Washington Snapshot - October 9, 2015

News from the Hill

Who will be the Next Speaker of the House?

Yesterday, in a significant and surprising move, the leading Republican to replace John Boehner as House Speaker, Rep. Kevin McCarthy (R-CA-23), announced that he was withdrawing his candidacy for the position. This has caused significant chaos in the Republican ranks on Capitol Hill, and has thrown a wrench in the works of selecting the next Speaker of the House.

House Republicans met this morning to discuss the future and possible candidates. The two previously announced candidates are still in the race, Reps. Daniel Webster (R-FL-10) and Jason Chaffetz (R-UT-3). However, neither appear to be making significant gains in support, The New York Times reported this morning.

Politico writes that there is mounting pressure on House Ways and Means Chairman Paul Ryan (R-WI-1) to run, despite Ryan issuing a statement yesterday saying that he was intent on continuing as Committee Chairman.

John Boehner (R-OH-8) has announced that he will stay on until someone can garner the 218 votes necessary to become the next Majority Leader.

Stay tuned!

Endowments are Scrutinized at 10/7 Ways & Means Oversight Hearing

As we reported last week, the House Ways and Means Oversight Subcommittee did hold their hearing on Wednesday to examine the tax-exempt status of colleges and universities to probe whether institutions’ endowments might provide an antidote to rising costs of tuition.

This type of examination reflects an alarming trend of Congressional skepticism about endowed philanthropy. While scrutiny of endowed philanthropy is not new, nor limited to universities, it appears to be intensifying and spilling toward all endowed institutions. While the Council would submit that much of the commentary often mischaracterizes or misses the mark about the purpose and value of endowed funds, nonetheless, it is important for foundations to understand that the scrutiny is increasing.

This week’s hearing focused on the appropriate use of university endowment funds for “charitable purposes,” the individual giving incentives behind donor intent, and the tax-exempt status of endowed institutions. Perhaps the most alarming aspect of this hearing was the announcement by Representative Tom Reed (R-NY-23) of his intent to introduce legislation that would restrict the way investment income from endowments at institutions of higher education could be used. During the testimony, he stated:

“One of our proposed reforms that I am very interested in, and the testimony got into today, is when I looked at the endowments of our largest universities and colleges… each having a billion dollars or more of funds in endowments; then I realize that those endowments are being held in a tax-free status; then I realize that donors get a tax deduction for giving these gifts to these institutions; then I realize when you do the simple math—for example… if we just change the rules and force this endowment to be a pot of money to be utilized to reduce tuition for our students, we could have a headline that says: we propose in the crisis for the immediate short-term future that students at these institutions will pay zero dollars for tuition… I would propose something to you: in order to keep that tax-free qualification, that we’re referring [to] here today, maybe we mandate that the endowments take their earnings—just their earnings, not their principal so we don’t get into the sustainability issue…—and mandate [that] it goes to tuition relief to the students that are going there.”

Representative Reed’s comments demonstrate how the Congressional actions around university endowments can gain traction and potentially open the door to wider threats of other endowed institutions.

If you would like to read Chairman Roskam’s opening remarks, click here.

Executive & Regulatory News

NASCO/NAAG Conference Takes Place in DC

On Monday, several members of the Policy team attended the National Association of State Charities Officials and the National Association of Attorneys General (NASCO/NAAG) annual conference in Washington, D.C. The topic of this gathering was “A Renewed Focus on the State Charity Regulator.”

Cindy Lott, Executive Director of the Columbia Law School National State Attorneys General Program and Senior Fellow at Urban Institute gave a preview of the first comprehensive report on state charity regulations. The report—soon to become publicly available—will be valuable to the Council’s members because it captures state laws that impact charities, on a state-by-state basis. We will make sure to share this report as soon as it is made available.

Additionally, our team member Lara Kalwinski, the Director of National Standards and Counsel, presented on a panel about updated industry standards, and specifically, the National Standards for U.S. Community Foundations® program. The audience was particularly interested how the program is used as a tool for training new staff and board members, and provides a process for investigating a noncompliance report.

