Form 990 'Transparency' Issue Misunderstood Yet Under Scrutiny: Help Us Protect the Integrity of the Sector!

Monday, December 3, 2012

In late October, the Chicago Tribune published another in a line of articles on nonprofits, highlighting a new bill by Illinois State Representative Greg Harris (D-Chicago). Prompted by the Tribune’s earlier pieces, Harris’ bill would require some nonprofits, whose contracts and grants are exempted under the Illinois Procurement Code, to disclose relationships with private management companies and for-profit subsidiaries, as a way to uncover executive compensation. In a conversation with Donors Forum, Harris told us this is a “transparency” issue.

In a meeting with Rep. Harris after the article was published, Donors Forum agreed that it is important for nonprofits receiving public dollars to disclose key employee compensation.

It is important to note, however, that nonprofits are currently required to disclose compensation on the 990, even in those instances where they have engaged a private management firm.

And while we agreed that disclosure of executive compensation should always be the norm, Donors Forum has concerns about creating unnecessary duplicative regulatory requirements for nonprofits. We will continue to watch Rep. Harris’ bill with an eye toward avoiding further redundancies.

Donors Forum researched the disclosure requirements of the 990.  The research included consultation nonprofit tax advisers, auditors, and management association professionals.  Here is what we found:

  • Though their instructions lack clarity, the IRS requires 501(c)3 organizations to report their relationships with management companies and related subsidiaries in at least three places in the 990. Donors Forum has created a helpful fact sheet on this topic; access it here.
  • Engaging private management companies and forming subsidiaries are two separate, and permissible, practices that shouldn’t be confused (which the Tribune did); and
  • The primary driver for using an outside management firm is typically increasing performance and efficiency – not hiding salaries.

Donors Forum sent a letter to the editor of the Tribune commenting on the October story; it appeared in the Sat., Dec. 1 issue. We are also initiating meetings with the Tribune to better inform them about nonprofits and the transparency required of them.

What can we do together to protect our sector’s integrity?

  • We need to  align our work with the highest operational standards, as recommended in our Illinois Nonprofit Principles and Best Practices.
  • We, our boards, and our staff need to know and follow the requirements and intricacies of the 990 – the primary reporting tool for our sector. A helpful fact sheet from Donors Forum on this topic will be forthcoming.
  • We Need Your Voice! As stewards of public dollars, it is critical for our nonprofit community not only to know the rules but to abide by them.  We are a catalyzing voice for policies that make our sector stronger and more effective; our strength rests in you. If you’ve spoken with a policymaker about these and other nonprofit transparency issues, let us know: send an email to advocacy@donorsforum.org.

-- Delia Coleman, Director, Public Policy