TESTIMONY BEFORE THE SENATE FINANCE COMMITTEE HEARING ON CHARITIES AND CHARITABLE GIVING: PROPOSALS FOR REFORM BY THE HONORABLE LEON E.

Transcription

1 TESTIMONY BEFORE THE SENATE FINANCE COMMITTEE HEARING ON CHARITIES AND CHARITABLE GIVING: PROPOSALS FOR REFORM BY THE HONORABLE LEON E. PANETTA Mr. Chairman; Members f the Cmmittee: I am pleased t be here in my capacity as a member f the Citizens Advisry Grup t the Panel n the Nnprfit Sectr. As mst f yu knw, I have been in the public sectr and the private sectr and I nw serve as the directr f the Panetta Institute, a nnprfit, nn-partisan center fr the study f public plicy lcated at Califrnia State University, Mnterey Bay. When I was in gvernment, I was privileged t serve as a Member in the Huse f Representatives, and as Directr f the U.S. Office f Management and Budget, and as Chief f Staff in the White Huse. Frm thse different vantage pints I learned a great deal abut the rle f charities and fundatins in this cuntry and came t appreciate, far mre than I had befre, hw essential t ur cmmunities and ur natin these rganizatins are t serving the needs f a natin. Whether large r small, these rganizatins fcus n a wide range f services frm helping the hmeless r bringing pera t the schls, cleaning the ceans r researching a cure fr AIDS. Their ability t innvate, cllabrate and tailr services t meet an immediate need, test a creative idea r build a museum fr the arts is smething gvernment fficials supprt and 1

2 applaud. Their wrk in many ways represents the essence f ur demcracy. The human as well as financial resurces these rganizatins tap is inspiratinal. We saw it mst recently and mst verwhelmingly, fllwing the tsunami crisis when the best f what we are capable f being, came t the fre as millins f individuals and rganizatins cntributed mre than a billin dllars t help the victims f this immense tragedy. Are there abuses in the nnprfit field? Yes, sadly, there are. In the midst f incmprehensible human suffering and need in sutheast Asia, there were a few scam artists attempting t siphn ff funds fr their persnal use, funds that wuld therwise have gne t help rebuild the devastated cmmunities in Sri Lanka, India and Thailand. There are a few charitable rganizatins that have nt been gd stewards f the public trust, that have spent charitable dllars fr purpses ther than thse fr which they were cntributed. I jin yu in saying that these abuses must end. I feel very strngly that charitable institutins must be abve reprach because they are s essential t every aspect f cmmunity life. The nly way t guarantee their cntinuatin is t ensure an even higher level f public cnfidence and trust in the way they d business. We cannt allw the small number f thse wh deliberately abuse the public trust t hurt the gd name f thusands f rganizatins that perate in gd faith and serve the public gd with distinctin. 2

3 Having spent sme time lately reviewing current laws and IRS regulatins as well as the Finance Cmmittee s staff discussin paper and the Jint Cmmittee n Taxatin s Optins paper, I believe that cllectively yu have dne an excellent jb f clearly identifying prblem areas. I want t cmmend yu fr yur vigilance and yur cmmitment t prtecting what is best abut this magnificent vluntary sectr. Already yur attentin t this area has stimulated many t lk at their prgrams and practices with an eye twards imprvement. The fundamental issue yu cnfrnt tday is hw d yu balance the need fr new laws and regulatins with the need fr strnger enfrcement f existing laws with the need fr tugher self-regulatin. There may be sme new laws r clarifying rules needed in certain areas f charitable activity, but we als need greater attentin paid t adequate enfrcement f current law. Many f the stries I ve seen describe excessive cmpensatin and self-dealing (where insiders benefit nt the charitable cause) appear t be vilatins f existing law. In thse instances the prblems wuld nt be slved by simply raising the bar but by ging after the vilatrs. The vast majrity f abuses are already illegal and the slutin lies mre in imprving greatly imprving enfrcement f the laws and regulatins already n the bks than in creating mre laws and regulatins that increase the burdens n the IRS. I say this having served in the public sectr and being keenly aware f the shrtage f financial resurces t achieve this imprtant gal. I begin, therefre, by 3

4 encuraging serius cnsideratin f increased funding fr the IRS t allw fr additinal audits, cllectin f fees and develpment, and installatin f sftware that will enable mandatry electrnic filing f all f the frms in the 990 series, including attachments, and Frm 1023, the applicatin fr 501(c)(3) status. I believe that a gd blueprint fr actin is prvided in the recmmendatins included in the Panel n the Nnprfit Sectr s Interim Reprt. As a member f the Citizens Advisry Grup, I had the pprtunity t review the wrk f the Panel and the well-cnsidered advice it received frm s many fine experts and rganizatins. I believe it has achieved the imprtant balance between adequate versight and accuntability and the ability f charitable rganizatins t fulfill their missins. Amng the recmmendatins that I call t yur attentin are: Requiring audits fr rganizatins with annual revenues ver $2 millin; and mandating an independent public accuntant s review f financial statements fr thse with budgets f $500,000 t $2 millin (p23). Defining and clarifying the rules fr dnr-advised funds (p36). Increasing penalties fr vilatins f the self-dealing rules (p40). Allwing better cperatin between state and federal regulatrs (p47) Encuraging the IRS t mve frward with mandatry electrnic filing fr the Frm 990 series (p 21) The Panel n the Nnprfit Sectr is nw preparing its recmmendatins n ther critical issues, and will release a final reprt in late spring. I encurage yu t hear the full scpe f its recmmendatins befre yu take any frmal actin. 4

