HANO: Federal and state nonprofit public policy update

Federal and state nonprofit public policy update

From the National Council of Nonprofits

WASHINGTON, D.C., Dec. 11 – With the U.S. Congress racing to pass multiple pressing and time-sensitive bills by the end of the year and many state legislatures gearing up to address massive budget deficits, December was filled with action, not quiet reflection. This edition of the Nonprofit Policy News highlights federal legislative matters, trends at the state and local levels, and hot issues on the horizon in 2010.

Health Care Reform

Because of the importance of this issue, it is critical to understand both the substance and the process.

Substance -- In the House: When the House passed its version of the health care reform bill, it treated nonprofit employers just like all other employers – including mandating that employers provide coverage to their employees or face a penalty. However, while the House took care of small for-profit employers by giving them a tax-credit, the bill did nothing to help small nonprofit employers, which pay the same higher premiums. The House bill respects the needs of small for-profits, but leaves small nonprofits out.

There is some good news to report on this front, however. First, Congresswoman Betty McCollum from Minnesota and other key allies circulated a "Dear Colleague" letter that persuaded 47 Members to write a joint letter to Speaker Pelosi pointing out this problem. House leadership is now aware that this issue must be corrected in conference committee.

Second, after the House vote, the Congressional Research Service issued a Report (R40919) reinforcing what nonprofits have been saying all along: "The use of tax credits to assist small businesses in obtaining health insurance coverage for employees provides no assistance for tax-exempt organizations."

In the Senate: Senate leadership adopted the Finance Committee's approach of helping all small employers provide insurance to their employees. Small employers are defined as those with fewer than 25 employees and with average wages below $40,000.

In Phase I, during 2011 through 2013, small nonprofit employers could take a credit of 25 percent of the employer contribution and apply it to taxes withheld through payroll. Employees would still get full credit for taxes withheld from their pay.

In Phase II, during 2014 and 2015, the credit would increase to 35 percent. The Senate bill, however, treats for-profits and nonprofits differently. For-profits would get a higher rate for the credit during both phases – 35 percent during Phase I and 50 percent in Phase II. However, nonprofits can claim the credit each pay period, whereas for-profits must wait until year end to claim the credit, if they have a profit. (This chart compares the House and Senate bills.)

Process -- Understanding the internal processes is important because of the huge impact it has on all the other issues now before Congress. Under Senate rules, if the health care reform bill were set aside temporarily to consider other critical legislation, it would require another 60 votes to resume consideration of the bill, which is too risky. Therefore, the Senate must take action on the health care bill before other bills may be considered – including raising the debt limit, passing seven appropriations by Dec. 18 and extending many other laws that expire on Dec. 31, such as the estate tax, IRA rollover, various other tax provisions, aspects of the Patriot Act and certain unemployment and COBRA benefits.

House and Senate leadership have put members and staff on notice that they expect to still be in session as late as Dec. 21, possibly returning before New Years Day in order to complete their work. The Washington Post offers a summary of the congressional schedule for the remainder of 2009 and its impact on President Obama's policy priorities.

Appropriations for Fiscal Year 2010

The House passed 12 appropriations bills for the budget year that started Oct. 1, but the Senate did not. Consequently, seven bills remained in limbo waiting for the Senate to deal with the health care reform bill.

Federal funding for hundreds of agencies and programs would end on Dec. 18 unless Congress passes these appropriations bills or a Continuing Resolution. Therefore, via a procedural maneuver, a conference committee met in early December to blend six of those bills into one massive bill to be passed by the Senate before the deadline. This procedure would allow the Senate to vote on the conference committee report without having to halt the health care debate.

In this abbreviated process, conferees split the difference between what the full House and Senate Appropriations Committee wanted for the Volunteer Generation Fund (now with a $4 million gap) and the Nonprofit Capacity Building Program (with a $1 million difference). The House took quick action, so the $446.8 billion omnibus spending bill is now with the Senate.

Estate Tax

The House just passed legislation permanently setting the estate tax at 2009 levels, including the exemption of up to $3.5 million. The estate tax is scheduled to expire on Dec. 31. If Congress fails to pass it by then, federal and state governments could lose billions in estate tax revenues and an incentive for wealthy individuals to make charitable contributions could disappear. OMB Watch provides a comprehensive overview, including the procedural and political hurdles the bill still must clear in the next three weeks and the consequences if it doesn't pass.

IRA Rollovers and Food Inventory

The House also passed the Tax Extenders Act of 2009, which would extend and, in some cases, expand a variety of tax code provisions, including provisions designed to increase charitable giving, such as tax-free contributions from individual retirement plans for charitable purposes and contributions of food inventory. Other provisions relate to community assistance programs, disaster relief assistance and more.

Consumer Financial Protection Agency

Because of the economic meltdown, the House and Senate are considering legislation to protect consumers. As written, the bills could have unintended consequences of sweeping in and regulating nonprofit fundraisers and even local community nonprofits -- such as a food bank or a YMCA that helps individuals by teaching them basic financial literacy.

For instance, the House version of the Wall Street Reform and Consumer Protection Act of 2009 would regulate organizations that offer financial services and advice, including specifically "providing educational courses, and instructional materials to consumers on individual financial management matters."

