Opposition Begins on the DOL Overtime Final Rule
Partisanship is on full display as Members of Congress trade accusations about the Labor Department’s Overtime Final Rule, the regulation that will, among other things, double the salary level that white collar employees must be paid in order to be exempt from overtime pay. At a hearing in the House last week, the Committee Chairman spoke for most Republicans in calling the Overtime Final Rule “an extreme, partisan approach,” while the lead Democratic Representative on the Committee praised the Administration’s action as being one that “can reduce income inequality and strengthen the middle class.” In the Senate, 45 Republican Senators introduced a resolution pursuant to the Congressional Review Act to overturn the overtime rule. Also last week, the chairman of the Senate appropriations subcommittee with jurisdiction over Labor Department funding said he would offer an amendment when his spending bill comes to the Senate floor that would block or scale back enforcement of the overtime regulations for a year. Since it is unlikely that the President will sign any such legislation or that Congress will be able to muster the two-thirds vote in each chamber to override his presumed veto, nonprofits are well advised to take steps to implement the new requirements that go into effect on December 1, 2016.
Reopening Government Grants and Contracts to Address Overtime Rule Costs
How is a nonprofit going to maintain the same level of services to the public pursuant to government grants and contracts when its costs are likely to go up when it implements the Overtime Final Rule but its reimbursement rate is not? The Labor Department, in its materials explaining the change in employment rules, seemed to acknowledge the challenge for “organizations for which some or a significant amount of funding comes from government or private grants of set amounts.” The Labor Department has offered assurances that future grants and contracts from that federal agency will adjust reimbursement rates to recognize the new overtime requirements. It was also revealed at a congressional hearing last week that National Research Service Award grants from the National Institutes of Health reportedly will pay above the new salary threshold for college and university research activities. Other federal departments and agencies may announce relief for future, and perhaps current, grants and contracts, but so far no clear path has emerged to identify tools or procedures to follow, and relief will still be needed for non-federal government grants and contracts. In the meantime, the Venable law firm recommends that nonprofits with government grants and contracts “reach out to their grants and/or contracting officer as soon as possible to determine how the nonprofit can formally modify the grant and/or contract budget to account for these new costs.” The advice continues with the reminder that “any increase should be reflected in a formal modification to ensure that the federal government acknowledges the increase, or corresponding limitation in scope, and does not result in an adverse response by the government.”
- Scrutiny of Education Endowments: Colleges and universities with billion-dollar endowments would be required to use at least 25 percent of their endowments’ annual earnings to offset the tuition of students that belong to “working families,” according to the summary of a bill being drafted by Representative Tom Reed (R-NY). A working family is defined as one with income between 100 percent and 600 percent of the federal poverty level (an income range of $24,300 to $145,800 for a family of four). In February, House and Senate tax committee chairmen sent letters to 56 institutions of higher education asking detailed questions about endowment management and spending practices. The large private universities responded by stressing that tax-exempt status is essential to their endowments and their missions as academic and research institutions.
- A New Cop in the Nonprofit Beat?: The Federal Trade Commission would gain the power to sue charitable nonprofits for alleged fundraising abuses if Congress approved legislation introduced by Representative Bobby Rush (D-IL). Expressing opposition to the bill, the American Society of Association Executives issued a statement pointing out that charitable nonprofits do not engage in “trade” as regulated by the FTC and that the Internal Revenue Service and every state regulates and enforces laws pertaining to nonprofit operations. For example, Minnesota’s Attorney General last month filed suit alleging abusive and deceptive fundraising practices by a Michigan-based fundraising organization.
- Private Museums: Senator Orrin Hatch (R-UT), chairman of the Senate Finance Committee, is raising questions about how private museums operate and whether the public interest is being met. In a letter to the Internal Revenue Service, Hatch wrote that while some private museums welcome the public at no charge, other “tax-exempt entities are operating museums that provide limited benefits to the public while enabling donors to reap substantial tax advantages.” He concluded, “Despite the good work that is being done by many private museums, I remain concerned that this area of our tax code is ripe for exploitation.”
- Social Security Shore-Up 8.0: The Bipartisan Policy Center is proposing a fifty-fifty split between cutting benefits and raising taxes to shore up Social Security. Newly released proposals include gradually raising the retirement age to 69 by 2070, changing the method of measuring inflation of cost-of-living adjustments, imposing social security taxes on taxable income up to $195,000 (an increase from the current $118,500), and raising the payroll tax rate and increasing taxes on benefits for high-income beneficiaries. The 19-member commission worked for two years to identify reforms to keep the retirement program solvent past 2035 when the Social Security trust funds are projected to run short of money and be unable to pay full benefits.
Unfunded State Liabilities are Driving Policy Challenges
A new report from J.P. Morgan about public finance decisions by state governments puts in perspective seemingly disconnected fiscal and public policy challenges that foundations and nonprofits are confronting across the country. The report, “The ARC and the Covenants 2.0” (ARC refers to “Annual Required Contributions”), found that four states – Connecticut, Illinois, Kentucky, and New Jersey – have the highest (worst) ratio of public debt and public employee retiree obligations to annual revenue. Each of the states has sought to address these and other costs of government by turning to charitable and foundation communities to fill budget holes and structural deficits.
