Nonprofit Policy News | December 11, 2009

December 11, 2009

A Wild Few Weeks Ahead for Nonprofits

With Congress racing to pass multiple pressing and time-sensitive bills by the end of the year and many state legislatures gearing up to address their states' massive budget deficits, December remains filled with action, not quiet reflection. This edition of the Nonprofit Policy News highlights federal legislative matters still at play this month, 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.

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 - EXCEPT that while the House took care of small for-profit employers (which pay higher insurance premiums because of their smaller size) by giving them a tax-credit, the bill did nothing to help small nonprofit employers, which pay the same higher premiums. So 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, along with some other key allies, circulated a "Dear Colleague" letter that persuaded 47 Members of Congress 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 voted, 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." (More information about the CRS Report appears below.)

Senate: Senate leadership adopted the Finance Committee's approach of helping all small employers (defined as fewer than 25 employees and average wages below $40,000) provide insurance to their employees. In Phase I (2011-2013), small nonprofit employers could take a credit (in the form of 25% of the employer contribution) and apply that credit to taxes withheld through payroll (and employees would still get full credit for taxes withheld from their pay). In Phase II (2014-2015), the amount would increase to 35%. The Senate bill, however, treats for-profits and nonprofits differently in these respects: for-profits get a higher rate for the credit during both phases (35% in Phase I and 50% in Phase II), but 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.)

Understanding the internal processes is important because of the huge impact the process has on all the other issues before Congress right now.

Under the Senate's rules, if the health care reform bill were set aside temporarily to consider other critical legislation, then it would require another 60 votes to resume consideration of the bill, which is too risky. So the Senate must take action on the health care bill before other bills may be considered - including: raising the debt limit, passing the seven appropriations bills that Congress must pass by December 18, and extending many other laws that expire December 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 December 21, with a possibility that they might return 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 has passed all 12 appropriations bills for the budget year that started October 1, but the Senate has not. Consequently, seven bills remain in limbo waiting for the Senate to deal with the health care reform bill. Federal funding for hundreds of agencies and programs ends on December 18 unless Congress passes these appropriations bills or another Continuing Resolution. Therefore, via a procedural maneuver, a conference committee met this week to blend six of those not fully passed bills into one massive bill that can be passed by the Senate before the December 18 deadline. (Leaders are holding back the seventh bill - the one for Defense - for the very end because they know politically officials cannot vote against the Defense bill.) This procedure also allows 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 just $4 million) and the Nonprofit Capacity Building Program (now just $1 million). 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 up to $3.5 million). The estate tax is scheduled to expire entirely on December 31. If Congress fails to pass something by then, the federal and state governments could lose billions in estate tax revenues - and an incentive for wealthy individuals to make charitable contributions may disappear. OMB Watch provides a comprehensive overview of the situation, including the substantial 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 this week. The Act would extend (and in some cases, expand) a variety of tax code provisions, including some tax provisions designed to increase charitable giving, such as tax-free contributions from individual retirement plans for charitable purposes (Sec. 135) and contributions of food inventory (Sec. 132). 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 like 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." The Chair of the House Financial Services Committee, Representative Barney Frank, 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. But nonprofits providing instruction to individuals could still face regulation. (Consider, for example, Junior Achievement, that has 330,377 volunteers teaching financial literacy and work readiness classes to 9,795,485 young people a year, according to its website.) The House is scheduled to vote on this quickly.

Stimulus Was Effective

The nonpartisan Congressional Budget Office recently released a report showing that the American Recovery and Reinvestment Act (ARRA) was effective and had a positive effect on the economy. According to the report, the ARRA created between 600,000 - 1,600,000 additional jobs in the third quarter of this year and added 1.2- 3.2% to the nation's Gross Domestic Product.

Charitable Mileage Rates

The IRS has lowered the standard mileage rates used to deduct costs of operating an automobile for business, medical, and moving purposes. The standard mileage rate for employees - including nonprofit employees - will decrease effective January 1, 2010, from 55 cents per mile to 50 cents per mile. The rate for driving for medical or moving purposes will decrease from 24 cents per mile to 16.5 cents. The IRS has authority to change those rates to reflect costs incurred. But Congress set the mileage for charitable volunteers in statute and locked in the rate at just 14 cents a mile and has not adjusted the rate in the last 12 years. Because it costs volunteers as much to fill up their gas tanks as it does employees, the National Council continues to advocate that Congress eliminate this unfair treatment of nonprofit volunteers.

State Budget Situations Continue to Worsen

At least 35 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 the brink" of financial crisis.
  • California recently released a budget forecast for the 2010-11 California Fiscal Year that projects a $20.7 billion deficit in the state's 2010-2011 budget. 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 that 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, with the State Treasurer reporting, "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 for funds. 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."

  • Allegheny County Commission (Pennyslvania) 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 (New York), 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.


A Wild 2010 Ahead, Too

"Governments in Crisis"

The Chronicle of Philanthropy just published its forecast of the Top 10 issues nonprofits will face in 2010. So what does the Chronicle see as 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 which 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" (R40919; November 17, 2009). This new report contains a variety of gems that nonprofits can use to help state and local policy makers, journalists, grantmakers, and the general public have a better understanding of the nonprofit sector, including:

  • The "significant" role nonprofits play 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 foundation) account for only 12% of nonprofit revenues, with earned income/payments for services (49%) and government grants and contracts (29%) 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% have experienced a loss in government support while 37% reported experiencing delays in government payments." [page 30]
  • "[N]onprofits 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]


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