Government and Philanthropy

State plays wait, see: Indiana likely to follow federal lead regarding oversight of charities

July 4, 2005

As the national conversation about improving not-for-profit oversight gains volume, Indiana's top charity watchdog is tuning in-while he considers whether to join the cacophony.

Attorney General Steve Carter convened an informal group of advisers to weigh in on the topic last year, ultimately pushing for changes in state law that give him more ways to deal with abuses in the sector.

Now he's content to let federal efforts play out before determining what more can be done to keep the state's 60,000-plus taxexempt organizations in line.

"We want to do a fair amount of listening. We're in a shakeout phase as far as a revision of [notfor-profit] regulations," he told IBJ. "It's important to see the national debate continue and review that with the experts on our advisory committee. There may very well be an additional role for us to play eventually."

But attention these days is directed toward Washington, D.C., where the Senate Finance Committee and, more recently, the House Ways and Means Committee are taking up the issue.

Sen. Chuck Grassley, the Iowa Republican leading the year-long charge to clean up what he has called a "cesspool" of abuses, is widely expected to introduce legislation this summer that would tighten controls on charities.

And Carter is far from alone in his vigil.

Not-for-profits nationwide are keeping an eye on the proceedings, fearing the changes could create a regulatory nightmare.

With 1.3 million tax-exempt organizations running the gamut from billion-dollar private foundations to nickel-and-dime Little Leagues, many observers say a one-size-fits-all approach could do more harm than good.

"We have tried to sensitize [officials] to the need to consider size and complexity" of different organizations, said Eugene R. Tempel, executive director of the Center on Philanthropy at Indiana University. By exercising restraint, he said, it's possible to "take care of most significant abuses without doing damage to pluralism and spirit of the sector itself."

Tempel is more than a casual observer of the goings-on in Washington. He also is a member of an expert advisory group convened to help the national Panel on the Nonprofit Sector recommend changes.

The panel's report, delivered to the Senate Finance Committee June 22, called for officials to do a better job of enforcing existing rules and suggested some improvements to federal regulations. But it also called on not-for-profits to improve their internal controls.

"Everything is aimed at enhancing trust in nonprofit organizations," Tempel said. "The sector works off of trust. ... If the government comes in and says, 'We have to take care of this,' it means we haven't taken care of it ourselves."

Indeed, the current conversation has been spurred by allegations of abuse that have surfaced in recent years as the sheer number of not-for-profits has outstripped the resources available to oversee them.

The Internal Revenue Service increased staffing this year, according to an April Government Accountability Office report to Congress, and now has about 470 agents to check the compliance of 500,000 organizations required to file annual informational returns. Only about 1 percent of the returns are audited.

"IRS has many other priorities in collecting the proper amount of tax from tens of millions of individuals and businesses," the GAO report said. "[Its] budget emphasizes areas that produce tax revenue rather than areas that are regulatory."

It's little surprise, then, that the Panel on the Nonprofit Sector recommended Congress devote additional resources to enforcement of existing regulations.

"The current rules are not well enough executed by the IRS, the Treasury Department or even state attorneys general," said panel member Ken Gladish, a former Indianapolis charity executive who now leads the national YMCA. "The rules on the books, if enforced, would be very effective. They should be appropriately and zealously applied."

In Indiana, charity oversight relies in large part on the squeaky wheel approach. Day-to-day responsibility falls to the 15-person Consumer Protection Division, which also handles everything from telemarketing complaints to lemon-law disputes. Most investigations begin with a citizen complaint.

Nevertheless, Carter has been active in the not-for-profit arena, most notably taking up a decades-old dispute over how Earlham College has managed Conner Prairie living history museum and a multimillion-dollar endowment the two institutions share.

His office also has posted information about professional fund-raisers on its Web site, adding a level of transparency intended to help educate donors.

"Donor-driven accountability makes not-for-profit organizations better," Carter said. "We have to do these things to maintain confidence, but there will still be instances here and there where there will be a problem."

And he convened the local advisory group last year to get a better feel for what more-if anything-his office should be doing.

Some states require organizations that raise money to file annual reports with a regulatory agency; others ask not-forprofits of a certain size to submit audited financial statements-something the national panel also recommended. Still others are applying Sarbanes-Oxley-type regulations to the charitable sector.

Carter isn't sure yet what would be appropriate here. And he's content to see how the national debate unfolds before making any bold moves.

"We're already doing more than this office has ever done," he said. "We have taken reasonable steps ... [but] I'm not ruling out further changes in the next legislative session."

In the meantime, the sector's efforts to improve self-regulation continue-something Indianapolis not-for-profits do particularly well, Gladish said.

"That is one of the great things about the charitable sector there," he said, citing the influence of the Center on Philanthropy and several well-run organizations. "They are already having conversations about these things. There are few cities in America, I think, that have such substantial resources to already be acting on a range of these issues and be able to hold them up to others as an example."

Central Indiana Community Foundation, for example, is one of about 700 like groups working on a new national accreditation process that will give a "seal of approval" to well-managed organizations.

And United Way of Central Indiana already has implemented Sarbanes-Oxleyinspired oversight to its operations.

"We're fortunate here to have highly engaged board members," UWCI President and CEO Ellen Annala said. "For us, trust is everything. We've always felt-and we have a board that feels-we want to be above reproach. ... As much as anything, it's a matter of our credibility at stake."

Indeed, one bad apple can sour the sector.

"The concern is, what if you have some organization that ... has some horrible practices, abuses even? Then the whole field is sullied," said CICF President Brian Payne. "I'm hoping [officials] can find a good middle ground-fix the problems, but do it in a way that doesn't create a huge regulatory burden or kill what's good about the sector.

"That would be a huge blow for American philanthropy."
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