State and Federal Regulators Must Do More to Police Nonprofits
THE PROBLEM of poor gov- ernance at nonprofits, as well as the large number
of reports of fraud, excessive
compensation, conflicts of interest, and other inappropriate
behavior, won’t be stemmed unless federal and state regulators
take a tougher stand. But they
seem either unwilling or unable
to strengthen their efforts to police nonprofits.
The government agencies that
oversee charities, both federal
and state, have too few staff
members and too little money.
The Internal Revenue Service’s
tax-exempt division has about
850 employees, fewer than half
of whom are charged with overseeing the operations of about
1. 2 million charities.
State charity regulators are
even more short-handed. Probably no more than eight attor-ney-general offices have even a
handful of regulators supervising nonprofits in their states.
But more money and staff
members are not all that are
needed. What charity regulators lack most are the political
will and courage to supervise
and police nonprofit organizations effectively.
The primary responsibility for
this state of affairs must fall on
the Senate Finance and House
Ways and Means committees,
which have set the tone for the
permissive practices of regulators at the federal level, just as
state legislators have failed to
demand tough action and enforcement from state charity officials.
Regulators, quite simply, are
afraid to tackle wealthy organizations that are big and influential or perceived to hold significant political power.
Federal and state regulators
have avoided taking much ac-
tion until Congressio-
nal and state legisla-
tors speak out. Unless
state regulators begin
to articulate and take
a more aggressive
approach, little will
change in the way non-
profits are regulated.
so-called compensation experts to advise
nonprofits about what
salaries to offer their
new executives, adding unnecessary costs
to their searches.
They seem to buy
the corporate argument that the importance of a
job is defined by a high salary,
not by the quality and competence of the person who fills
the job. They fail to understand
that thousands of highly qualified people are willing to take
top jobs for a modest, reasonable salary.
Many regulators also overlook the nonprofit tradition
that board members should
not receive any compensation
for serving on boards or providing services that are typically paid for, such as accounting or investment advice. Conflicts of interest and self-dealing
among board members are serious problems, yet regulators are
doing little or nothing to stop
these abuses. Cozy relationships
and sweetheart deals may be
common in corporate America,
but they are antithetical to the
values and best interests of the
nonprofit world.
Poor governance is a major
reason for many of the scandals
and objectionable practices that
have riddled the nonprofit world.
Yet in very few cases have regulators persuaded or pressured
irresponsible board members to
resign their positions.
Again, political will and courage could have prevented serious problems at nonprofits and
also sent a tough message to
nonprofits that poor governance
will not be tolerated.
Despite all the indicators
of inappropriate behavior and
practices among large, politically influential nonprofits, the
Internal Revenue Service and
state attorneys general have
chosen either to look the other
way or to pursue half-hearted
examinations.
Plenty of abuses deserve serious attention: nonprofit hospitals that offer better care to
wealthy and insured patients
than to indigent and uninsured
patients; religious organizations
that pay overly high salaries
to their executives; museums
that provide few or no benefits,
such as free admission, to low-income families; and universities that spend profligate sums
on football, basketball, and other coaches.
What can be done to encourage regulators to pay more attention to such issues?
n The Senate Finance and
House Ways and Means committees should direct the IRS to
issue tougher regulations where
necessary and to strengthen
their enforcement practices.
The lawmakers should make
clear that regulators must con-
front abuses in the nonprofit
world even if they are caused
by large and influential organi-
zations.
n Federal and state lawmak-
ers should devote more mon-
ey and more staff members to
charity regulatory offices. Be-
sides empowering them to do
more, this would make it clear
that lawmakers and the public
value regulators’ work.
n State legislatures should
either make their charity regulators independent of the state
attorney general’s office or in-
It is probably time
for a high-powered
national commission
to reassess
the charity world.
Among the questions it could
consider: Does it make sense for
hospitals and colleges, which
account for much of the wealth
of the nonprofit world, to be
lumped into the same legal category that includes small grass-roots and social-service organizations? Should separate rules
be created for newly emerging
hybrid groups that are not non-profits nor for-profits but a combination of both?
How should nonprofits deal
with compensation and conflict-of-interest issues?
Thirty-five years have passed
since the Commission on Private Philanthropy and Public
Needs, a private group created
by John Rockefeller III, took a
broad look at nonprofit groups.
Since the commission issued
an influential report to Congress and other policy makers,
the nonprofit world has grown
much larger, much more complex, and perhaps more important to the health of our society.
Why not take another look?
Charity regulators
lack the political will
and courage to police
nonprofit groups
effectively.
sulate them from political pressures if they remain under the
attorney general’s supervision.
It is probably time for a high-powered national commission
to reassess the structure of the
charity world, to examine if it
could be changed to improve its
functions and services, and to
determine how it could be more
effectively regulated.
Pablo Eisenberg, a regular
contributor to these pages, is a
senior fellow at the Georgetown
Public Policy Institute. His e-mail address is pseisenberg@
verizon.net.
tives salaries and benefits that
exceed $1-million.
After all, from their perspective, those jobs are scarce and
must compete with for-profit
salaries in the job market. As
a result, the definition of excessive compensation in the IRS
regulations is at best mushy.
That is why regulators permit
nonprofits seeking new executives to compare pay to senior
jobs at businesses, thereby unleashing a slew of highly paid,
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