For more than 40 years, many not-for-profit charities in New York State have been required to get a financial audit every year – but they didn’t have to pay attention to it.
They also didn’t have to worry about doing business with one of their directors, even if the terms were unfair to the charity.
Now, both situations could change a lot, along with many other aspects of how not-for-profits are governed.
After years of scams, fraud, oversight failures and even corruption in the charity arena, the Cuomo administration and some legislative leaders are once again seeking to crack down on bad actors and carelessness with sweeping changes to New York’s not-for-profit laws.
Attorney General Eric T. Schneiderman today will unveil his second attempt to overhaul the governance of charities and other organizations, with a bill to address financial abuses and poor management practices while making it easier for nonprofits to operate properly in the state.
The legislation comes a year after an earlier version went nowhere, and follows 11 months of discussions and revisions with state lawmakers and representatives from over 32 large and small nonprofits statewide – including Clotilde Dedecker, president and CEO of the Community Foundation for Greater Buffalo.
The state’s top cop – whose responsibilities already include oversight of nonprofits – wants to tighten the rules governing how charities are managed, expanding transparency and strengthening the fiduciary accountability for officers and directors to ensure they’re doing their jobs. He also hopes to rein in what many critics say is excessive compensation for some nonprofit CEOs and other top executives.
The goal is to prevent the kind of fraud, mismanagement and financial abuses that increasingly have come to light in recent years. Such scandals have seriously damaged confidence and eroded public trust in the nonprofit charitable sector.
At the same time, Schneiderman wants to modernize decades-old regulations, eliminating red tape, unnecessary burdens and costs, so it’s easier to incorporate and do business in New York. It would be the first major change to the nonprofit laws in over 43 years.
“It’s very important because the law has not been revised in about 40 years and it has been convoluted and confusing,” said state Sen. Michael H. Ranzenhofer, R-Clarence, who is sponsoring the main legislation in the Senate as chairman of that chamber’s Corporations, Authorities and Commissions Committee.
“This streamlines the process of allowing not for profits to operate more efficiently than they have been, and it also adds sufficient oversight and emphasizes the fiduciary responsibility of directors and officers. It does quite a bit from where the state of the law is right now.”
Nonprofits are a critical part of the state’s economy and infrastructure. Such agencies provide key social, educational, health and other services, generating hundreds of billions of dollars in annual revenues and creating one in seven jobs. More than 60,000 nonprofits are registered with the Attorney General’s Office, which is responsible for making sure the agencies operate honestly, properly and on behalf of the public.
But nonprofits have also been under intensified scrutiny amid revelations of scandals involving embezzlement, fraud, misuse and waste of funds, and abuse by public officials.
Indeed, whenever there’s an incident of public corruption in the state, invariably there’s some kind of charity or nonprofit agency involved. That was the case with scandals involving Sen. Pedro Espada Jr., Assemblyman William F. Boyland Jr., Sen. Shirley Huntley and Sen. Joseph Bruno, among others, as well as former Ellicott Council Member Brian C. Davis in Buffalo, who was indicted for stealing funds from two nonprofits.
That’s caused distrust among donors, who already cut back their financial support because of the recession and uncertain economic recovery. The combination left nonprofits facing financial, strategic and other challenges. So state leaders hope the legislation, which has support in both chambers and from nonprofits themselves, can address those issues.
“The law is not intended to address any particular situation. The law is much more comprehensive than that,” said Ranzenhofer, who will hold three public hearings on his bill later this month in Albany, New York City and Rochester.
At the center of Schneiderman’s effort are two bills he wants lawmakers in Albany to pass before the end of the session: The Nonprofit Revitalization Act and the Fair Compensation Act. Together, according to a Schneiderman memo, the two bills “would give New York one of the strongest legal regimes on noprofit governance.”
The first bill would take particular aim at making sure a nonprofit’s officers and directors take responsibility for detecting and preventing misbehavior, such as “self-dealing” or looting of nonprofit assets. For example, state law currently requires most larger charities to get an audit every year. That’s filed with the Attorney General’s Office, but the charity doesn’t have to review the results, even after paying thousands of dollars to have it done.
Now, the board would be required to retain the auditor, not the staff, and the board would be required to go over the report with the auditor each year. Charities with over $1 million in revenues would be required to have even more detailed discussions.
Conflicts of interest, such as doing business with a company owned by a director, would have to be disclosed to the board, and the person who stands to benefit would have to recuse himself or herself from any discussion or vote. The board also would have to determine whether the transaction was fair and reasonable, and in the organization’s interests. If not, the state would ask a court to unwind the deal.
The legislation also would require that all nonprofits adopt conflict-of-interest policies, and that larger agencies adopt “whistle-blower” policies. But in a concession to smaller charities, the bill no longer would require all 60,000 charities to file the policies with the state each year.
Also, the second bill would require that all nonprofits collect data on executive pay at similar-sized agencies, compare pay levels and make sure they’re not overpaying their CEO. But most nonprofits pay so little that it made sense to limit that provision to nonprofits with more than $2 million in revenues or for the top five executives who earn at least $150,000 a year.
On the red-tape side, the legislation would simplify the bureaucratic process so nonprofits would have an easier time forming and getting approvals for key transactions. It also would update parts of the law that haven’t kept up with society and technology, such as allowing charities to send meeting notices or vote by email, and even meet by teleconference.
It also would reduce needless dealings with state bureaucracy, allowing a new nonprofit to provide notification of its services instead of seeking pre-approval. That way, for example, the incidental use of the word “education” in incorporation papers for something other than a school or library wouldn’t trigger a months-long review by the state Education Department.
Ranzenhofer said he was confident the current version will go through. “I believe there will be strong support,” he said. “This is legislation that has been in the offing and has been worked on for well over a year. It’s not a bill that’s being thrown out there for the first time at the last minute.”