bcp/conline/edcams/charityfraud/index.html The Federal Trade Commission website, particularly the Charity Fraud page, offers information to consumers, businesses, and nonprofit organizations about how to guard against charity fraud. The site provides numerous FTC articles highlighting common scam practices and offering advice on safe methods to donate as well as ways to determine if a charitable organization is legitimate, such as a Charity Checklist, available at http://www.ftc.gov/bcp/ conline/pubs/misc/ charitycheck.htm. The site instructs consumers on how to file a complaint with the FTC if they feel they have been defrauded by an allegedly nonprofit organization. There is also information for nonprofit organizations regarding acceptable solicitation practices and tips on hiring professional fund-raisers. The site also provides numerous links to other organizations that provide information about nonprofit entities. The FTC has also undertaken ―Operation Phoney Philanthropy,‖ a law enforcement and public education campaign, in conjunction with state charity regulators to stop fraudulent fundraising.21 ―Phone-y‖ refers to deceptive fundraising calls made to individuals and businesses by telemarketers.22 Society for Nonprofit Organizations 5820 Canton Center Road, Suite 165 Canton, MI 48187 Telephone: (734) 451-3582 Internet: http://www.snpo.org The Society for Nonprofit Organizations (SNPO) is an organization whose purpose is to provide a forum for the exchange of information on nonprofit organizations, offering services to directors, board members, volunteers, and anyone interested in nonprofit organizations operations. It offers professional support services and referral services to members and maintains an information center of books, periodicals, and tapes. SNPO publishes a bimonthly journal, Nonprofit World: The National Nonprofit Leadership and Management Journal, which focuses on the management of nonprofit organizations. SNPO also issues a monthly electronic newsletter, Nonprofit World Funding Alert, that details funding opportunities and includes profiles of various foundations. Limited information is available to non-member website visitors. These recently-published books deal with various aspects of starting and managing nonprofit organizations. Blazek, Jody. (2004). Tax planning and compliance for tax-exempt organizations: Forms, checklists, procedures. Hoboken, N.J.: Wiley. LC CALL NUMBER: KF6449 .B58 2004

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Colombo, J.D., & Hall, M.A. (1995). The charitable tax exemption. Boulder: Westview Press. LC CALL NUMBER: KF6449 .C59 1995 Connors, T.D. (Ed). (2001). The nonprofit handbook. Management. (3rd ed.). New York: Wiley. LC CALL NUMBER: HD62.6 .N662 2001b Greenfield, J.M. (2001). The nonprofit handbook. Fund raising. (3rd ed.). New York: Wiley. LC CALL NUMBER: HD62.6 .N662 2001 Gross, M.J., Jr., McCarthy, J.H., & Shelmon, N.E. (2005). Financial and accounting guide for not-for-profit organizations. (6th ed.). Hoboken, NJ: Wiley. LC CALL NUMBER: HF5686.N56 G76 2005 Grobman, G.M. (2005). The nonprofit handbook: Everything you need to know to start up and run your nonprofit organization. (4th ed.). Harrisburg, PA: White Hat Communications. LC CALL NUMBER: HD62.6 .G762 2005 Hopkins, B.R. (2003). The law of tax-exempt organizations. (8th ed.). Hoboken: NJ: J. Wiley & Sons. (2004 & 2005 Supplements available). LC CALL NUMBER: KF6449 .H6 2003 Kitrosser, E., & Dropkin, M. (1993). Tax considerations in non-profit organizations. New York: American Institute of Certified Public Accountants. LC CALL NUMBER: KF6449.Z9 K57 1993 Listro, J.P., & RuJoub, M.A. (2001). Accounting and financial reporting for governmental units and not-for-profit organizations. (3rd ed.). Dubuque, Iowa: Kendall/Hunt Pub. LC CALL NUMBER: HF5686.N56 L57 2001 National directory of nonprofit organizations. (1990 - ). Rockville, MD: Taft Group. (Published annually). LC CALL NUMBER: AS29.5.N38 Nonprofit executive‟s tax desk annual. (2001 - ). Gaithersburg, MD: Aspen Publishers, Inc. (Published annually). LC CALL NUMBER: KF6449 .A15 N66 Whaley, J., & Stratton, J. (Eds.). (2001). Nonprofit organization management: Forms, checklists & guidelines. (2nd ed.). Gaithersburg, MD: Aspen Publishers. LC CALL NUMBER: HD62.6 .N666 2001 Table 1. Types of Tax Exempt Organizations Type 501(c)(1) 501(c)(2) 501(c)(3)

