What Kind of Watchdog? The Role of the State Attorney General in Nonprofit Oversight

For those who read my posts regularly, it is no secret that I try to encourage greater oversight of the nonprofit charitable sector than is currently exhibited across the country. For example, I asked why the New York Attorney General had nothing to say while Lincoln Center paid off the children of Avery Fisher so that the center could re-sell the naming rights to obtain funds for an extensive renovation. The New York AG did step into the Cooper Union case and many applauded his actions. But the board of Paul Smith’s College appears to be trying to go around the AG as the upstate New York college endeavors to change its name.  I questioned why the Michigan AG allowed the Edsel Ford House museum to sell a Paul Cezanne painting to a private buyer and add the funds to the museum’s endowment. In many blog posts relating to the attempted closing of Sweet Briar College, I noted the bizarre actions of the Virginia AG.

Thankfully, the oversight role of states attorneys general in the nonprofit charity arena is finally starting to get more attention. Here's a look at a few recent salvos in the emerging debate—and who's on the right side. 

On July 19, 2015, the Roanoke Times published an editorial in which it noted the differences between New York’s nonprofit law (one of the strongest) and that of Virginia (apparently one of the weaker ones). The Times indicated that the New York law “provides more state oversight of what are otherwise private organizations.” The editorial goes on to say that New York is a more liberal state (than Virginia), with laws that give the AG more oversight responsibility of charities. It ends by asking whether Virginia really wants to be more like New York.

I am not a lawyer, but I have read the Virginia Nonstock Corporation Act and I don’t think it allows nonprofit charitable organizations to act without AG oversight except in cases when there is evidence of criminal conduct. And, if I am incorrect, then the Virginia law needs to be changed.

Nonprofit charities are not private entities. These tax-exempt entities are classified by the IRS as public charities in recognition of the fact that they receive wide public support in order to conduct their activities. We, the people have granted tax-exempt status to these entities (thereby increasing our share of the tax burden or responsibility) because these public charities have agreed to perform a public service that we, the people value—and reward with tax-exempt status. These entities do not incorporate under the general state corporation laws that private businesses do. In every state, there is a special section of the corporate laws dealing with nonprofit, tax-exempt entities. Yes, some state nonprofit corporation statutes are stronger than others, but all states recognize the unique nature of the tax-exempt charity formed to serve the public that is paying for its services.

I believe the Roanoke Times has it wrong. The Virginia AG should have done more in the illegal attempted closing of the college by its board.

The second item in the press was the July 23, 2015 editorial in the Chronicle of Philanthropy authored by Robert E. Cooper Jr., former attorney general of Tennessee. He discusses state oversight of charities by citing the rare event when all 50 states and the Federal Trade Commission joined together to sue the Cancer Fund of America, a charity that conducted widespread abuse for over two decades.

Cooper notes that charity oversight is not resident in the state AG’s office in all states. In eight states, the secretary of state has primary responsibility. In Rhode Island, it is the Department of Business Regulation and in Utah, it is the Division of Consumer Protection. As more and more charities operate across state lines, many of them fundraising nationally, oversight and enforcement becomes fragmented, and issues fall more easily through the cracks.

The prime reason that Cooper mentions for lax oversight is financial. Yes, it’s always about the money. Cooper notes that consumer cases are frequently filed against well-capitalized, for-profit entities and financial recoveries earned by state enforcement agencies can be used to fund future cases. This is typically not the case in charitable litigation. Oversight litigation, except in fraudulent solicitation cases, often has no financial component or award associated with it.

Frequently in matters that do involve fraudulent solicitation, the entities have dissipated the assets before the suit is even filed. In addition, any financial recoveries from these cases are often directed to bona fide charities rather than being applied to the costs of litigation in the AG’s office. Quite frankly, this lack of a reliable funding stream for nonprofit enforcement is a big problem as state budgets shrink or get diverted to an ever widening array of needs.

Cooper mentions a number of initiatives that are designed to make enforcement of multi-state organizations easier. While these are a step in the right direction, I would like to see the National Conference of Commissioners on Uniform State Laws draft some model legislation that would bring clarity and stability to nonprofit oversight in state statutory law.

The charitable sector represents 10 to 15 percent of the economy, depending on whether the measurement is in dollars spent or number of employees. It is inappropriate that such a large sector, dependent on wide public support and subsidized by every taxpayer whether they are a donor or not, is so relatively free of oversight.