The Nonprofit Revitalization Act of 2013, which the legislature passed on June 2013, during the final days of its session, appears to be just that. The bill represents the first major overhaul to New York’s charities laws in over 40 years. I believe that the Nonprofit Revitalization Act does a favorable job reducing unnecessary, outdated, and costly burdens to help non-profit organizations focus resources on providing services. It improves oversight of operations which has the dual role of providing organizations will better financial management and increasing the public trust that donations and taxpayer funds are being put to proper use. However, key provisions of the Act that include reducing bureaucracy and costly requirements by amending rules governing not-for-profit properly sales, mergers, corporate formations, and dissolutions to create a more welcoming environment for new not-for-profits and a more business-friendly environment for existing ones create an unnecessary traverse. It also creates a false sense of preservation by increasing efficiency, by modernizing board procedures, such as enabling non-for-profits to use email and video technology for meetings, and by allowing boards to delegate the approval of small transactions to committees. New York’s nonprofit sector finds itself in the center of generating hundreds of billions of dollars in annual revenue and is responsible for one in seven jobs, but at what expense? Arguably, the bill makes New York a more attractive destination for nonprofit organizations and a model for governance and oversight. I am however, not so convinced and here is the proof.
The Nonprofit Revitalization Act enhances nonprofit governance and oversight to prevent fraud and improve public trust by ensuring sound financial management by requiring that charities’ boards perform active oversight over financial audits. In other words, boards will be responsible for retaining independent auditors and reviewing results of the audit. At larger charities of over $1 million in annual revenue, the board or audit committee will be required to follow additional oversight procedures. Thus, preventing conflicts of interest by requiring that transactions between a nonprofit and insiders who stand to benefit be fully disclosed and that nonprofit boards determine they are fair, reasonable, and in organizations’ best interests. But, when a charity engages in a substantial transaction with an insider, the board will have to consider alternatives and document its basis for choosing the insider transaction which is one dimensional. I make the case that it strengthens the Attorney General’s power to police fraud and abuse by granting clear power to bring judicial proceedings to unwind interested-party transactions to the point that that ensuring board independence is a fait accompli in the planning process.
By prohibiting any employee of a nonprofit from also serving as chair of its board we a promoting of good governance by requiring all nonprofits to adopt conflict of interest policies and those with over $1 million in annual revenue and 20 or more employees to adopt whistleblower policies.[i] But no one ever said promotion is always a good thing. The bill also focuses too much on reducing unnecessary and outdated burdens on nonprofits by streamlining procedures for nonprofit mergers, property sales and corporate dissolutions, so that funds needed for ongoing charitable programs are not wasted on unnecessary red tape. In doing so, modernizing laws to allow nonprofits to conduct their affairs more efficiently, such as permitting nonprofits to use email and video technology for meetings and allowing boards to delegate the approval of small transactions to committees does not modernize any of its other direct arms like opportunities for monetary donations. Yes, eliminating unnecessary and costly requirements for nonprofits forming in New York, saves nonprofits money and time and allowing them to commence charitable programs more quickly but the bill will help many of the vital nonprofits that already serve in a region not start ups. In particular, it provides a roadmap to improve upon the public trust, requiring that nonprofit boards proactively oversee audits and conflicts of interest and encouraging electronic communication. However, the NYS legislature doesn’t always get a lot of credit for working through complex issues and competing viewpoints before crafting new laws that are generally seen to represent reasonable compromises and significant legislative improvements and this adversely affects charitable giving. So when supporters of the 2013 Nonprofit Revitalization Act say that the bill will cut red tape and reduce administrative burdens on nonprofits while simultaneously enhancing governance and oversight they are not saying much beyond retrospection. Yet, some nonprofit leaders are expressing concerns that while the bill does streamline some regulatory red tape, its enhancement of the Acting Governor’s oversight authorities may also be creating a new and different set of administrative burdens.
