Changes Could Come Soon to Laws that Govern N.Y. Nonprofits

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May 28, 2013; Your News Now (Rochester, NY)

In the state of New York, legislation has been proposed that that will make life for nonprofits both harder and easier. “It’s been long overdue,” said Mike Ranzenhofer, R-61st District. “There have been a number of complaints from the nonprofit community; it’s just too difficult to incorporate and do business in New York State, and also we wanted to deal with the governance issue.”

The proposed Nonprofit Revitalization Act being considered by the New York legislature seeks to increase the use of fiscal audits by nonprofits, as well as make nonprofits act on audit findings and recommendations. The legislation would also make it easier for new nonprofits to incorporate in New York, as some nonprofits have been choosing to avoid New York’s nonprofit incorporation process and incorporate in Delaware, where business incorporation has always been relatively friendly and simple. The article refers to several provisions of the proposed law that would make nonprofit operations easier, including the ability to conduct board meetings using distance technology and streamlined mergers and affiliations.

The article refers to two pieces of legislation, but doesn’t detail the provisions of the Executive Compensation Reform Act, which would require all charities to review executive compensation to assure that it is appropriate. In addition, charities with annual budgets exceeding $2 million will also have to review compensation of the top five highest paid officers or key employees.

As the two bills work their way through the process, it will be interesting to see how much latitude nonprofits will have to disagree with auditors’ recommendations. Also, the proposed law perpetuates the myth that audits are, in and of themselves, some sort of seal of approval and public assurance that an organization is run well. Based on the article, the compensation review requirements closely reflect the IRS’s requirements for nonprofit organizations and do not attempt to cap executive compensation.

The key benefit of the proposed laws to the state is allow the N.Y. Attorney General new powers to oversee and act on apparent violations of good governance practice. If passed, New York would be able enforce governance standards under state law that have, up to now, been subject to enforcement at the federal level under IRS regulation. This would include new explicit power to “unwind” transactions between a charity and an insider, requirements for audits, conflict-of-interest and whistleblower policies, and prohibitions on having a nonprofit staff member also serve as the board chair.

Will other states follow New York’s lead and empower their attorneys general to enforce governance standards on nonprofits, perhaps influenced by the widely reported problems within the nonprofit function at the IRS?—Michael Wyland