Examples Corporations organized by Act of Congress; including Federal Credit Unions, Resolution Trust Corporation and Resolution Funding Corporation Title-holding corporations Religious, educational, charitable, scientific, literary, testing for public safety, fostering national or international amateur sports competition, prevention of cruelty to children or animals

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Type 501(c)(4)

501(c)(5) 501(c)(6) 501(c)(7) 501(c)(8) 501(c)(9) 501(c)(10)

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501(c)(11) 501(c)(12) 501(c)(13) 501(c)(14) 501(c)(15) 501(c)(16) 501(c)(17) 501(c)(18) 501(c)(19) 501(c)(20) 501(c)(21) 501(c)(22) 501(c)(23) 501(c)(24) 501(c)(25) 501(c)(26) 501(c)(27) 501(c)(28) 501(d) 501(e) 501(f) 501(k) 501(n) 521 526 527 528

Erika Lunder Table 1. (Continued) Examples Civic leagues, social welfare organizations, local associations of employees dedicated to charitable, educational, or recreational purposes Labor unions, agricultural and horticultural organizations Trade associations, chambers of commerce, professional football leagues Social and recreational clubs Fraternal benefit societies and associations VEBAs (Voluntary employees’ beneficiary associations providing the payment of certain employee benefits) Domestic fraternal societies whose net earnings are devoted to religious, charitable, scientific, litera educational, and fraternal purposes, which do not provide benefits to members Teachers’ retirement fund associations Benevolent life insurance associations, mutual ditch or irrigation companies, mutual or cooperative telephone, electric, or water companies Cemetery companies Credit unions Small mutual insurance companies Cooperatives to finance crop operations Supplemental unemployment benefit trusts Pre-June 25, 1959 employee funded pension trust Veterans’ groups Group legal service organizations Black lung benefit trusts Multi-employer pension plan trusts Veterans organization established before 1880 ERISA trusts for certain terminated plans Multi-parent real property title-holding companies State-sponsored organizations providing health coverage to high risk individuals State-sponsored workers’ compensation reinsurance organization National Railroad Retirement Investment Trust Religious and apostolic organizations with common or communal treasury Cooperative hospital service organizations Cooperative educational investment organizations Child care organizations Charitable risk pools Farmers’ cooperatives Shipowners’ protection and indemnity associations Political organizations Homeowners’ associations

