07/27/2012 07:20 pm ET Updated Sep 26, 2012

The Misuse of the Nonprofit Sector


This week a Congressional panel of the House Ways and Means Committee will begin hearings on the nonprofit sector, focusing on the complexities of organizational and compliance issues related to public charities. Congressman Boustany (R-LA), Chairman of the Subcommittee on Oversight, recently stated "over the last two decades, the organizational structures of public charities have become increasingly complex, creating compliance and transparency issues."

This is just one instance where government has become more intimately involved with the nonprofit sector. Beginning in 2005, where the Senate Finance Committee began "considering a number of comprehensive reforms to protect charities from bad actors" to former IRS Deputy Commissioner Matt Miller declaring in 2008 that "the IRS isn't finished. The IRS wants to broaden the agency's powers to more robustly monitor nonprofits."

One of the major outputs of this increased focus has been a new federal tax form that is aimed to create openness and transparency in the work of nonprofit organizations.

Unfortunately as government has increased its relationship to the sector, government and its representatives have often acted as the bad actors it aims to protect the sector from. The following outline the more popular ways the nonprofit sector is being used and misused by government:

Political Advantage -- On a more frequent basis than ever before, nonprofit organizations are being caught in political wars. In 2008, the Association for Community Organizations for Reform, better known as ACORN, was the victim of political attack. As a result, Congress passed and the president signed a bill that prohibits the "federal government from awarding contracts, grants, or other agreements to, providing any other Federal funds to, or engaging in activities that promote the Association of Community Organizations for Reform Now." Congress stated that "both structurally and operationally, ACORN hides behind a paper wall of nonprofit corporate protections to conceal a criminal conspiracy on the part of its directors, to launder federal money in order to pursue a partisan agenda and to manipulate the American electorate." All of the sudden a 30-year-old organization that helped tens of thousands of low-income people register to vote was defunct.

To all the outrage about ACORN and the organization officially closed, both the United Stated General Accounting Office (GAO) and the Massachusetts Attorney General released audit reports related to ACORN. The GAO looked at the six highly publicized cases of alleged ACORN-related voter fraud, and all these cases were closed for lack of evidence. The Massachusetts AG report stated, "we did not find a pattern of intentional, illegal conduct by ACORN staff; in fact, there is no evidence that action, illegal or otherwise, was taken by any ACORN employee." Since the closing of ACORN a couple of other nonprofit organizations have found itself in a similar position including important groups like National Public Radio and Planned Parenthood.

As states throughout the United States are suffering from voter registration issues, imagine if an ACORN was around to help fight in this cause.

Unprepared Action -- Looking back at the major initiatives enacted during President Obama's first term, one could assume that the nonprofit sector would be a significant part of these efforts. For example, the healthcare legislation would definitely involve a large network of nonprofit providers and contractors. While this is inevitably true, within the hundreds of pages of health care legislation, the nonprofit sector is mentioned less than a handful of times.

Another example of general unawareness of the nonprofit sector can be seen in the Congressional Research Service. CRS works exclusively and directly for members of Congress and their offices to provide them with information to make decisions. There are over 7,000 detailed and in-depth reports conducted by CRS and until 2010 there had never been a single report on the nonprofit sector, a sector that accounts for nine percent of the economy's wages, and over ten percent of U.S. jobs, the third largest of all U.S. industries.

Having spoken to a number of congressional offices while conducting research, I asked congressional communication officials about the nonprofit sector and almost unanimously they discussed the elected officials' charitable interests but had no knowledge about the nonprofit sector as a whole. In 2010, Congresswoman McCollum's (D-MN) introduced the Nonprofit Sector and Community Solutions Act, which would have created an office to help the federal government in areas relating to the nonprofit sector. Unfortunately the legislation has been sidelined for over 18 months.

Misaligned Focus -- In multiple states there is legislation being adopted that limits the pay for nonprofit executives. There has been specific attention to this work being conducted in the State of New Jersey and New York. Certainly there are instances of abuse in compensation of nonprofit executives but largely throughout the sector this should be a non-issue. According to a recent Guidestar Compensation Study, human service executives earned a median annual pay of just over $122,000. What is more interesting is that of the over 3,000 nonprofits surveyed, just 0.004 percent earned more than a million dollars and only 4 percent earned more than $500,000, with sizes of organizations peaking in the multi-billions. The focus on executive compensation by states does not seem too warranted.

What state and federal officials should be paying more attention to is abiding by the contracts they set with their nonprofit partners. In research conducted by National Council of Nonprofits, many state governments have "failed to honor their written agreements to pay nonprofits to deliver those government services." One example, which is similar to many others, is in the State of Illinois where the Illinois' Comptroller released a 50-page list of more than 2,000 nonprofits that the state has failed to pay almost half a billion dollars.

The above areas only touch on a few of a number of areas where the nonprofit sector is misused. During the election season, I am sure we may see a number of potential violations of elected officials misusing 527s or charitable funds but as Congress this week begins discussing the nonprofit sector and the 1.5 million nonprofit organizations it encompasses, it should first look at its own relationship with the sector and how it can improve upon its recent challenges.