OMB Publishes Streamlined Grants Guidance that Benefits Charitable Nonprofits
The White House Office of Management and Budget (OMB) officially published its overhaul of federal grants policies and procedures on December 26, and many of the changes should benefit charitable nonprofits, their work in communities on behalf of governments, and the nonprofit community as a whole. Most notably for community-based organizations, the new Final Guidance will require pass-through entities (typically state and local governments) entering into contracts or grants with nonprofits to pay the nonprofit’s approved federal indirect cost rate, negotiate a rate based on the federal guidelines, or, at the election of the nonprofit, pay a minimum default rate of 10 percent of a nonprofit’s modified total direct costs. Additionally, all federal agencies will be required, under most circumstances, to utilize a nonprofit’s approved indirect cost rate if one exists, rather than negotiating its own rate. The new guidance merges and replaces eight OMB Circulars, including A-110, A-122, and A-133, that most directly affect grants and contracts with charitable nonprofits. The Council on Financial Assistance Reform (COFAR), which worked closely with OMB on this effort, will now facilitate the implementation of the new guidance. For more information, see the official publication by OMB, the special edition of Nonprofit Advocacy Matters, and the statement from the National Council of Nonprofits.
Regular Order Returning to Congress, for Now
Congress faces yet another deadline (January 15) to approve $1.012 trillion in appropriations for the federal government before temporary spending authority expires, but this deadline is different because Congress is focused on where to spend the money rather than whether to spend at all. This approach, known as “regular order” or the normal process, is the result of the budget deal reached by Representative Paul Ryan (R-WI) and Senator Patty Murray (D-WA), chairs of the House and Senate Budget Committees, and approved by Congress in December. The agreement ends disputes over total spending by setting specific levels for Fiscal Years 2014 and 2015 while temporarily turning off $65 billion in additional arbitrary sequestration cuts. Appropriators in Congress are busily at work allocating resources to all federal departments, agencies, and programs; House and Senate action are expected in the next two weeks. The likely “omnibus” spending bill will not address the federal borrowing limit (debt ceiling), leaving the possibility of another government shutdown in the spring.
Changes in Tax Leadership in 2014
The New Year is bringing changes at the top for federal tax law drafting and enforcement:
- Senate Finance Committee: In December, President Obama nominated Senator Max Baucus (D-MT) to serve as Ambassador to China. If Baucus is confirmed, as expected, then the chairmanship of the powerful Senate Finance Committee will likely pass to Senator Ron Wyden (D-OR), who has a record for seeking bi-partisan solutions to tax problems and is a vocal supporter of the charitable deduction. As an indication of Senator Wyden’s respect for the work of charitable nonprofits, check out the feature on his Senate website: A Lifeline not a Loophole.
- Internal Revenue Service: Also in December, the Senate confirmed John Koskinen to be 48th Commissioner of the IRS. As Commissioner, he presides over the nation’s tax system, which collects approximately $2.4 trillion in tax revenue each year and manages many of the rules governing tax-exempt organizations including charitable nonprofits. Prior to his appointment, Koskinen served as the non-executive chairman of Freddie Mac from 2008 to 2012 and its acting chief executive officer in 2009.
State Budgets See Meager Growth, More Fiscal Uncertainty in 2014
State budgets are expected to undergo only modest improvements and continued financial challenges in FY 2014, according to a report from the National Association of State Budget Officers (NASBO). Revenue is projected to increase by only 0.8 percent in FY 2014 as a result of federal tax rate increases in 2013 and tax cuts in states in 2014. “The lingering effects of the recession are still present, as a number of states have yet to surpass pre-recession revenue and spending levels in nominal terms,” the report authors find. A meager spending increase will represent an improvement from the 26-year low reached in 2012, but “for most states, spending growth will be very limited and there will be few additional budget dollars available.”
These continued fiscal strains could limit or negatively affect the programs that support the work of nonprofits in many states. “For many states, operating budgets also face pressure from spending needs in such areas as transportation and infrastructure, as well as pensions and retiree health care,” the NASBO report states. For example, the Kentucky Legislature is facing a major budget gap that is likely to trigger cuts, with $600 million in required expenditures and only $230 million in increased revenue. Similarly, Pennsylvania officials anticipate major battles over the 2014-2015 budget due in part to increased pension and medical assistance costs amid meager revenue growth. Governments in California, Florida, Illinois, Indiana, Michigan, Nevada, New Hampshire, New Jersey, New York, and Rhode Island are also expecting budget pressures in 2014.