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End Notes

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1

IRC § 501(c)(3) reads: Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. IRC § 501(c)(4) reads: (A)Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes. (B)Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual. The IRS recognizes that an organization qualifying under § 501(c)(4) may also meet the criteria to qualify under § 501(c)(3). See Treas. Reg. § 1.501(c)(4)-1(a)(2)(i). 2 See IRC §§ 4940-4946. 3 Legislation was introduced in prior Congresses that would have allowed taxpayers who do not itemize deductions to deduct a portion of their charitable contributions. For example, a provision was included in the Care Act of 2005 (S. 1780, 109th Congress), the More Act (S. 6, 109th Congress), the Charitable Giving Act of 2005 (H.R. 3908, 109th Congress), and the Senate-passed versions of the Tax Relief Act of 2005 (H.R. 4297 and S. 2020, 109th Congress). In the 110th Congress, a narrower provision has been introduced. The Volunteer Emergency Responder Fair Mileage Act of 2007 (H.R. 606) would, among other things, provide an above-the-line charitable deduction for individuals who allow their automobiles to be used by qualified volunteer fire departments. 4 For more information, see CRS Report RL33377, Tax-Exempt Organizations: Political Activity Restrictions and Disclosure Requirements, by Erika Lunder. 5 See Seasongood v. Comm’r, 227 F.2d 907 (6th Cir. 1955) (where the court found that an organization whose lobbying was about 5% of its activities was not engaged in a substantial amount of lobbying); League of Women Voters v. United States, 180 F. Supp. 379 (Ct. Cl. 1960) (where the court looked at the amount of hours the organization spent on legislative activities); Haswell v. United States, 205 Ct. Cl. 421 (Ct. Cl. 1975) (where the court found the fact that between 19% and 20.5% of the organization’s expenditures were for lobbying was evidence that the organization violated the ―no substantial part‖ rule). 6 See Christian Echoes Nat’l Ministry, Inc. v. Untied States, 470 F.2d 849 (10th Cir. 1972); Kuper v. Commissioner, 332 F.2d 562 (3rd Cir. 1964); Dulles v. Johnson, 273 F.2d 362 (2nd Cir. 1959); Krohn v. United States, 246 F. Supp. 341 (D. Colo. 1965). 7 For more information, see CRS Report RL33377, Tax-Exempt Organizations: Political Activity Restrictions and Disclosure Requirements, by Erika Lunder. 8 2 USC § 441b. 9 Electioneering communications are broadcast, cable, or satellite advertisements that refer to a clearly-identified federal candidate within 60 days of a general election or 30 days of a primary election and, if a House or Senate election, are targeted to the relevant electorate. 2 USC § 434(f)(3)(A)(i). 10 For more information on IRC § 527 organizations, see CRS Report RS21716, Political Organizations Under Section 527 of the Internal Revenue Code, by Erika Lunder. 11 Any IRC § 501(c) organization that is prohibited from participating in political activities, such as IRC § 501(c)(3) organizations, may not use an IRC § 527 organization to get around that prohibition. 12 The National Association of State Charity Officials website provides links to state offices that regulate charitable solicitations at http://www.nasconet.org/. The site includes the unified registration form for charities seeking to solicit in multiple states. 13 For an overview of the application process for IRC § 501(c)(3) organizations, see CRS Report RS21892, Application Process for Seeking Section 501 (c)(3) Tax-Exempt Status, by Erika Lunder. 14 IRC § 501(p), enacted by P.L. 108-121. 15 See e.g., Green v. Kennedy, 309 F.Supp. 1127 (D.D.C. 1970) (where a class action was brought to force the IRS to stop granting exempt status to racially discriminatory private schools) and its subsequent history found at 398 U.S. 956 (1970), 330 F.Supp. 1150 (D.D.C. 1971), culminating in a summary affirmance, Coit v. Green, 404 U.S. 997 (1971)).

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Erika Lunder

16

Simon v. Eastern Kentucky Welfare Rights Organization, 426 U.S. 26 (1976). United States Catholic Conference v. Baker, 885 F.2d 1020 (2nd Cir. 1989). 18 If an organization is denied exempt status, its application for exemption is not open to public inspection. 19 26 U.S.C. 6104(d)(4); see also 26 C.F.R. 301.6104(d)-2, which states that a tax-exempt organization can make its annual information return ―widely available‖ by posting the document on a World Wide Web page established and maintained by the organization or by having the document posted, as part of a database of similar documents of other tax-exempt organizations, on a World Wide Web page established and maintained by another entity. This regulation also states what criteria must be met for a document to be considered widely available (e.g., the website must inform readers that the document is available and how it can be downloaded, the document must be an exact reproduction and be accessible without special hardware or software). 20 See 26 C.F.R. 301.610(d)-3 for discussion of what constitutes harassment. 21 FTC and States Unite to Fight Fundraising Fraud, http://www.ftc.gov/opa/2003/05/opp.htm. 22 ―Operation Phoney Philanthropy‖ Launched to Fight Charity Fraud, http://www.guidestar.org/news/features/ phoney_phil.jsp.

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CHAPTER SOURCES

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The following chapters have been previously published: Chapter 1 – This is an edited, excerpted and augmented edition of a United States Congressional Research Service publication, Report Order Code R40919, dated November 17, 2009. Chapter 2 – This is an edited, excerpted and augmented edition of a United States Congressional Research Service publication, Report Order Code 96-809A, dated May 7, 2008. Chapter 3 – This is an edited, excerpted and augmented edition of a United States Government Accountability Office publication, Order Code GAO-10-477, dated May 2010. Chapter 4 – This is an edited, excerpted and augmented edition of a United States Government Accountability Office publication, Order Code GAO-09-193, dated February 2009. Chapter 5 – This is an edited, excerpted and augmented edition of a United States Government Accountability Office publication, Order Code GAO-07-1084T, dated July 24, 2007. Chapter 6 – This is an edited, excerpted and augmented edition of a United States Congressional Research Service publication, Order Code 96-264, dated January 30, 2007.

