You write a newsletter about nonprofits. Last summer you wrote, “(t)he erosion of the private money principle is an existential threat to the philanthropic sector.” Why is that?
Unfortunately, it really is all about the money. Specifically, it is all about the fact that state and federal governments need money, and they increasingly see nonprofits not so much as organizations performing vital functions in society that government would otherwise have to perform, but as competitors for the same dollars. It’s not hyperbole to suggest that the biggest threat to the nonprofit sector is government — both federal and state. There is a certain irony here. Money in the hands of the government must be used for public purposes as directed by the government — whereas charitable money must also be used for public purposes as directed by the governing boards of nonprofit institutions and private donors who fund them. So in many ways the debate is about who is a better steward of these funds for the public benefit–governmental agencies or privately managed nonprofits? The government is a very powerful player in this tug-of-war because it has the power to levy taxes, to administer the tax law, and to regulate much of what nonprofit organizations do.
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The private money principle, you explain, is charitable funds are subject to private control but are committed in perpetuity to a public purpose or use. How important is that principle to the nonprofit sector?
The private money principle is based on two legal concepts that really are part of our cultural and legal bedrock. The first is the right to private property and to use and dispose of it as we deem appropriate, and the second is a 400-year-old doctrine that is referred to as the “statute of charitable uses.” The statute of charitable uses dates back to Elizabethan England. Taken together, these concepts allow any one person to commit their property to a charitable use–such as a donation to your college or to a hospital, which must be used thereafter in perpetuity for the purpose you designate. This principle is vitally important to a healthy nonprofit sector – and a healthy nonprofit sector is vitally important to our economy and our culture. Most of us are born in nonprofit healthcare institutions, interact with them throughout our life in things as varied as Little leagues and churches, and many of us will end our lives in nonprofit hospitals or nursing homes. The nonprofit sector as we know it is uniquely American–it is not something that exists in much of the world – and we need to protect and preserve it. Â
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In what you describe as “sleight of hand,” some states think they’re entitled to nonprofit dollars because they aren’t taxed (as you say, governments think because they could tax the dollars away they are public dollars). You cite states who have tried to tap private nonprofit funds for state needs. How prevalent a threat is that to nonprofits in Connecticut?
I’m not aware of any specific legislative initiative or attempt to change Connecticut law to jeopardize nonprofits in this manner on a state wide level. What I am seeing on a statewide level is drastic cutbacks in funding to nonprofit agencies that perform social services with no parallel diminution in the obligations and responsibilities of these nonprofit agencies. This is a very serious problem. On the local level, however, I see more cases in which cities and towns are reevaluating the extent to which nonprofits are exempt from local property taxes.
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How about nationally? Do you ever see the federal government making a concentrated effort to go after private money this way?
I do. First, there are the continuing rumblings about the federal government limiting the value of the charitable deduction. Second, and perhaps more ominous, is the way the IRS is using its regulatory authority to make life overly difficult for nonprofits. I am by no means saying that the IRS does not have a vital function in the enforcement of the tax law.  But having said that, the IRS seems almost to be punitive in its approach to nonprofits. The underlying gambit is that if the IRS can come down hard on the sector there will be fewer nonprofits and the money they would otherwise get or which would be contributed to them on a deductible basis would be taxed and would benefit the government. One specific example is the new annual return nonprofits must file–Form 990. It was revised substantially two years ago and now delves into matters which have little or nothing to do with the tax law and which impose greater reporting costs and burdens on nonprofits. In the Summer 2008 edition of our nonprofit newsletter (available on the web) we described the new Form 990 as a manifestation of the “death by 1,000 cuts” concept.
