Vol. IV, No. 2 March - April 1996

State Bureaucrats Add Burdens to Nonprofits, Fund Raisers
Government overregulation of nonprofit organizations, at both the federal and state levels, has drawn significant attention in recent years. Nevertheless, politicians and bureaucrats continue to press for more regulation, notwithstanding overwhelming evidence that such regulation does not work, serves no legitimate government interest, and is constitutionally objectionable. Below are several examples which illustrate the dangers posed to nonprofits (and those who help them raise funds) by unnecessary regulation.

Bureaucrats in the State of Washington are preparing to recommend sweeping changes to the state's charitable solicitation requirements. Ironically, one change is even being touted as regulatory relief: Washington's Secretary of State, Ralph Munro (R), characterizes the proposed increase in the minimum threshold of annual revenue required for registration (from $5,000 to $25,000) as a liberalization of the law. In reality, however, the effect of such "liberalization" will be negligible, only applying to nonprofits which have no paid staff and no paid fund raisers. All others must register regardless of the organization's annual revenue.

Specifically, the new burdens proposed include:
New and expanded reporting requirements for nonprofits. Nonprofits must:

• Provide an audit performed by an "independent certified public accountant" if "the annual net amount allocated to charity" exceeds $500,000. Nonprofits reporting between $250,000 and $500,000 in net revenue would have a choice between an audit and a "financial review" by a CPA. Those with an annual revenue under $250,000 would be required to comply with current regulations, which require a financial statement signed by the organization. This proposed new audit requirement appears to have no basis whatsoever in existing statutory authority. Rather, the proposed audit provision seems to be a radical expansion of the enabling law, which provides merely that, "The secretary may provide by rule for the filing of a financial statement by registered entities." Why is Washington Secretary of State Munro proposing such a change? We suggest that he is acting out of a misguided or uninformed sense of what is right for his state and its citizens.

• Provide the name of the case, the court, and the case number for all legal actions, if any, against the nonprofit related to charitable solicitations.
• List all states where the nonprofit is registered for solicitation.
• List the name and address of individual(s) with expenditure authority who can respond to questions regarding the expenditure of funds. (The language of the proposed rule does not identify, however, who may ask the questions, e.g., state government employees, public interest groups, members of the general public.)
• Provide a detailed report for the preceding fiscal year listing gross revenue, gross solicitation expenditures, cost of goods sold, net cost of solicitation, etc. This information is then calculated in a formula (P=E/(A-C)x100) to calculate a new government-mandated "efficiency" rating to be imposed upon nonprofit organizations.
• List the name, physical address and telephone number of any commercial fund raiser used by the organization.

Commercial Fund Raisers
The Washington Secretary of State did not stop at creating new burdens for nonprofit organizations. He also has devised a new burden on commercial fund raisers. Commercial fund raisers whose solicitation receipts total under $350,000 for all charitable organizations, defined broadly to include virtually all nonprofits soliciting contributions, would be required to conduct a "financial review" or an audit performed by an independent certified public accountant. Those whose solicitations raise over $350,000 would be required to pay for a full audit. Although not stated expressly in the proposal, the dollar thresholds appear to apply to all income received by nonprofit clients, not just income received from sources within the state. Regulators estimate new regulations will cost each fund raiser from $6,000 to $18,000 depending on the status and the revenue of the fund raiser.

The proposed regulations in Washington will be the subject of a hearing in that state's capital, Olympia, on March 27, 1996. FSC will submit, and urges others to submit, testimony against the proposals.

The State of Washington is not the only state creating new burdens upon nonprofits' efforts to raise funds. The Iowa legislature is currently considering amendments to that state's charitable solicitation law that would create a special fund for bureaucrats: segregating into a separate budget all revenues and expenditures related to the state's oversight of charitable solicitation (e.g., registration, investigation, enforcement). This would create a separate, charitable solicitation "fiefdom," over which the state legislature may effectively lose control. Bureaucrats would have the incentive to impose the highest registration fees, to enforce the most rigorous regulatory requirements, and to collect large fines from nonprofits and fund raisers.

