News and analysis
October 05, 2015

Nonprofits Proliferate but Not the Regulators, Says Report

Despite the growing number of nonprofits in recent years, states are doing little to hire new regulators to police charities, according to a new report’s preliminary findings.

The report, which was previewed Monday at a conference of state charity officials, showed that 53 percent of state charity offices have not increased staffing since 2008. Another 13 percent have thinned their ranks of lawyers, paralegals, investigators, and accountants.

Flat state regulatory staffing levels makes anti-fraud efforts more difficult as the number of charities explodes, said Cindy Lott, executive director of the Columbia Law School National State Attorneys General Program and author of the report. Thanks in part to a new, shorter application form for nonprofit status, the number of groups to earn a 501(c)(3) tax-exempt designation nearly tripled in 2014.

The full report, a joint project of the Columbia Law School program and the Urban Institute, will be released later this fall.

State charity regulators bared their teeth this May, when officials from all 50 states and the District of Columbia joined the Federal Trade Commission in filing suit against four anti-cancer organizations that had allegedly fleeced donors of more than $187 million. The suit charges that officials at the groups diverted money for their personal use.

According to Karl Racine, attorney general of Washington, D.C., state charity officials need to pick up the slack from the federal regulator, the Internal Revenue Service. The IRS, he said, remains in a state of "paralysis" because of budget cuts and fallout from a political scandal in 2013 over the agency’s scrutiny of Tea Party groups that applied for nonprofit status.

Reflecting on the cancer-charity case, Mr. Racine rallied his fellow state regulators at the conference: "We’ll get together. We’ll organize, and we’ll come after them."

States’ Charity Rules Vary

Big differences in how states regulate nonprofits present a challenge to battling fraud, Ms. Lott said. For instance, charity watchdogs are housed in different offices, depending on the state.

Adding to the confusion, more than half the states split charity oversight between two offices. Typically, the state attorney general’s office oversees charitable assets and those who administer them, while another agency — often the Secretary of State or the Department of Consumer Affairs — enforces registration and filing requirements.

State charity offices are "equal but not alike," Ms. Lott said.

The new study compares charity laws in each state. Researchers tabulated survey responses from charity officials in all 50 states, the District of Columbia, and five U.S. territories.

Ms. Lott said the report could unravel some of the mystery surrounding state charity regulation, helping nonprofits that operate in more than one state as well as federal lawmakers confused about the variety of state approaches.

"They’re looking for information about how the regulatory landscape works," she said.

Among the report’s preliminary conclusions:

  • Three-quarters of the states require charities or fundraising professionals to register. Forty-four percent of 50 jurisdictions that responded require audited financial statements from charitable organizations.
  • More agencies (82 percent) regulated telephone solicitations than fundraising by direct mail (80 percent) or social-media (70 percent).
  • Regulators vary in their efforts to reach the public with information about charities. One-third of the regulators provide an annual report, and 82 percent update the news media using news releases. Fifty-one percent had a charity hotline, 32 percent offered training in compliance for charities, and 7 percent offered webinars.
  • Nearly three-quarters of the watchdog offices do not regulate B Corporations. Sixty-seven percent do not regulate low-profit limited liability companies (LC3’s), and 61 percent do not regulate religious organizations.

Send an email to Alex Daniels.