The unintended consequences of ethics reform

Without question Albany needs to make ethics reform a priority, which is why the goals of the recent anti-corruption bill signed by Gov. Andrew Cuomo should be supported. 

At the same time, it’s important that we appreciate the unintended consequences this new law will have on nonprofits and think about how to reduce the growing compliance and financial burdens too many organizations face.

The new legislation lowers the reporting threshold for nonprofit 501(c)(4) organizations engaging in lobbying activity. Most concerning is that it also requires any nonprofit 501(c)(3) organization that gives more than $2,500 to a 501(c)(4) to disclose all of its donors during that six-month filing period. These donors must be disclosed even if their funds were never intended for or even used for lobbying activities.

The public certainly deserves transparency from our campaign finance system, but establishing blanket disclosure requirements is a worrisome trend that could have a chilling effect on donations to the nonprofit sector. Many nonprofit donors feel more comfortable giving anonymously for perfectly ethical reasons – perhaps the issue is politically charged and they do not want to be harassed, or, even more mundane, they wish to give a gift without receiving credit – and may be wary of how their donations are listed and how that information is being used. Additionally, the requirement to list all donations, including those not used for lobbying activities, is confusing to donors who earmark funds for certain purposes, and nonprofits will have to explain this law time and again to donors who see themselves listed. At a time when these organizations are already struggling to close ever-widening budget gaps, nonprofits cannot afford to risk alienating even a single patron.

Nonprofit organizations delivering essential services to communities across the state are facing severe financial strain. A recent report from the Human Services Council, New York Nonprofits in the Aftermath of FEGS: A Call to Action, revealed that one out of every five nonprofit human services organizations was insolvent in 2013, 30 percent had only two months of operating reserves or less, and the budgets of nearly half showed losses between 2010 and 2013. Nonprofits depend on private funding sources to fill the gaps when government funding doesn’t go far enough. In 2014, nonprofits listed raising private funds as one of their top three challenges; this is not the time for actions that are likely to disincentivise private giving.

Furthermore, the legislation’s inclusion of “in-kind” donations is incredibly unclear in a sector where partnerships are not only common, but also necessary in order to adequately support the wellbeing of our communities. This vague term could be interpreted to include a number of different activities like shared office space or donated professional services. Without these donations, nonprofits would face even bigger financial hurdles. Many organizations rely on the work of pro-bono legal services, but the true hourly cost of this type of legal assistance would quickly run up the bill and would have to be reported as a hefty political contribution.

The sweeping requirements of this new law will likely create confusion and financial strain within nonprofit organizations that we depend on to deliver essential services on behalf of government. As HSC’s report points out, there is already an overabundance of ineffective oversight and compliance mechanisms nonprofits spend time and money on. Accountability is important, but will not be realized in a sea of unread paperwork. Let’s examine what is needed and by whom and design the system accordingly, rather than piling on. This new legislation unintentionally creates more headaches for struggling nonprofits acting ethically and threatens their ability to attract the donations they need to maintain financial stability.

Cleaning up corruption in our campaign finance system must remain a priority. Nonprofits agree that we need mechanisms to increase transparency in political giving, but groups that are not engaging in lobbying activity should not be caught up in these efforts. With so many of these organizations facing financial distress, we cannot risk jeopardizing their critical relationships with private donors. Policy makers must be more thoughtful about the impacts of policy changes on the organizations working throughout the state to build strong communities. We cannot continue to pass new laws without appreciating the real life impact on the budgets of nonprofits. Our lawmakers must be more cognizant of the impact of even well-intentioned legislation if we want nonprofits to continue to successfully serve our communities.

Allison Sesso is the Executive Director of the Human Services Council, an association of nonprofit organizations providing human services in New York.