Oregon Sets 30% Program Spending Benchmark for Charities

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June 12, 2013; Portland Business Journal

NPQ has had a number of stories on overhead lately, including our blockbuster today where three prominent organizations are calling for an end to the overuse of overhead as a measure of grantworthiness but what about when nearly no money of what is raised goes to program?  Oregon has now enacted the nation’s toughest law on spending by nonprofits. The law will pull eligibility for the state charitable tax deduction for donations from charities that do not spend at least 30 percent of their donations “to support their mission.” Charities that fall short of the 30 percent threshold are required to disclose that information or face a penalty of up to $25,000.

Given recent debates within the nonprofit sector about the content and levels of nonprofits’ administrative or overhead expenditures, including debates on this webpage, the text of the bill is worth examining to determine how the state law defines the operative terminology and allows for exceptions under “extenuating circumstances.” The final version of the legislation—House Bill 2060—contains the pertinent provisions: The measurement of spending on program services is based on the charity’s expenditures over the previous three fiscal years. According to the bill, “The calculation of program services expenses and total functional expenses shall be based on the amounts of program services expenses and total functional expenses identified by the organization in the organization’s Internal Revenue Service Form 990 return or other Internal Revenue Service return…”

That means what nonprofits put on their 990s isn’t just important for how donors search for relevant information, but for how the attorney general in Oregon will determine if nonprofits qualify for the state’s charitable deduction. According to the Urban Institute, the error rate on nonprofits’ e-filed 990s is only one percent but 30 percent for non-e-filed 990s. The IRS says the error rate for paper-filed 990s is 25 percent. By errors, however, these reports largely refer to mistakes such as putting information in the wrong lines or categories, not intentional misclassification of information. For example, according to a 2012 report, 41 percent of the nearly 38,000 charities that raised $1 million or more reported no fundraising expenses at all, and the remaining 22,000 charities that did report fundraising expenses reported that their fundraising cost them 7 cents on the dollar. It isn’t clear from the Oregon bill whether and how the Oregon AG would potentially challenge the accuracy and veracity of potentially misreported spending data.

The law does allow charities to contest findings that they spend below the 30 percent program-spending threshold based on having made payments to affiliates that should count as program expenditures or other mitigating purposes. The press coverage of the bill suggests that a typical mitigating circumstance would be raising money for a capital campaign.

Typically, state nonprofit associations resist legislative efforts to define nonprofit efficiency or to limit nonprofit fundraising expenditures as a proportion of overall nonprofit expenses, but in this case, the Nonprofit Association of Oregon endorsed the bill. NAO issued a statement that reads, in part, as follows:

NAO believes that a “minimum floor” of 30% will easily identify those under-performing charities that, year-after-year, devote only a fraction of donated funds to their program mission. These organizations are anomalies, draining away charitable donations from effective charities providing essential services to our communities… NAO views HB 2060 as an important step in distinguishing between the vast majority of high-performing nonprofits and those that are clearly not…NAO is mindful that setting a blanket threshold has some risks. There may be legitimate reasons why a worthwhile charity could fall below even the 30% expenditure minimum. We believe that HB 2060 recognizes authentic reasons for under-performance and creates appropriate exceptions…NAO estimates that HB 2060…would not cause any undo harm or reporting burden to the vast majority of nonprofits operating in Oregon, but will go a long way to upholding the integrity of our sector.

We suspect that the NAO position may not be totally supported by other state associations. We would like to hear from supporters and critics of the Oregon bill and have them explain why a 30 percent minimum program expenditure requirement is or isn’t a workable mechanism for state oversight of legitimate charitable performance.—Rick Cohen

  • Mark Fulop

    I applaud HB2060 and NAO’s role in seeing this legislation move forward. However, capping nonprofit organization overhead at 70% is a pretty low bar that will likely impact only the most disingenuous of our nonprofit brothers and sisters. There should be legislated disincentives that are punitive to organizations that devote less that 30% revenues to programs (and absorb the rest to administrative costs). Most of these organizations are predatory and well deserving of an attribution of “worst.” However, as the leadership over at NAO (and other state nonprofit associations would likely agree) the solution to the “overhead” dilemma cannot rest on the establishment of a single numerical metric. Indeed the other “half” of the news of today is the much hoopla’ed joint letter of GuideStar, Charity Navigator, and the BBB Wise Giving Alliance decrying the use of a numerical overhead metric. The truth and practice is likely some where in between. Two and a half years ago, I argued in a blog post that what we actually need is for nonprofit leaders to go inward and reflect on their values, vision & strategy and create a coherent set of transparency measures and actively promote their story to the community. My view has not changed. Judicious regulations like HB2060 are good. Nonprofits that boldly invest in accountability, transparency, and authentic communication are even better.

  • Jim White

    Agree with Mark Fulop’s comment that “the solution to the “overhead” dilemma cannot rest on the establishment of a single numerical metric.” In fact, we at NAO applaud the Guidestar, Charity Navigator, and the Wise Giving Alliance for helping to shift the conversation through their “Overhead Myth” letter. Overhead is not the ultimate measure by which nonprofits’ effectiveness should be measured. There should never be a ratio that “good” nonprofits spend 65 or 70% (or 90%?) of their revenues on programs. Let’s have the debate and reach some agreements in our sector to define impact measures that can demonstrate our effects on society as well as business performance ratios that make sense. Let’s adopt some Standards of Excellence of what it means to be a nonprofit along the lines of the initiative that the Maryland Nonprofits and others have initiated. (www.marylandnonprofits.org/dnn/Strengthen/StandardsforExcellence.aspx)

    At the same time, let’s recognize that while this debate is continuing,our sector’s credibility gets eroded every time a new scammer is uncovered collecting donations from well-meaning citizens but then putting only a fraction back into the programs for which they are collecting. It was with this in mind that the Nonprofit Association of Oregon supported HB2060 to set a “floor” based on the current mechanism nonprofits are required to submit to the state for reporting revenues and expenditures. We believe this is a practical approach that does not let the perfect be the enemy of the good. Our Oregon Attorney General is now empowered to review those organizations at the extremes of the overhead ratio as reported in 990s and force them to disclose to their donors that they cannot take Oregon tax exemption. At a time when the status conveyed by the charitable tax incentive is under attack in so many states and at the Federal level, we felt that it needs to be kept sacrosanct to those organizations that are actually providing community benefit.