- Connecticut: As it faces obligations of up to 35 percent of current revenues, Connecticut is also facing a significant budget shortfall that has resulted in spending cuts in the current and upcoming fiscal years. Funding for services provided by nonprofits has been particularly hard hit by budget rescissions. Lawmakers have also turned to seeking to tax the property of some nonprofit hospitals and colleges and universities, and even considered taxing endowment earnings. “Rather than erode the social compact between community nonprofits, government and the citizenry,” states Jeff Shaw of the Connecticut Community Nonprofit Alliance, “Connecticut, and other states, need to adopt long-term structural change to better use limited dollars while maintaining high quality services.”
- Illinois: It is no surprise to anyone following state fiscal affairs that Illinois has the highest debt and unfunded obligations in the J.P. Morgan study. The state is in the 12th month of a budget impasse for the current fiscal year and little progress appears likely for the new fiscal year that begins on July 1. One way state government has kept itself open is to demand that nonprofits with government contracts continue to provide services, but not paying the nonprofits when bills come due. The state owes nonprofits hundreds of millions of dollars for services rendered and not paid by the state, many organizations have shut their doors or curtailed services, and, most importantly, individuals across the state have not received the services they need.
- Kentucky: The former Governor convened a special tax reform commission dedicated to addressing, among other issues, what it will take to close the exorbitant public pension obligations of the Commonwealth. A key recommendation of the Blue Ribbon Commission and of subsequent legislation called for capping itemized deductions, including the charitable giving incentive, at $17,500. The newly elected Governor is on record saying his administration will also study the issue. The Kentucky Nonprofit Network (KNN) is among many who have urged a balanced approach to tax reform in the Commonwealth. KNN’s Executive Director Danielle Clore says, “Examples from other states demonstrate how damaging inclusion of the charitable giving incentive in a cap on itemized deductions can be to the work of charitable nonprofits – government's essential partners in meeting the needs of Kentucky citizens.”
- New Jersey: The structural deficit reported in the J.P. Morgan analysis, and a projected revenue shortfall of $1 billion, combine to make other policy progress very difficult. New Jersey does not provide a state tax incentive for charitable giving and legislative proposals to create charitable deductions have run up against a fiscal stonewall for years. Also, dozens of local governments, deprived of needed funds from state government, are taking advantage of a tax court ruling last year to seek property tax and other revenues from nonprofit hospitals. The hospital challenge in New Jersey is attracting national attention as municipal governments look for their own ways to generate additional revenues from tax-exempt entities within their jurisdiction.
In Focus: Louisiana
When Legislatures Rush to Fill Budget Gaps
To fill a gaping budget shortfall earlier this year, the Louisiana Legislature impressed into service nonprofit membership organizations, food banks, and an army of little green-clad Girl Scouts to serve as sales tax collectors for the state. They did it by temporarily suspending, with short notice and no debate, hundreds of sales tax exemptions and exclusions in an effort to raise revenues very quickly to satisfy the state’s constitutional mandate of ending a fiscal year (June 30 in this case) in the black. The backlash against imposing taxes against tax-exempt, community-serving organizations was swift and effective. So effective, in fact, that as the Governor is calling the Legislature back into session to address additional budget shortfall issues, he is instructing legislators to “clean up various unintended tax consequences created at the end of the 2016 First Special Session.” Among the list of unintended taxes slated for reconsideration are: tickets to school athletic and entertainment events, sales and donations to food banks, food sales by youth serving organizations (such as Girl Scouts), membership fees or dues of nonprofit civic organizations, and the list goes on. The overall goal of the special session, which begins July 1, is to raise revenues to balance the FY 2017 budget, fix these nonprofit tax “errors,” and take steps toward permanent structural changes to budget and tax policy.
Government-Nonprofit Contracting Update
Contracting Reform Efforts Continue to Progress in the South
Legislation advancing in North Carolina’s House would authorize a government study of the red tape nonprofits encounter with government grants and contracts. The study is designed to identify solutions to address the issues all too familiar to nonprofits – late payments, complex applications procedures, and the chronic underpayment of nonprofits' indirect costs by state agencies. The bill is the result of ongoing advocacy efforts of the North Carolina Center for Nonprofits and is scheduled for a full vote of the House this week. Elsewhere, the Kentucky joint government-nonprofit task force on contracting and grant issues for nonprofits is scheduled to hold its first meeting later this month.