The Nonprofit Revitalization Act began as a series of legislative proposals introduced in 2012 by Attorney General Eric Schneiderman. The proposals were taken from recommendation by the Leadership Committee on Nonprofit Revitalization, a group of 32 nonprofit leaders from across the state which the AG had convened. But, during the course of a year’s legislative session, the bill was modified in several significant ways based on alternative legislative proposals and input coming from the NYS Law Revision Commission, the NYS Bar Association and a number of nonprofit associations and advocacy groups. Republican Senator Mike Ranzenhofer (R-Amherst), Chair of the Senate Corporations, Authorities and Commissions Committee, and Democratic Assemblyman James Brennan (D-Brooklyn), Chair of the Assembly Committee on Corporations, Authorities and Commissions, led the legislative efforts to develop and win passage for the final bill. In their opinion, New York’s nonprofit sector rivals any in the nation, providing crucial services to families and institutions across the state, but how long is too long when we are talking about being hamstrung by red tape in some areas, and lacked oversight in others? The significance of this year’s vote on The Nonprofit Revitalization Act of 2013 was that it was the first reform to our charities law in decades, allow charities to do what they do best which is to power our economy, support vulnerable citizens and our most valued institutions. The bill’s various key provisions were to raise the gross revenue thresholds triggering the requirement to obtain an independent CPA’s audit from $250,000 to $500,000 for and an independent CPA’s review from $100,000 to $250,000.[ii] The gross revenue threshold for an independent CPA’s audit will escalate to $750,000 on July 1, 2017 and $1 million on July 1, 2021. The Attorney General will have authority to request an independent CPA’s audit from nonprofits with gross revenue over $250,000 after reviewing their annual filings; Next, to create new requirements to protect against self-dealing. These include requirements that boards, or board committees, undertake an independent review of transactions between the nonprofit and related parties, and affirmatively determine that such transactions are in the nonprofit’s best interest. The amendments also provide clearer authority for the Attorney General to remedy self-dealing. Next, to clarify that individuals who may benefit from compensation paid by the corporation cannot participate in deliberations or voting on their own compensation. Next, to ensure that boards are aware of, and respond to, issues and risks identified by auditors. Next, to prohibit any employee of a nonprofit corporation from also serving as chair of its board. The intent of this provision is to promote clear lines of accountability between management and the board and ensure independent board leadership. Next, to require that nonprofits adopt written conflict of interest policies and require that nonprofits with twenty or more employees and annual revenue exceeding $1 million adopt whistleblower policies Next, to add key employees to the list of individuals against whom actions may be brought to remedy violations of the section. Next, to simplify corporate “types,” creating only two categories of corporations of “charitable corporations” and “non-charitable corporations” instead of four or A, B, C and D. Corporations formed for both charitable and non-charitable purposes under the Not-for-Profit’ Corporation Law will be deemed charitable for purposes of this statute. The amended section will grant authority to nonprofits that have already formed as a particular type so that they will not have to file new paperwork or amend contracts. Next, eliminate the requirement that certain types of nonprofits obtain pre-approval from the State Education Department prior to incorporation. Under these amendments, schools, libraries, museums and historical societies will continue to require the State Education Department’s approval, but other nonprofits may notify the State Education Department of their formation after incorporation. The intent of this amendment is to streamline the incorporation process without hampering oversight by the State Education Department. Next, to permit a majority vote of the nonprofit’s board or a committee of the board, rather than a two-thirds vote of the entire board, to approve non-substantial real estate transactions. If a committee approves the transaction, it must promptly notify the board. The two-thirds voting requirement is maintained for transactions involving property that constitutes all or substantially all of the nonprofit’s assets. Next, to allow nonprofit corporations seeking to sell, lease, exchange or dispose of all or substantially all of their assets to go through a one-step approval process or Attorney General approval instead of a more cumbersome two-step process court approval following Attorney General review. Nonprofits will retain the right to seek court approval of the transaction at any time. Next, to allow facsimile and electronic transmission of board and membership meeting notices, waivers of notice and votes requiring unanimous written consent. These amendments will also allow board members to participate in meetings via videoconference, Skype, and other forms of video communication. Next, to remove the definition of ‘entire board.’[iii] The bill creates a new definition for this term in section 102 of the statute, the purpose of which is to correct ambiguities caused by the existing definition. Next, to simplify the classification of board committees by eliminating the distinction between standing and special committees. Next to permit education and religious corporations to enter into merger transactions in addition to consolidation transactions. Next, to allow the Department of State to correct non-material typographical errors in certificates of incorporation and other instruments upon written authorization from the incorporator. Has it been a success? Some will say that many of the reform measures passed were long needed and the Acting Governor’s Office is to be congratulated for their vision and perseverance but I am not so convinced. Yes, the bipartisan proposals contained in the Nonprofit Revitalization Act have been a long time coming, but they do not necessarily strike the right balance in achieving comprehensive modernization of state law to assist charitable organizations, and requiring common sense Board of Directors oversight to ensure donor confidence. What we need are more rational and efficient framework for governing nonprofits even still. After all, the nonprofit sector plays an invaluable role in responding to the needs of individuals and communities challenged by complex social and economic factors so if we are not fully rational then The Nonprofit Revitalization Act will not bring New York into that next echelon. It will fail to reduce operating costs without compromising accountability and public access to information. It will not follow through on taking all the critical steps to streamlining and modernizing New York’s charities laws to remove unnecessary burdens, save taxpayer dollars, and help nonprofits focus resources on providing services. I do not strongly support the Nonprofit Revitalization Act, which has been promising to streamline bureaucratic processes and appropriately exempts small nonprofits from unnecessary and costly regulatory measures.