Representative Barney Frank, chair of the House Financial Services Committee, reportedly has agreed that the intent was not to have the new Consumer Financial Protection Agency regulate charitable giving advice; so fundraisers and professional advisors to individuals will be exempted. However, nonprofits providing instruction to individuals could still face regulation, such as Junior Achievement, which has 330,377 volunteers teaching financial literacy and work readiness classes to 9,795,485 young people a year. The House is scheduled to vote on this quickly.

State Budget Situations Continue to Worsen

At least 48 states have significant deficits in their current year budgets, according to the Center on Budget Policy and Priorities. For example:

New York is facing a budget deficit of $3 billion. The governor recently declared New York to be "on he brink" of financial crisis.
California recently released a budget forecast for its 2010-11 fiscal year that projects a $20.7 billion budget deficit. The Los Angeles Times offers a good summary of the forecast and its prediction that state revenues will not rebound until 2015.
In Arizona, a recent budget forecast predicts the state's economy will not recover for the foreseeable future. The state recently had to borrow money for the first time since the Great Depression. The state treasurer said, "Literally, the state is out of money."

Local Governments Seek to Raise Revenues through Fees on Nonprofits

With revenues depleted, an increasing number of local governments have been trying to tap nonprofits. This excellent article summarizes why nonprofits – as one leader of the Minnesota Council of Nonprofits testified – are feeling "death by a thousand cuts" due to a proliferation of fees and assessments from local government.

As a YMCA leader explained: "Nonprofits have tax exemption for a reason – they provide service to the community that lessens the burden on government. We are partners with government and the community. But as these additional fees and assessments get assigned, it comes out of our donated dollars and resources."

The Allegheny County (Pa.) Commission recently voted unanimously to impose $13 million in fees on tax-exempt property. The county executive, however, vetoed the tax, saying it was illegal under Pennsylvania law. When the county solicitor agreed that the tax was unconstitutional, the commission backed off – although several commissioners reportedly vowed to search for other ways to get money from nonprofits.
Even though Minnesota law recognizes that nonprofits lessen the burden of government and therefore exempts nonprofit property from taxation, Minneapolis has tried to be creative by instead imposing a "streetlight" fee on churches and other nonprofits.
In Kingston (N.Y.), local officials are looking to follow this emerging trend of charging nonprofits for local services. The garbage collection fee, unofficially dubbed "pay-as-you-throw," would raise nearly $1 million in revenue for the city. Local officials have also considered additional fees for public safety and other municipal services.

Prediction: 2010 Will Be Wild, Too

The Chronicle of Philanthropy just published its forecast of the Top 10 issues nonprofits will face in 2010. The nonprofit sector's most pressing issue? "Governments in Crisis." The Chronicle identified the following trends behind this top issue: state spending cuts, the end to stimulus money and county and local budget crunches. All of these add up to "more cash-strapped local [and state] governments may try to seek money from nonprofit groups." The article quotes the President of the National Council of Nonprofits, who advised: "Leaders of nonprofits must get engaged in the policy process because this problem is not going away."

New Tool: Treasure Trove of Data

To help make their policy arguments, nonprofit leaders should become familiar with a fresh report issued by the Congressional Research Service, entitled "An Overview of the Nonprofit and Charitable Sector." This new report contains gems that nonprofits can use to help state and local policy makers, journalists, grant makers and the public better understand the nonprofit sector, including:

Nonprofits play a significant role in the U.S. economy: "the charitable sector is larger than the construction industry" and "larger than the finance and insurance and real estate industries combined." [page14]
Nonprofit organizations actually pay many taxes. For instance, "tax-exempt organizations are subject to tax on income from business activities unrelated to their exempt purpose. … Additionally, tax-exempt organizations must generally pay the same employment taxes (i.e., withhold income and payroll taxes of their employees) as for-profit employers." [page 3]
Sector-wide, private contributions from individuals, corporations and foundations account for only 12 percent of nonprofit revenues, with earned income and payments for services (49 percent) and government grants and contracts (29 percent) being much larger. [page 17]
"Another major pressure on nonprofits during the recession has been the decline in support by governments – primarily state governments – including delays in payments. A recent survey of nonprofit organizations found that 35 percent have experienced a loss in government support while 37 percent reported experiencing delays in government payments." [page 30]
"Nonprofits continue to feel the pressures of increased demands for their services coupled with decreasing revenue. More than a third of nonprofits have had to cut operations." [page 34]
"Overall … it appears that governments, particularly state governments, may be contributing to the financial difficulties of nonprofit organizations, even to the point of not paying for contracted services." [age 35]
"In the recent economic crisis, states reduced funding to nonprofit … organizations and in some cases were delinquent on payments. … If there were a spotlight on states' behaviors, especially states not making their contract payments on time, they might be less willing to address their short-term cash-flow problems in this manner." [page 54]

The National Council of Nonprofits publishes the Nonprofit Policy News to share critical public policy information with nonprofits across the nation. Anyone interested in nonprofits – board members, employees, volunteers, students and others – can click here and subscribe to this free service. But if you really care about nonprofits, join your state's nonprofit association to add strength to the united power of the nonprofit sector at the national, state and local levels.