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INDEX A

C

accommodation, 6 accountability, 86, 132, 133, 147, 148 accounting, 72, 77, 78, 79, 87, 90, 91, 149 advocacy, vii, 43, 45, 52, 57, 58, 59, 60, 62, 63, 68, 128 agencies, viii, 41, 63, 65, 71, 74, 76, 77, 81, 86, 88, 90, 94, 96, 97, 100, 101, 102, 103, 104, 105, 106, 107, 108, 111, 114, 116, 117, 118, 122, 127, 130, 132 AIDS, 73, 74, 76, 89 Alaska, 123 American Recovery and Reinvestment Act, 55, 73 appropriations, 63, 68 assessment, 42, 106, 112, 120, 121 assets, 1, 2, 4, 9, 10, 11, 12, 18, 24, 26, 27, 33, 34, 44, 48, 51, 52, 53, 66, 99, 128, 133, 144 authorities, 105 authors, 54 automobiles, 25, 151 average revenue, 9

cable television, 62, 69 campaigns, 58, 62, 63, 139, 142 capacity building, 41, 43 capital gains, 33, 34, 48 case study, 88, 90 cash flow, 45, 85, 86 CCR, 95, 108, 123 Census, 6, 119, 120, 121, 123, 124 certification, 65, 133, 136 challenges, 44, 60, 72, 73, 75, 79, 82, 84, 85, 86, 87, 92, 108, 126, 127, 132, 133, 134 character, 144 charitable organizations, viii, 2, 3, 4, 8, 9, 11, 12, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 29, 30, 31, 32, 34, 35, 37, 39, 40, 41, 42, 43, 44, 45, 49, 51, 54, 58, 59, 60, 117, 126, 137, 139, 147 charities, vii, 1, 2, 3, 4, 5, 7, 8, 9, 11, 15, 16, 17, 18, 19, 23, 24, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 42, 43, 45, 46, 48, 50, 51, 53, 54, 57, 58, 61, 66, 79, 84, 89, 98, 99, 122, 127, 128, 129, 132, 136, 139, 146, 147, 151 checks and balances, 132 clients, 65, 72, 79, 83, 84, 102 colleges, 27, 28, 33, 135 communication, 62, 63, 64, 67, 69, 132, 140 community, 30, 40, 41, 48, 52, 53, 55, 58, 89, 101, 116, 129, 151 community service, 101 community-based organizations, 129 complement, 39, 95 complexity, 78, 122, 126, 132 compliance, 98, 146, 148 conference, 65 confidentiality, 144 Congressional Budget Office, 47, 48, 52, 53, 55, 112, 123 conservation, 102, 135 consumer goods, 25, 45

B background, 2, 62, 64, 147 background information, 2 balance sheet, 144 banks, 103 basic needs, 36, 53 BBB, 147 BEA, 12, 24, 34 behavioral change, 52 behaviors, 45, 100, 103, 111 board members, 82, 133, 148 bonds, 15, 35, 51, 52, 103, 112, 113, 117, 120 borrowers, 102, 103 business cycle, 2, 26

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Index

consumption, 29, 30, 42 coordination, 132 cost, vii, 3, 12, 29, 30, 33, 34, 35, 36, 39, 40, 41, 42, 43, 45, 47, 48, 62, 71, 72, 74, 75, 77, 78, 79, 80, 81, 82, 83, 84, 86, 87, 88, 90, 100, 107, 112, 119, 120, 123, 139, 146 cost of living, 84 counseling, 103, 117 Court of Appeals, 144 covering, 27, 65, 91 crime, 38, 135 critical infrastructure, 83 crowding out, 38, 54 culture, 1, 9, 11, 16, 18, 19, 21, 23, 26, 27, 34, 36, 40, 49, 135

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D data collection, 43, 77 database, 98, 123, 152 decision makers, 105, 126 deduction, 2, 31, 33, 34, 35, 36, 37, 40, 41, 46, 47, 49, 67, 113, 140, 141, 151 deinstitutionalization, 129 democracy, 30 demographic characteristics, 89 Department of Agriculture, 95, 101, 102 Department of Commerce, 6, 12 Department of Defense, 95, 101 Department of Energy, 95, 101 Department of Health and Human Services, 73, 74, 88, 95, 100, 101 Department of Homeland Security, 95 Department of Justice, 117, 127 depreciation, 35, 77 devolution, 129 direct cost, 77, 78, 79 disaster, 29, 43, 132 disaster relief, 29, 132 disclosure, 6, 58, 64, 65, 66, 142, 146 District of Columbia, 7 diversity, 40, 73, 89, 114, 128, 130 domestic violence, 83, 89 donations, vii, 1, 15, 20, 31, 33, 38, 46, 48, 51, 54, 81, 82, 100 donors, 3, 28, 31, 32, 47, 48, 51, 130, 134, 139, 140, 141, 144, 147 draft, 98, 132