5 Even with imprved regulatins and the significant infusin f funds, there is a limit t what can be achieved thrugh new legislatin and imprved enfrcement. Withut the cllective will within the vluntary sectr t uphld gd standards f ethical practice, we will nt achieve the utcme we all wish fr. I have had the pprtunity t meet many leaders f charitable endeavrs. Their purpse is t make life better in sme way and they try their best t live up t their bligatins. T many f them dn t knw as much as they wuld like abut bard gvernance, management f rganizatins, audit prcesses, self dealing and s n. Fr them a gd prgram f educatin wuld d wnders. I hpe that this Cmmittee will favrably cnsider putting sme meaningful resurces behind a natinwide educatin system undertaken by the charitable sectr itself. But I als encurage the sectr itself t invest in this effrt. A cmprehensive educatin initiative will take bth public and charitable sectrs cming tgether t achieve these utcmes. Let me ffer sme thughts that g beynd where the Panel is at this time. I fervently believe the best way t prevent abuse and raise the standards f the charitable sectr is fr the sectr t demand f itself greater accuntability. And I understand that this is beginning t happen. Numerus rganizatins have held cnferences, wrkshps, seminars and ther training sessins n the fiduciary respnsibilities f Bards f Directrs, Chief Executive Officers and thers. Many f the sectr s leaders have begun t better educate themselves and their directrs 5

6 abut the law and filing requirements. And there are a hst f rganizatins natinal, reginal and lcal devted t standard setting and imprving the practices f their affiliates and thse assciated with them. I am aware that sme fields f practice require cmpliance and meeting f certain standards in rder fr the rganizatin and prfessinals t perate. Other standards are entirely vluntary. It is a gd start, but it is far frm sufficient. Self-regulatin, t be credible and effective, must have a structure, must demand high standards, and must have the authrity t investigate allegatins f wrngding and enfrce penalties. Withut such a structure, self-regulatin is just an aspiratin. It is my view that the charitable sectr needs a frmal structure, a Natinal Cuncil n Nnprfit Accreditatin, that brings tgether all f the accrediting bdies f the sub-sectrs under ne umbrella. They ught t have cmmn standards regarding gvernance, transparency and accuntability, allwing fr the diverse needs f small, intermediate and large rganizatins. Althugh the charitable purpses f public interest grups, family service agencies, health systems and research centers are significantly different, there are standards f peratin that they must surely share. A Natinal Cuncil f sme srt culd write clear guidelines requiring that any nnprfit institutin seeking accreditatin frm any cperating accrediting bdy must meet the guidelines fr bard cmpsitin, audits, public disclsure f 6

7 financial infrmatin, and cmpliance with all laws and regulatins gverning exempt rganizatins. These guidelines wuld be in additin t the sub-sectr requirements fr curriculum develpment, physician certificatin r whatever is relevant in each sub-sectr t btain accreditatin tday. Vilatins f gvernance and ethical standards wuld be cause fr suspensin and finally revcatin f accreditatin, just as failure t meet academic, health r safety standards. An additinal functin f a Natinal Cuncil n Nnprfit Accreditatin wuld be educatin and training. I have been truly surprised t find that many, many peple wrking in charitable rganizatins r serving n bards r as trustees d nt knw the laws and regulatins that apply t their tax-exempt status, IRS filings, fiduciary respnsibilities and public disclsure requirements. While nt denying that there is abuse f tax laws that is knwing and purpseful, there are a great many errrs f missin and cmmissin that are due t ignrance f the law r its applicatin t the specific rganizatin. Examples are failure t file a Frm 990, failure t receipt gifts ver $250 r prviding excess benefits t executives r trustees. At the end f the day, relying n this type f self-regulatin has three main advantages: It lightens the burden n the IRS and ther regulatry agencies, all f whm are already struggling t meet their respnsibilities with limited resurces; it preserves the independence f the sectr, which has been crucial t its ability t address the needs and aspiratins f Americans; and it places the respnsibility where it shuld be n the rganizatins acrss the cuntry that knw that they 7

8 will maintain the supprt f the public nly if they perate accrding t the highest pssible ethical standards. The charitable sectr is indispensable t American life as we knw it. Americans value vlunteer service t their cmmunities and they trust and rely n nnprfit institutins that serve them. We send ur children t religius schls r cmmunity centers t learn the values in which we believe. Peple frm all ver the wrld cme t the United States fr higher educatins in sme f the finest clleges and universities ever established. It is impssible t enumerate the myriad services charitable rganizatins make available t families that wuld be unable t affrd them in the private marketplace frm shelters fr the hmeless t jb training, cancer screenings t literacy prgrams. The charitable sectr serves the public gd. But it must d mre. It must serve well and t d that there must be mre accuntability and transparency. The trust placed in these rganizatins is mre imprtant than the dllars cntributed t them. The gd wrk needs funds; the dnrs need trust. They are inseparable. S I urge yu t please keep the pressure n. Demand better enfrcement f current laws frm the IRS and give them the means t d it. Demand passage f new laws and prmulgatin f new regulatins t curb abuse and increase penalties, but d s cautiusly and nly where abslutely necessary. 8

9 And finally, demand that the charitable sectr d a better jb f self-regulatin. Thse f us invlved in the sectr will make demands n urselves as well: fr higher standards f ethics and gvernance, fr better training f prfessinals and vlunteers abut their duties and respnsibilities, and fr hlding rganizatins accuntable fr meeting thse standards. Tgether we have an bligatin t give the public the trust they need t ensure that they give t the natin. 9