State Tax Reform in 2014 and Charitable Giving Incentives
Comprehensive tax reform remains a priority on several state legislative agendas in 2014, and nonprofits learned from past experience that such “reform” efforts could subject the charitable giving incentives in their states to artificial caps or attempts at restructuring. Governors in Kentucky, Nebraska, New York, and Oregon have identified tax reform as a policy priority in 2014, and other governors could advance similar goals in their budget proposals in the coming weeks and months. As a result of effective nonprofit advocacy, consensus among states in 2013 about the importance of charitable giving incentives holds an important lesson and warning for states wading into tax reform in 2014. Notably, legislators in Kansas, Minnesota, North Carolina, and elsewhere considered but ultimately decided against changes to charitable giving incentives that would have negatively affected the work of nonprofits and the communities they serve. Late last year, the Governor of Vermont spoke out against a proposal from the Legislature’s tax writing committees to limit state itemized deductions, including the charitable giving incentive, saying it violated his promise not to increase taxes. Legislators in Maine will be considering a bill this year to reinstate the full deduction for charitable donations retroactive to January 1, 2013. The proposal would undo the damage caused by the imposition of a $27,500 cap on total itemized deductions which was inserted at the last minute in the State’s 2014-2015 biennial budget.
Research Questions the Effectiveness of Tax Incentives for Businesses
A new report on business taxes indicates that states doling out tax incentives or exemptions to businesses in hopes of increasing jobs may be wasting tax revenues. The report found that tax breaks have far less to do with where a business decides to locate than is commonly believed. Instead, the report documents that other factors, such as housing costs, labor costs, and the supply of certain types of skilled workers, are equally if not more important than business tax rates. As reported in a recent issue of Nonprofit Advocacy Matters, half of states are unable to demonstrate that tax breaks given to businesses lead to the desired economic outcomes, and several states are considering ending existing incentives.
Additional State and Local Issues
Illinois’ Donors Forum Expands Policy, Capacity Building in 2014
Donors Forum, the state association of nonprofits in Illinois, is beginning 2014 with a giant step forward through a dramatic expansion of its engagement in policy and advocacy and by announcing plans to expand its capacity building work across the middle of the state.
Acting on feedback received from member nonprofits at its annual Nonprofit Summit late last year, Donors Forum has revealed plans to help strengthen and unify nonprofits’ policy work by building their advocacy capacity, creating a sector-wide voice, and better demonstrating the value of nonprofits to policymakers. To meet these goals, Illinois’ nonprofit state association is offering member organizations more of the policy tools needed for success in 2014, including increased member engagement and policy guidance, improved advocacy trainings, timely data and research, more agile policy communications, and a stronger social media presence.
These new policy commitments come on top of a powerful advocacy tool Donors Forum unveiled last fall. Known as BuildingStrongerIL, the new web portal offers nonprofits, policymakers, members of the media, and other site visitors a variety of new graphs, charts, and district-level maps on Illinois’ robust and diverse nonprofit community.
Further demonstrating its statewide impact, this week Donors Forum officially absorbed Good Works CONNECT (GWC), a network of community foundations and operating nonprofits located in Central Illinois. "GWC is vital to philanthropy and nonprofits in Central Illinois," one Central Illinois foundation leader said. "We are … thrilled that GWC is now in the capable hands of Donors Forum."
“The new guidance means that nonprofits should be able to focus more on their missions and should be under less pressure to raise additional funds to essentially subsidize governments. In turn, charities with no government contracts or grants could see less competition for scarce philanthropic dollars. This is a major win for the entire charitable nonprofit community.”
- Tim Delaney, President and CEO, National Council of Nonprofits in a news release on the OMB Guidance that was published in the Federal Register on December 26, 2013.
Contracting Facts Worth Noting
75 percent of nonprofits responding to a Urban Institute survey reported that reimbursements from governments for administration/overhead costs are limited to 10 percent or less, with 24 percent reporting no reimbursement whatsoever for these expenses.
Source: Nonprofit-Government Contracts and Grants: Findings from the 2013 National Survey, Urban Institute, December 2013
"Struggling for revenue, local governments look to nonprofits," The Washington Post, December 21, 2013, providing an analysis of and nonprofit perspective on efforts by municipalities to impose new taxes, fees, and payments in lieu of taxes (PILOTs).
"How Food Stamp Cuts Affect Your State," Stateline, December 30, 2013, explaining the impact of reduced food stamp benefits on individuals and providing a state-by-state breakdown.
Defining, Not Reinventing the Wheel: A Pilot Study on Youth Development Outcomes and Budgeting for Results, Donors Forum, December 13, 2013, analyzing Illinois’ “Budgeting for Results” reform efforts and highlighting that developing measurable outcomes can be a complex process, requiring a sustained, long-term, and broad level of contact with nonprofit providers and experts field by field, program by program.
Artists Can Impact ’14 Nonprofit Trends, Art in Praxis Blog, December 30, 2013, applying the National Council of Nonprofits’ “2014 Nonprofit Trends to Watch” to show ways that artists can use advocacy “to influence the (potentially life-saving) decisions made within political, economic, and social systems and institutions.”