E earnings, 27, 31, 32, 34, 50, 53, 55, 139, 150, 151 economic activity, 12, 112 economic crisis, 44

economic development, 40, 41, 95, 103, 106, 135 economic downturn, vii, 1, 2, 3, 24, 44, 45, 47 economic growth, 44 economic problem, 60 economy, viii, 2, 12, 14, 19, 25, 34, 46, 52, 99, 125, 128 Education, 10, 18, 23, 27, 35, 36, 47, 49, 83, 95, 98, 102, 103, 105, 111, 112, 113, 117, 118, 120, 124, 135 educational services, 5, 14, 51, 112, 135 electricity, 83, 122 Emergency Assistance, 76, 90 employment, 2, 4, 5, 6, 7, 8, 13, 14, 50, 83, 84, 101, 112, 116, 133, 145 encouragement, 59 endowments, 9, 16, 24, 27, 32, 34, 43, 48, 52 equipment, 77, 83, 138, 151 equity, 2, 47, 104, 117 ETA, 95, 116, 117 ethical standards, 148 exclusion, 64, 112, 113, 120 exercise, 61, 67 expenditures, 26, 32, 33, 35, 59, 60, 61, 62, 63, 64, 65, 66, 94, 96, 97, 98, 99, 100, 103, 105, 110, 111, 112, 113, 117, 119, 120, 122, 123, 124, 141, 144, 145, 151 externalities, 29, 30

F family members, 132 federal funds, 24, 41, 60, 61, 62, 63, 72, 80, 81, 87, 91, 94, 97, 98, 103, 105, 108, 111, 114, 119, 126, 130 federal law, 58, 63, 64, 77, 127, 138 Federal Student Aid, 95, 117 FEMA, 136 financial market, 16, 51 financial markets, 16, 51 financial performance, 146 First Amendment, 60, 61, 67 flexibility, 99, 126, 130 fluctuations, 16, 17, 21, 34 football, 150 foreign affairs, 135 formal education, 30 formula, 45, 115, 117 Foundation Center, 52 foundations, 2, 3, 4, 11, 15, 19, 20, 21, 23, 24, 25, 26, 27, 28, 31, 32, 33, 34, 36, 41, 43, 44, 50, 51, 53, 57, 58, 61, 91, 98, 122, 127, 128, 129, 133, 134, 136, 139, 141, 148 fundraising, 79, 82, 91, 127, 148

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Index

G general election, 151 general expenses, 79, 82, 91 goods and services, 2, 8, 9, 29, 30, 39, 45, 51 governance, 32, 42, 48, 126, 132, 134, 136, 147 government funds, 38, 40, 54, 77 government intervention, 29, 30 government payments, 16, 23, 25 government policy, 45 government spending, 38, 39, 45, 54 graduate students, 118 grant programs, 73, 74, 75, 78, 79, 85, 88, 94, 104, 108, 132 grass, 57, 58, 59, 62, 65 grassroots, 66 gross domestic product, 125, 128 growth rate, 34 guidance, 72, 74, 75, 77, 78, 79, 87, 90, 107 guidelines, 67, 105, 107, 149

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H harassment, 146, 152 health care sector, 17, 27, 111, 119 health insurance, 35, 41, 43, 47, 97, 117 health services, 18, 49 heterogeneity, 16, 37 higher education, 16, 18, 34, 38, 106, 111, 113, 121 housing, 11, 12, 25, 35, 37, 40, 46, 73, 74, 76, 82, 83, 87, 88, 89, 103, 104, 107, 113, 117, 120 human capital, 126, 133 human resources, 87, 90, 91 human rights, 134 human welfare, 24, 28

I Immigration and Nationality Act, 144 inclusion, 62, 66, 106 income tax, vii, 4, 15, 33, 35, 37, 46, 47, 50, 52, 57, 58, 60, 67, 68, 103, 111, 113, 122, 134, 138, 145 individual students, 97 industrial sectors, 2, 51 inflation, 19, 24, 25, 26, 27 information technology, 83, 87, 91, 99 inheritance tax, 37 insight, 75, 115 interest rates, 97, 112 intermediaries, 97, 102, 104 Internal Revenue Service, 1, 10, 15, 17, 27, 43, 48, 55, 73, 86, 88, 91, 95, 99, 115, 117, 120, 122, 124, 127, 138 international affairs, 21

