Nonprofits, Transparency and Sunshine

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Rick Cohen

Last week was “Sunshine Week”, an effort led by the American Society of News Editors—and funded by the John S. and James L. Knight Foundation—“to open a dialogue about the importance of open government and freedom of information.” Sunshine Week started in Florida in 2002 when the press and the public mobilized to defeat state legislators’ attempts to create hundreds of exemptions from the state’s public records laws. Although President Obama issued a public statement endorsing Sunshine Week, both Public Citizen and Citizens for Responsibility and Ethics in Washington expressed concerns that the Obama Administration hasn’t been the model of public sector sunshine that many had hoped.

But what about the intersection of government and nonprofits for the purposes of sunshine? When is a nonprofit organization sort of like a public agency for the purpose of levels of transparency and disclosure beyond what all nonprofits (above a specific threshold annual revenue level) provide to the Internal Revenue Service in their Form 990s?

According to a New Hampshire court, when a nonprofit is largely paid for with government dollars, it has enough governmental DNA to make it subject to public agency-like Right-to-Know disclosure requirements (Read more from the Nashua Telegraph).

For several years, the Local Government Center of New Hampshire has resisted calls for disclosing its schedule of salaries. The LGC’s argument was that the organization is a private nonprofit organization and its salaries were not subject to public interest disclosure. The LGC is the home of the state’s association of municipalities and administers some benefits packages for participating municipal workers such as health insurance and workman’s compensation.

Charging that there was some financial misbehavior in the organization, the state’s firefighters union went to court asking for, among other things, a list of the organization’s salaries. The state supreme court just ruled against the LGC, concluding that while the LGC is not a government agency, the wages of its staff are paid for mostly by tax dollars and the work of the organization (such as the health care and workman’s comp) are programs for the benefit ultimately of taxpayers.

The result was the revelation that 21 of the LGC’s employees earn more than $75,000 a year and seven make more than $100,000. Because of the multiple functions of the LGC including its benefits programs for municipal workers, the court found LDC is “conducting the public’s business” and therefore should be subject to the Right-to-Know law provisions.

At what point does the proportion of a nonprofit’s budget that comes from governmental funds make the nonprofit subject to public sector right-to-know laws? What kind of activities might a nonprofit do that would be considered “the public’s business?” On the other hand, what kinds of standards and thresholds should apply to largely government-funded nonprofits regarding the information that the public has a right to know about and should not be camouflaged behind nonprofit 501(c)(3) confidentiality standards? A New Hampshire state legislator, Democratic State Rep. Dick Watrous, introduced a bill to compel the state’s nonprofits to comply with public sector right-to-know standards. But just last week, the New Hampshire House of Representatives voted 214 to 80 to kill the Watrous bill, which would have classified nonprofits as public agencies if they exceeded $100,000 in annual revenue and got half of their funding from state or local government (Read the Eagle-Tribune story).

Nonprofits in New Hamphire were united in opposition to the Watrous bill. The state’s nonprofit association declared that the bill would have been a “huge burden” on nonprofits. One major charity called the bill a “slap” against nonprofits. Nonprofit sector spokespersons declared that nonprofits are “all about transparency,” making the bill unnecessary, and that the disclosure requirements, including financial disclosure, would make people “less willing to serve on nonprofit boards of directors if they knew they could come under increased public scrutiny.”

While Watrous might have been engaged in legislative overkill, some of the “all about transparency” counter-arguments don’t ring true about a sector that is as diverse as ours, particularly when some nonprofits are created or function to camouflage government activity. In some states, public universities have created nonprofit foundations, ostensibly to raise charitable money for schools, but often to conduct some business, such as adding to the salaries of university officials and college sports coaches, out of the eyeshot of the public (go ask newspapers that have tried to FOIA these entities for how less than transparent those 501(c)(3) arms of state universities have been). At the municipal level, this author is quite aware of local governments that have created (c)(3)s to pull some activities, such as economic development programs, out of the grasp of city councilmembers.

Enhanced disclosure requirements for publicly funded nonprofits is not a new battle. In 1998, San Francisco adopted the Non-Profit Public Access Ordinance, requiring nonprofits with more than $250,000 in government contracted funds to release basic budget and tax information that largely tracked what is publicly transparent through other sources, with little or no powers to compel nonprofits to disclose more.

A few years later, the San Francisco supervisors had extensive discussion of a Sunshine Ordinance that would apply to nonprofits, in part because the City ran over $1.5 billion in funding to and through 835 nonprofits during a period of a couple of years. Activists pushed the issue because of the purported secrecy of local AIDS nonprofits, according to the San Francisco Bay Guardian News, operating with “unaccountable operations that spend money, often public money, with little effective community input.” In 2008, the San Francisco board of supervisors narrowly killed a bill that would have given the city the ability to limit the CEO salaries of nonprofits largely funded by the city.

Nonprofits appear to have staved off tougher requirements in San Francisco and New Hampshire, but the issue is not going to go away: if you want transparency to follow the money in the public sector, then the path of sunshine might lead to publicly funded nonprofits with demands that they disclose more than they typically do under typical state and federal regulations. For example, the National Academy of Public Administration has called for more transparency of government-funded nonprofits: “Non-profit organizations receiving funds from the government are often supporting people who are traditionally under-served and who do not have a choice in what service provider to use, so they can't hold them accountable in the same way that someone who has a market choice can. The service provider essentially has a monopoly. Therefore, it is extremely important that the government regulates and evaluates these organizations to ensure quality.”

The Sunshine Week campaign is increasingly touching on nonprofits as well as government agencies as needing more disclosure when they use government funding, note these examples from the Baltimore Sun (citing some $302,000 in “staff training” grants for the Montgomery County Collaboration Council for Children, Youth and Families),  the Atlanta Journal Constitution (on the selection of a nonprofit closely linked to the city’s top school officials to conduct an investigation of cheating on standardized tests at two-thirds of Atlanta’s elementary and middle schools), the Detroit Free Press (citing the American Red Cross), the Montgomery Advertiser (addressing pending legislation that would require lobbyists to report on their interactions with government-funded nonprofits) and the Decatur Daily (on the government-endorsed sale of a nonprofit hospital).

Follow the money, advocates of increased sunshine say. With the increasing shift from governmental agencies providing services to handing off that function to nonprofits, the nonprofit sector should prepare for more demands for increased transparency and reporting and sunshine.

  • Claudia Damon

    Right to know requests to the government will allow the public to see the terms and conditions and reports required by and filed pursuant to a contract the government enters into with a nonprofit. If the government (read “The people”) wants more disclosure as a term of the contract, then that requirement can be made a part of the reporting requirements for government contracts and grants too.

    You don’t mention government contracts and taxpayer funds being spent on contracts with private for-profit contractors. Those amount, at least often, to far more significant dollar totals than contracts with nonprofits. Should the records of the private for-profit companies also be open to public inspection?

  • rick cohen

    Agree: I think you’d suspect that we want to see many more records open to public inspection. Transparency isn’t a cure-all, but it’s a big step toward a more effective democracy.