Trending in Legal Affairs

Making a Change in Donor Advisors

Recently, the Legal Affairs team received a question from a community foundation member about how to change the designated advisor for a donor advised fund. Here are the highlights of that advice:

• When a donor advised fund is established, the original donor may designate an advisor (or advisors) to give input on the charitable purposes for which grants and distributions are made from that fund. Legal Affairs advised that, upon the request of the original donor, the community foundation can amend the original fund agreement to change the designated advisor for the fund. This amendment would need to reflect the explicit approval of the original donor to the change in advisor.
• Legal Affairs recommended the following amendment language for changing a designated advisor in a fund agreement:
  This amendment, executed on this ___ day of ________, 2015, by and between the XYZ Community Foundation and _________ (donor), shall amend the fund agreement originally executed on __________ and known as the ____________ Fund, as follows: Paragraph __ regarding appointment of fund advisor(s) shall be amended to read: [insert advisor change language].

For more information on this or any other tricky legal matters, please contact the Council’s Legal Affairs team at legal@cof.org.

Access to the Council’s legal team is a valuable member benefit. Council attorneys are available to discuss your legal questions and to provide legal information by telephone, email and through our various publications and newsletters. This information is intended for educational purposes and does not create an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.

Happening in the States

Exclusive from our colleagues at the National Council of Nonprofits.

North Carolina Legislative Session Reflects, Presages Policy Action Elsewhere

The North Carolina Legislature adjourned for the year last week having addressed numerous policy issues nonprofits and foundations have seen in other states this year and leaving unfinished several bills that could be live issues in 2016 across the country. As in Hawai`i, Kansas, and Vermont this year, the North Carolina Legislature rejected significant efforts to impose caps on charitable tax deductions. Nonprofits in the Tar Heel State worked to turn back a proposal to limit sales tax exemptions. Sales taxes were a subject of interest elsewhere this year: Alabama imposed new registration requirements on nonprofits and Minnesota came close to expanding the exemption to all nonprofits in the state.

The Legislature in North Carolina delayed acting on a bill to authorize a study committee to investigate the impact that the acquisition of previously taxable property by tax-exempt nonprofits has on local governments. Similar studies of nonprofit property tax exemptions are currently underway in Montana and Wyoming. Earlier this year, Maine’s Legislature rejected a similar study committee proposal, as well as the Governor’s effort to repeal tax exemptions for some nonprofit properties. The Connecticut budget, however, includes a provision to allow municipalities to tax certain new property acquired by some nonprofit universities and hospitals. A bill to restrict the operations of the University of Connecticut Foundation was not enacted.

In the final days of the North Carolina session, legislators followed the lead of Illinois and New Jersey in considering measures to streamline government-nonprofit contracting. A North Carolina bill provides relief to nonprofits by preventing duplicative monitoring of nationally-accredited nonprofits providing mental health, developmental disability, and substance abuse services through state grants and contracts. Lawmakers could also call for a comprehensive study of bureaucratic red tape that nonprofits experience when they provide public services through state grants and contracts.

Contracting and grantmaking reforms are expected to be high on policy agendas in 2016 as state and local governments, preferably in collaboration with nonprofits, revise statutes, policies, and procedures to implement grants reforms in the federally-mandated OMB Uniform Guidance. The federal grants reforms require governments at all levels to reimburse nonprofits for some or all of their indirect costs when federal money is part of the funding stream. A recent article in a National Association of Counties publication (page 12) explains the impact of the reforms on governments and nonprofits, and as a result, on foundations.

Philanthropy News and Op-Eds

Skepticism of Endowed Philanthropy Continues

On Monday, an article in the Daily Beast sparked some further discussion of donor advised funds (DAFs). The article, which is framed to raise questions about the charitable giving practices of Republican presidential candidate Carly Fiorina, mistakenly conflates DAFs with sponsoring organizations and argues that these philanthropic tools are widely abused as “holding cells controlled by money managers” and are “largely unregulated.” It even goes so far as to claim that “donor-advised funds have no charitable purpose.”

The Council has specifically written the editorial team at the Daily Beast to request a correction of this last point, asserting that donor advised funds have no charitable purpose. In case you ever receive questions about this issue, find some helpful information on the legal background on the DAF resource page of the Council’s website.

Our colleagues at Inside Philanthropy published a commentary in response that dispels some of the misleading notions in the article and highlights the complexity of the ecosystem of philanthropy, yet still questions how donor advised funds are used as a philanthropic tool.

The bottom line is this: donor advised funds are a legal and legitimate tool that allows donors to make investments in their communities to create and implement solutions for the issues of today and beyond. Community foundations around the country are able to give millions of dollars to local causes such as health and human services, arts and culture, sciences and education, environmental protection, and disaster recovery through donor advised funds. DAFs are important lifelines to communities, and should not be endangered as a result of lack of understanding.

For more information about donor advised funds, please visit our website or contact a member of our Policy & Legal Team.