Some will argue that the bill will benefit from having been fully informed by the best ideas of New York’s nonprofit professionals, including those of us who served on his Leadership Committee for Nonprofit Revitalization but more work needs to be done. At the same time, however, nonprofit sector leaders and legal experts are already focusing on ways to improve the bill even further. As long as government officials are working with the legislature next session for chapter amendments in a number of areas including but not limited to the prohibition of compensated directors and employees from serving on boards we will be better off as a state and local practice . Extending the Act’s prohibition of employees serving as Board Chairs to Treasurers and Secretaries, requiring the Acting Governor to process mergers and dissolutions within six months of receipt of filings, is not the solution. The legislation has congenial things in it but there are some things that are not in it which should have been. Therefore, simplifying the complex process of obtaining agency consents prior to incorporation was in the Law Revision Commission bill and the State Bar Association bill, but not in the bill which was finally passed does not mean that all considerations re simplified. The gradual increase in revenue thresholds for audit requirements are staying. Many would have preferred that these were increased more quickly and so do I. To become law, the Nonprofit Revitalization Act of 2013 had to be signed by the Governor, who can offer any views on the bill or its provisions. In other words, if members of the nonprofit community supported the bill, it could have been a good idea for them to reach out to the Governor’s office and articulate that support which some did. And the fact of the matter is that nonprofit organizations operating in New York generate hundreds of billions of dollars in annual revenue or the highest of any state in the nation and are responsible for one in seven jobs in New York state. On paper, the A.G.'s bill has made New York competitive with other states in continuing to attract and nurture the most vibrant nonprofits in the world, and it will make New York a model for nonprofit governance and oversight but that has yet to be seen.
In conclusion, the bill is the product of more than two years of work by the Acting Governor's office, and a year of legislative deliberation and negotiation. However, more importantly, The Nonprofit Revitalization Act makes a number of key reforms to New York law that have long been sought by the charitable sector and legal practitioners. Nonprofit organizations will now be able to incorporate, dissolve and merge more easily; communicate and hold meetings using modern technology like Skype and videoconference; and enter transactions without having to go to court. At the same time, the bill includes crucial oversight and governance reforms that will help protect taxpayer dollars and preserve public trust. Nonprofit boards will have to perform stricter oversight of insider deals, and the Acting Governor will be better able to hold insiders accountable for abuse. The bill requires the adoption of more robust financial oversight requirements, conflict of interest policies, and whistleblower policies to protect nonprofit employees from retaliation when they identify wrongdoing. To some, the passage of the Nonprofit Revitalization Act represents government at its best. The question becomes, is this a meaningful reform that makes sense in the real world? Is this is a model that should be replicated in all areas of policymaking? I am convinced that this legislation does not represent the right balance between ridding the current law of unnecessary and burdensome requirements, strengthening the governance structures of nonprofit corporations and enhancing oversight over them since charitable organizations and the thousands of New Yorkers that benefit from their work are better off today have yet to declare this from the profit lines. Perhaps, nonprofits and the courts are no longer still faced with the heavy, unnecessary burdens of multi-level reviews of nonprofit transactions by government but, nonprofits and the courts cannot always focus time and resources on serving the public when donor confidence changes so much. Good things are supposed to sell themselves. Unfortunately, the bill has not sold me on its launch. It has simply been a process that has been a model of policymaking transparency.
The Summary of the Nonprofit Revitalization Act of 2013
•The Nonprofit Revitalization Act will bring reform in two main areas:
- Enhancing nonprofit governance and oversight to prevent fraud and improve public trust; and
- Reducing unnecessary and outdated burdens on nonprofits.
•The Nonprofit Revitalization Act will give New York the strongest nonprofit governance regime in the country. These bills will:
- Ensure sound financial management by requiring that charities' boards perform active oversight over financial audits. Boards will be responsible for retaining independent auditors and reviewing results of the audit. At larger charities (more than $1 million in annual revenue), the board or audit committee will be required to follow additional oversight procedures.
- Prevent conflicts of interest by requiring that transactions between a nonprofit and insiders who stand to benefit be fully disclosed and that nonprofit boards determine they are fair, reasonable, and in organizations' best interests. When a charity engages in a substantial transaction with an insider, the board will have to consider alternatives and document its basis for choosing the insider transaction.
- Strengthen the Attorney General's power to police fraud and abuse by granting clear power to bring judicial proceedings to unwind interested-party transactions.
- Ensure board independence by prohibiting any employee of a nonprofit from also serving as chair of its board.
- Promote good governance by requiring all nonprofits to adopt conflict of interest policies and those with more than $1 million in annual revenue and 20 or more employees to adopt whistleblower policies.
The Nonprofit Revitalization Act will also streamline and modernize New York law to remove unnecessary burdens, save taxpayer dollars, and help nonprofits focus resources on providing services by:
•Streamlining procedures for nonprofit mergers, property sales and corporate dissolutions, so that funds needed for ongoing charitable programs are not wasted on unnecessary red tape;
•Modernizing laws to allow nonprofits to conduct their affairs more efficiently, such as permitting nonprofits to use email and video technology for meetings and allowing boards to delegate the approval of small transactions to committees; and
•Eliminating unnecessary and costly requirements for nonprofits forming in New York, saving nonprofits money and time and allowing them to commence charitable programs more quickly.
[i] Bill S5315-2013. Amd ᵹ602, N-PC L
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