November 20, 2012

A FRUITFUL FIELD FOR REGULATION: Making Sure Nonprofits Aren’t All About Profit.

The fastest-growing part of the U.S. economy is not business, at least not the commercial kind. It’s the nonprofit sector. In the past decade, the number of nonprofit groups has grown by 25 percent to 1.6 million. They now account for 5.4 percent of gross domestic product and 10 percent of jobs.

As the sector has boomed, however, government resources devoted to overseeing it have either declined or stayed the same. That has left considerable room for questionable practices. In recent reports, Bloomberg Markets has explored nonprofits’ use of dishonest solicitations by professional fundraisers whose efforts primarily benefit themselves, the issue of high executive compensation, and the matter of whether groups even deserve to be tax exempt.

The American Bureau of Shipping, for instance, functions like other companies that certify ships as seaworthy but enjoys a tax exemption because it’s registered as a nonprofit trade association. With $605.3 million in profits since 2004, it paid its chief executive officer $21.5 million over seven years.

Nonprofits fall under the jurisdiction of both the Internal Revenue Service and state authorities, notably the attorneys general. One barrier to effective oversight is that AGs lack access to IRS information about ongoing investigations. An amendment to the federal tax law lifting that proscription would improve coordination.

When nonprofits basically ran orphanages and hospitals, the lack of scrutiny was reasonable. Now they handle huge amounts of money without much in the way of accountability. It’s time for nonprofits — including colleges and universities — to face a lot more scrutiny on how they spend the money.

I’ve written about this before on several different occasions. And check out this investigative report from the Boston Globe.

It’s been nearly 10 years, and not much has been done. Increased nonprofit accountability — including pay caps for administrators — might be a good addition to any new tax bills coming out of Congress. As I’ve suggested elsewhere, Congress might want to cap pay at tax-exempt organizations at the level of a member of Congress, or a Supreme Court Justice. At some point, after all, you’ve made enough money.