The Ongoing Overhead Myth and the Dangers of Overly Zealous State Legislators

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Speed Limit Very Very Slow / Eric Fischer

On March 17th, 2016, California Assemblymember Jim Frazier introduced Assembly Bill 2855 (“AB 2855”) to amend the state statute governing charitable solicitations. Frazier’s initial proposed bill would have required all websites produced by or on behalf of charitable nonprofits to contain a special financial disclosures page. That page would then have been required to include a statement of “the sum total of the salaries, other compensation, and employee benefits of the charity’s executive director and board of directors and all of the charity’s other administrative overhead expenses, as reported on the charity’s most recent Internal Revenue Service Form 990 filing.” AB 2855 even went so far as to specify the required font type and size of the mandated overhead expenses disclosure statement and further required that the financial disclosures page contain a complete copy of the nonprofit’s most recently-filed Internal Revenue Service Form 990.

Moreover, each and every page on a subject nonprofit’s website would have been required to include in the upper right corner a direct link to the nonprofit’s financial disclosures page with the phrase, “Click here to read a full disclosure of the finances, including the salaries and expenses, of this organization” (also in a specified font type and size). But AB 2855 didn’t stop there—it also proposed that any document produced by or on behalf of a subject nonprofit for the purpose of soliciting charitable funds include a statement on the first page of the document containing the overhead expenses disclosure described above.

For nonprofits that failed to strictly comply, AB 2855 would have authorized the California Attorney General to enforce its requirements by directing the California Franchise Tax Board to suspend or revoke a violating nonprofit’s state tax-exempt status, suspending or revoking the nonprofit’s registration with the Attorney General, or taking such other enforcement action as permitted under the Attorney General’s existing powers and duties.

Unsurprisingly, this overreaching and unnecessarily burdensome bill elicited strong objections from the nonprofit sector. The California Association of Nonprofits (“CalNonprofits”), a statewide alliance of more than 10,000 organizations, very quickly issued strong statements in opposition to the proposed AB 2855 and sent a letter to Assemblymember Frazier stating that the Bill’s provisions are duplicative and overly burdensome for both nonprofits and the state of California, which nearly 300 California nonprofits also signed. The letter noted that the Form 990 is already a publicly available document and that the California Attorney General’s office maintains a Registry of Charitable Trusts that provides information about nonprofits subject to registration. Moreover, many large nonprofit websites include thousands of web pages and the requirement that the disclosures link be added to the top corner of each of those pages would impose an extreme burden.

The CalNonprofits letter further challenged the oft-repeated notion, reinforced by AB 2855, that overhead expenses at nonprofits are an undesirable thing that should be minimized and that high overhead expenses indicate a cause for concern. As has been repeatedly pointed out, “overhead” includes necessary costs such as utilities, legal compliance, insurance, healthcare benefits, and some employee salaries. AB 2855 strongly perpetuated the dangerous notion that overhead expenses alone are an appropriate metric by which to judge the effectiveness and worthiness of a nonprofit.

Likely in response to this strong opposition, AB 2855 was amended in early April to instead require that all subject charitable nonprofits include a “prominent link” on the home page of their websites, and a corresponding web address on all documents soliciting charitable contributions, that directs visitors to the California Attorney General’s website. The amended version of AB 2855, in turn, requires the Attorney General to “develop and publish on the Attorney General’s Internet Web site, which contains information about charities, informational materials containing consumer rights and protections and charity resources to allow donors to become informed about a charity before making a decision to give” by no later than July 1st, 2017.

While possibly a slight improvement over the initial version, the amended AB 2855 still raises significant concerns for subject nonprofits and the sector as a whole, and has continued to draw significant and loud opposition. (CalNonprofits in particular has continued to oppose what it is calling the “Warning Label Bill” and has sent an additional letter to the Chair of the Assembly committee that was considering AB 2855.) In addition to the burden that the required additions to websites and solicitation documents would place on organizations, AB 2855 is also completely vague with respect to the nature of the information that will be included on the Attorney General’s website to “inform” donors about such nonprofits. Moreover, AB 2855 arguably compels speech in an unconstitutional manner by dictating specific content to be included on nonprofit websites and documents and seems ripe for challenge on this basis.

Although AB 2855 is proposed state legislation, if it were to become law, its impact would be felt well beyond California. As an initial matter, the proposed requirements of AB 2855 would apply not only to all California nonprofit public benefit corporations, but also to all nonprofits, no matter where they were formed, that solicit funds for charitable purposes in the state or are otherwise subject to the California charitable solicitation statutes. The California Attorney General has been known to widely assert the applicability of the state’s charitable solicitation laws and the impact of the bill could therefore be rather extensive. Perhaps more worrisome, however, is the possibility that AB 2855 could set a dangerous precedent for other states and spur copycat legislation across the country.

Thankfully, the Assembly Committee considering the amended AB 2855 voted on April 12th, 2016 not to send the bill out of committee. However, this may not be the last that we see of this type of troublesome legislation.