Iowa is also considering imposition of a $50,000 bond on commercial fund raisers. No factual justification has been offered for imposing such a requirement, whose only real effect would be to raise the costs of regulatory compliance by fund raisers.

California legislators enacted a requirement that "commercial fund raisers for charitable purposes" file a financial report with the state attorney general and with the sheriff of every county where the fund raiser "intends to solicit funds." There are 58 counties in California.

Typical of the bureaucratic mindset is Minnesota's "opt in" or "positive option" law, which prohibits solicitation of persons who have not given their prior consent. Minnesota's law makes it unlawful for a "charitable organization" or its agents to sell or furnish for consideration any list of contributors that includes the name of a contributor who has not already given consent to receive additional mailings.

This law (and other bills modeled on the Minnesota approach, under consideration in other states) greatly increases the state's ability to restrict or prevent the dissemination of ideas and information, or the mobilization of grassroots support or opposition, by advocacy groups on matters of public concern.

Increasing regulatory burdens are not inevitable. A prominent example of regulatory reversal, illustrating what can happen when the people's voice is heard, occurred last year in the Commonwealth of Virginia. Virginia's Solicitation of Contributions Law was amended in 1993 to require nonprofits soliciting contributions in excess of $25,000 to furnish an independent CPA audit in addition to their IRS Form 990 when they registered in subsequent years.

In mid-1994, Governor George Allen instructed state executive agencies to solicit opinions from the public on possible regulatory changes. FSC (and others, including many nonprofits and agencies who were urged to comment by FSC) submitted formal comments to the Virginia Department of Consumer Affairs, pointing out the many defects in the recently amended Virginia Solicitation of Contributions Law, and specifically attacking the audit requirement.

The upshot? With the support of the Governor, the audit requirement was repealed by the Virginia Legislature in 1995. An outstanding result? We think so, at least in part. (FSC had also sought repeal of other elements of the Solicitation of Contributions Law.) But all interested parties need to work together if we are to have any chance at making regulatory reversals like Virginia's the rule, rather than the exception.

West Virginia Can Demand Disclaimers, Copies of Solicitations
West Virginia successfully sued the Christian Action Network (CAN), an IRC section 501(c)(4) organization incorporated in Virginia, seeking a court order to force CAN's compliance with the state's Charitable Solicitation law. In its defense, CAN had argued that: (1) it is not a charitable organization as defined by the West Virginia Charitable Solicitation law; (2) the law's requirement that CAN include a disclosure statement, dictated by the statute, on all solicitations mailed to the state is unconstitutional; and (3) the law's requirement that CAN supply the West Virginia Secretary of State with copies of all solicitations mailed into the state is unconstitutional.

The state trial court ruled for West Virginia. The court decided that CAN is a charity, under the statute, because it "is, or holds itself out to be," an educational, religious, philanthropic, benevolent, and patriotic organization that "solicits and obtains monies from the public for charitable purposes." The court ruled that the law's statutory disclosure statement requirement does not violate CAN's First Amendment rights because the requirement promotes West Virginia's "substantial interests" in informing the public and preventing fraud, and because the requirement is "sufficiently narrowly tailored" to further the state's substantial interests. Finally, the court ruled that the statutory requirement forcing CAN to supply its solicitation materials to the Secretary of State is not an unconstitutional prior restraint on CAN's free speech rights because the Secretary of State has a statutory obligation to ensure that funds solicited from the public are solicited for charitable purposes, and are spent on the charitable purposes identified by the solicitation. The court stated that the Secretary of State's statutory review of solicitation materials is "content neutral."

CAN's attorney, David Wm. T. Carroll, Esquire, is appealing this case to the West Virginia Supreme Court.

The Free Speech Coalition, Inc. is a nonpartisan, nonprofit 501(c)(4) organization which educates, lobbies, and litigates to defend the rights of advocacy organizations and their members. FSC needs your support to continue its fight to protect the rights of citizens to associate together and exercise their First Amendment right to petition their government for redress of their grievances. Contributions to the Free Speech Coalition, Inc. are not tax-deductible.