157

intervention, 29, 89 investment incentive, 47 investors, 103, 117 itemized deductions, 3, 40, 46

J job training, 113, 129, 134, 135 joint ventures, 48

K kindergarten, 116

L law enforcement, 148 leadership, 65, 117, 133 learning, 113 legal issues, 55 legislation, 31, 59, 60, 62, 63, 66, 67, 68, 113, 151 legislative proposals, 40, 42 lending, 99 library services, 77 lifetime, 49 local government, vii, 13, 24, 28, 31, 37, 45, 46, 51, 62, 66, 71, 72, 74, 75, 76, 77, 78, 79, 80, 81, 82, 85, 87, 88, 90, 103, 105, 106, 113, 114, 117, 122, 123, 126, 130, 132, 134 Louisiana, viii, 71, 74, 79, 81, 82, 83, 84, 86, 88, 89 Low-Income Housing Tax Credit, 51

M majority, 16, 17, 35, 51, 80, 99, 106, 125, 127, 128, 130 management, 43, 75, 79, 82, 83, 84, 86, 87, 91, 101, 122, 132, 133, 134, 147, 148, 149 manufacturing, 14 market failure, 28 mass communication, 62, 69 media, 31, 135 median, 22, 48 Medicaid, 16, 24, 30, 41, 94, 95, 96, 101, 109, 111, 116, 119, 123 medical care, 15, 30, 50, 113 Medicare, 16, 23, 24, 41, 54, 94, 95, 96, 98, 101, 102, 104, 107, 108, 109, 110, 115, 116, 117, 119, 120, 121, 123, 124, 130 membership, 16, 135, 147, 151 membership dues, 16 mental health, 89, 135 mentoring, 117 methodology, 75, 96 microelectronics, 117

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Index

missions, 72, 79, 85, 88, 89, 95, 97, 99, 127 modernization, 102, 118 monetary policy, 46 multiplier effect, 45

N nanotechnology, 117 National Institutes of Health, 95, 100, 104, 116 national security, 68 natural resources, 135 needy, 33, 117 North America, 6 nursing, 102 nutrition, 38, 101

O Office of Management and Budget, 62, 71, 73, 74, 90, 93, 95, 96, 119, 123 opportunities, 148 organizational development, 73 outreach, 43 overhead costs, 79, 84, 87, 91, 134 oversight, 2, 3, 24, 31, 41, 42, 43, 96, 97, 100, 105, 108, 123, 126, 127, 131

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P PACs, 142 Pareto, 52 patents, 146 payroll, 4, 47, 50 peer review, 104 penalties, 32, 63, 68, 145, 146 performance, 23, 58, 63, 74, 86, 94, 96, 97, 100, 101, 104, 105, 114, 126, 132, 133 policy choice, 60 policy makers, 94, 97 policy options, 2, 3, 40, 46 political party, 65 polling, 142 pools, 150 population size, 89 positive externalities, 30 poverty, 95 poverty alleviation, 95 present value, 123 prevention, 50, 89, 90, 135, 138, 149, 151 price elasticity, 40, 54 private benefits, 47 private schools, 151 procurement, 78, 98, 100, 106, 122, 123 profit, vii, viii, 2, 4, 14, 30, 36, 39, 41, 46, 48, 50, 57, 58, 60, 61, 62, 64, 66, 99, 100, 102, 103, 106,

107, 116, 118, 123, 124, 132, 137, 138, 144, 145, 149, 151 programming, 84 project, 40, 42, 75, 78, 86, 91, 115, 122 project sponsors, 78 propaganda, 63, 151 properties, 29 property taxes, 37 public education, 148 public goods, 2, 28, 29, 30 public health, 100, 116 public interest, 98, 127, 130, 146 public opinion, 139, 142 public policy, vii, 57, 58, 63, 66, 132, 148 public radio, 38, 54 public safety, 50, 58, 138, 149, 151 public sector, 87, 130 public service, viii, 73, 125 public support, 3, 38, 54, 139