New York Prompt Contracting Sees Slight Improvement
The on-time record for New York State agencies complying with prompt contracting laws improved slightly last year, but areas of concern remain, according to the annual prompt contracting report from the New York State Comptroller. Government contracts with nonprofits were completed past the statutory deadline 61 percent of the time in 2015, down from 77 percent in 2014. The total number of contracts subject to the law declined by 798, due in part to the increase in multi-year contracts that did not need annual renewal. The Comptroller found that improvements are not being accomplished across the board; half of all agencies reported contracts as late 90 to 100 percent of the time in 2015. Another disturbing finding was that only 22 percent of eligible contracts received interest for late payments in 2015, down from 32 percent in 2014. Noting the financial hardship that late contracts cause for nonprofits providing vital services, the report makes clear that there is still a good deal of work to be done.
Vendetta Politics Continue in Maine
Paul LePage, Governor of Maine, appears to believe that a personal message from him is the most effective way to stifle critics, particularly those in the nonprofit community. This month he reportedly sent taxpayer-funded letters to 200 donors to an environmental organization urging them to “carefully review” the nonprofit membership organization’s public policies “before donating to them in the future.” It is unclear whether individual donors will feel intimidated by public employees tracking down their home addresses for politically charged communications from the Governor. Last year, a private school withdrew a job offer to the Speaker of the House, who is a political opponent of LePage, after the Governor complained of the appointment and allegedly threatened to withdraw public grants. The Governor’s policy agenda has consistently targeted nonprofit resources for balancing the state budget, seeking to tax the property of some tax-exempt organizations and successfully capping charitable and other itemized deductions. LePage famously alleged that nonprofits “don’t pay their fair share,” despite extensive and conclusive evidence to the contrary.
Effective Advocacy Through Survey Comments
Frontline nonprofits have a knack, consider it a gift, for succinctly expressing their challenges and speaking up for pragmatic solutions. This form of every day advocacy was evident as hundreds of nonprofits responded to the National Survey on Overtime and Overhead, conducted in May. Survey takers were asked a series of questions about the at-the-time proposed overtime regulations from the Department of Labor and another issue related to procurement policies. At the end of multiple-choice questions, participants were invited simply to “provide any comments that you think may be useful for understanding the challenges or uncovering solutions to the policies addressed in this survey.” They filled those comment spaces with insights and wisdom.
- I think that this [overtime] change will support workers around the country…. I think this would improve work-life balance and reward hard workers who truly believe in the mission.
- Although the burden of nonprofits is different from for-profit entities, we still have an obligation to our employees to treat them well.… In the long run our industry will be held in higher esteem as we encourage good behavior and practices. These changes will help all nonprofits in the long run (especially the smaller, newer orgs).
Operational Anxiety for Mission Delivery
- Many of the services to the children we provide for are unscheduled and/or emergency services. It will be very difficult to anticipate and plan for overtime costs and also difficult to control as the individuals providing the services, not the managers, often determine whether the service is necessary.
- The new rules increasing the salary of exempt employees will decrease the amount of services we are able to provide to victims of domestic violence and sexual assault.
- We have not had an increase to our service rates for eight years and actually sustained an overall 2% decrease in that time. With no potential for increasing revenue we cannot afford to increase our expenses. Compliance with the proposed regulations will put our organization out of business in less than three years.
- Our staff is currently underpaid for the work they do. It would be great to be able to pay the more than $50,000 per year but our funding will not cover this. I fear this will force us to discontinue services or even close the nonprofit organization.
- Because our revenue streams for these services are capped, we are planning to shut down these services when we can no longer sustain them. Unfortunately for our clients and our employees, this will leave both groups to do without.
Between a Rock and a Hard Place
- The majority of our grants are set for 3 years at a time and will not allow for raises to cover these extra costs. Since we operate the only domestic violence shelter program in the area lives are at stake when we have to cut back on services. Also cutting back on services means that we may not be able to meet all the goals of the grants that we agreed to before this change.
- The [nonprofit] cannot afford to pay the overtime and the federal and state government will not adjust our contracts to accommodate the DOL's mandate. The DOL has put us in a difficult position and possibly compromised the quality of services families will receive in the future.
- Our shelter is required to operate by government contract 24 hours per day/7 days per week…. We have no wiggle room in our budget for additional costs, therefore we cannot raise salaries and we cannot meet the 24 hour per day contracted requirement without management answering phones after hours. This change in overtime law has left us with no choices. This is just simply not realistic.
Solution Needed: Reopen Government Grants and Contracts
- If this changes, I think there needs to be a requirement that government contracts pay for the additional expenses.
- We are implementing these regulations in a state where there has been no COLA for government contracts for almost a decade. … I am unsure that individual donors are going to support salaries for services that they perceive to be the responsibility of the government.
- Federal/state/local grants and contracts need to be adjusted in 2017 to reflect the actual organizational cost to grantees of the new [Fair Labor Standards Act] threshold, and they also need to be adjusted every three years as the FLSA threshold adjusts. If this does not happen and if as a result grantees must reduce staff/services, then required outcomes must be adjusted to reflect the reduction in services.
- If the feds and the state want me to be able to pay people more, they are going to have to do a heck of a lot better with reimbursement. If I can't afford to raise salaries, how is it rational that I can afford to pay overtime?