Oregon State Government Considers Administrative Cost Ratios for Charitable Organizations
(May 10, 2011) The Oregon state legislature is considering a bill that would establish administrative cost ratios for nonprofits. If passed, Oregon will be the first state to establish such ratios.
Under the bill, already approved by the state Senate, if charitable organizations do not expend at least 30 percent annually on program services (averaged over a three-year period), the state attorney general can declare that donations to those organizations would no longer be tax-deductible, and the charities would have to notify potential donors of that status.
The state House gave the bill its first reading April 12 and referred it to the House Revenue Committee.
If Oregon enacts the bill, it would be the first state to codify administrative cost ratios.
A copy of the bill is available here.
AFP supports transparency and ethical behavior but opposes the establishment of administrative cost ratios for a number of reasons. In addition, the bill potentially could face a constitutional challenge because the Supreme Court has ruled that government discrimination against charities and/or charitable appeals based solely upon spending formulas are unconstitutional. See, e.g., Village of Schaumberg v. Citizens for a Better Environment, 444 U.S. 620 (1980); Secretary of State of Maryland v. Joseph Munson Company, Inc., 467 U.S. 947 (1984); Riley v. National Fed'n of the Blind of NC, 487 U.S. 781 (1988); and Illinois ex rel. Madigan v. Telemarketing Associates, Inc., 538 U.S. 600 (2003).
For these reasons, AFP opposes the bill as currently drafted. AFP urges its Oregon members to educate House members, particularly those sitting on the House Revenue Committee, about this bill.
House Revenue Committee Membership:
Phil Barnhart, Co-Chair
Vicki Berger, Co-Chair
Jules Bailey, Co-Vice Chair
Katie Eyre Brewer, Co-Vice Chair
For your convenience, AFP has drafted the following talking points:
- As a member of the Association of Fundraising Professionals (AFP) and [insert your title and position at your organization], I urge you to oppose SB 40 as currently drafted, which would allow the Oregon Attorney General to disqualify charitable organizations from receiving charitable contributions that are deductible for Oregon state income tax purposes if the organizations do not expend at least 30% annually on program services when those expenses are averaged over the most recent three fiscal years.
- AFP represents 30,000 members in 222 chapters throughout the world, working to advance philanthropy through advocacy, research, education and certification programs. The association fosters development and growth of fundraising professionals and promotes high ethical standards in the fundraising profession.
- AFP supports transparency and ethical fundraising, exemplified by the AFP Code of Ethical Principles and Standards. However, a potentially arbitrary administrative cost threshold overlooks more important aspects of nonprofits, including their mission, and ignores the fact that some highly-effective nonprofits, particularly very small nonprofits, may have high administrative costs. Furthermore, some charitable organizations that support necessary, yet unpopular missions may have higher administrative costs due to the additional challenges that they may face.
- Administrative costs alone are poor indicators of nonprofit effectiveness, and AFP has raised this issue both with the Internal Revenue Service (IRS) and the Canadian Revenue Service (CRA). The IRS revised its updated Form 990 in response to charitable sector feedback by placing less emphasis on simple cost ratios and other raw data, and the CRA revised an evaluation grid based upon cost ratios in its fundraising guidelines in response to similar feedback.
- For these reasons, we urge you to oppose SB 40 and instead seek sector input to ensure that the bill curbs unethical behavior without establishing an arbitrary mathematical formula that might impede the altruistic mission of our state's charitable organizations.
- Thank you.
Related AFP ResourcesAFP Offers Tax Incentive Recommendations to Finance Committee
AFP Political Action Committee Fact Sheet and Q&A
IRS Issues Revised Instructions on New Form 990
IRA Rollover Provision Introduced by Key Senators
AFP Urges Congress to Include IRA Rollover in Stimulus Package