Q qualifications, 50, 84, 138

R radio, 62, 69 real estate, 6, 13, 14, 117 real terms, 17, 19, 21, 27 recession, 16, 24, 25, 26, 27, 34, 45, 82 recognition, 65, 122, 143 recommendations, iv, 132 recreation, 5, 6, 50, 135 regulatory requirements, 32 rehabilitation, 83, 89, 90 rehabilitation program, 83 reinsurance, 150 relative size, 14 reliability, 93, 94, 96, 97, 98, 101, 106, 108, 109, 110, 115 relief, 35, 41, 111 religion, 21, 50, 134 rent, 34, 72, 73, 78, 79 reproduction, 145, 152 reserves, 72, 84, 85, 146 resources, viii, 2, 60, 62, 66, 72, 82, 83, 84, 86, 132, 133, 137 respect, viii, 7, 9, 18, 22, 39, 59, 63, 64, 78, 89, 137, 145 restaurants, 82 retirement, 33, 113, 135, 150 revenue, 1, 2, 3, 8, 9, 11, 15, 16, 17, 18, 20, 21, 23, 24, 27, 28, 30, 33, 34, 35, 36, 37, 40, 42, 43, 46,

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Index 48, 49, 52, 61, 67, 87, 96, 100, 103, 111, 112, 113, 120, 123, 124 rights, 48, 61, 67, 135 rural areas, 97, 102

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S savings, 35, 37, 52, 84, 103 scholarship, 32 secondary schools, 135 Senate, 33, 47, 48, 52, 53, 55, 64, 65, 132, 151 service provider, 75, 81, 83, 84, 86, 88, 104 shape, 132 shareholders, 138 shelter, 38, 54, 78, 83, 89, 99, 116 small businesses, 35, 47 social problems, 2, 134 social security, 34, 46, 145 Social Security, 54 social security payments, 46 social services, 50, 74, 90, 100, 101, 112, 116, 117, 132 social welfare, vii, 3, 39, 57, 58, 60, 61, 98, 122, 127, 138, 139, 141, 150, 151 software, 83, 152 speech, 61, 62, 69 staffing, 72 stakeholders, 87 statistics, 52, 122, 146 statute, 33, 57, 63, 76, 78, 81, 99 statutes, 58, 74, 76, 79 stimulus, 28, 35, 44, 45, 46, 47 subsidy, 31, 36, 40, 42, 46, 47, 53, 123 substance abuse, 135 substitutes, 39, 68 succession, 133 supervision, 65, 82, 84 support services, 117, 148 Supreme Court, 60, 67, 144 survey, 25, 27, 28, 33, 40, 43, 46, 91, 104 sustainability, 84, 85

T tax breaks, 29 tax collection, 37 tax cuts, 45, 52 tax deduction, 40 tax incentive, 41, 46, 49 tax increase, 42 tax policy, 111, 128 tax rates, 49 tax system, 37, 47

159

taxation, 34, 57, 59 technical assistance, 41, 103, 104, 133 telemarketing, 79 terrorism, 41, 144 terrorist organization, 144 testing, 50, 58, 106, 120, 138, 149, 151 total revenue, 8, 9, 11, 15, 17, 18, 23, 27, 34, 52, 108, 113, 123 tracks, 94, 97, 105 trade-off, 83 training, 41, 43, 82, 84, 101, 103, 116, 117, 133 transactions, 30, 53, 122 transfer payments, 24 transmission, 102, 118 transparency, 132 transportation, 6, 101, 117, 135 tuition, 15, 33, 113 turnover, 84, 133

U U.S. Bureau of Labor Statistics, 6 U.S. economy, vii, 1, 2, 12, 98, 99, 128 uniform, 62 unions, 3, 12, 50, 103, 112, 122, 135, 138, 139, 141, 142, 150 United Nations, 144 United States, 153 United Way, 27, 36, 82 universe, 3 universities, 27, 28, 33, 130, 135 USDA, 95, 116, 118

V variations, 72, 79 vehicles, 32, 34 vocational education, 83 volunteer work, 8 volunteerism, 43

W wages, 12, 45, 46, 84 waste, 5 waste management, 5 wealth, 22, 28, 40, 51, 147 welfare, 12, 24, 50, 60, 61, 129 White House, 31, 50 witnesses, 33 workers, 5, 7, 8, 43, 50, 84, 101, 116, 133, 150 Workforce Investment Act, 117 World Wide Web, 152

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