Observing Nonprofits

The Evergreen State Society

January 25, 2002

by Putnam Barber, President, The Evergreen State Society

I participate in several online discussion forums about nonprofits. One of the most interesting is called "Cyber-Accountability" in recognition of its commitment to exploring the ways the Internet and related technologies can be used in pursuit of accountability for nonprofits.

The conversation ranges widely around that focus, though. A couple of days ago, one of the regular participants posed a question to the group and I responded. I thought you might be interested by this exchange.

Systemic "bias"?

Mark Weinberg poses for debate the proposition:

"The current systems of Federal and state, tax, legal and accounting regulations are biased against small organizations."

I certainly agree.

The systems mentioned all impose unavoidable costs on every participant. The impact of those costs is incalculably greater for organizations that do not reach the scale where there are specialists (accountants, lawyers, development officers, etc.) whose remuneration is routinely included in their G&A expense.

A ready example of this is the calculation of the "support ratio" in Schedule A of the 990. Anyone attempting to do this calculation correctly needs to have organizational books set up in a complex way, to maintain records of financial transactions throughout the year in accordance with those complex standards, and to possess a knowledge of financial reporting that is more sophisticated, shall we say, than anything you can learn in the school of hard knocks. The simplifications that distinguish Form 990 from Form 990-EZ are relatively minor. Requiring Schedule A's support ratio calculation of all filers makes the distinction meaningless.

Plus, there is no real reason why a "small" nonprofit should not prepare the statement of functional expenses that is the chief difference between the 990 and the 990-EZ. Any sane person would prepare five statements of functional expenses and throw in a bottle of cheap champagne if told they could skip the calculation of the support ratio. (Further, as a matter of policy, it is hard to see what risk of damage to the body politic might ensue if an organization with less than $100,000 in revenue fails the public support test.)

Also, it makes it hard for people who try to assemble good statistics from 990 data (a small, but determined band) to have the income statement and balance sheet numbers fall on different lines on the two forms. That difference probably means that fewer "small" nonprofits are included in the aggregate statistics. Of course the ones that don't file at all are left out entirely; I don't know if that's an instance of "bias" or not, but it certainly skews many commentaries on the nonprofit sector in unexamined ways.

The most important form of bias, though, is in the process by which these systems and standards get established. There are only a handful of nonprofit organizations -- all large -- that can afford a public affairs effort directed at the development and administration of laws, regulations, policies and procedures affecting nonprofit organizations. When these organizations do take an interest in those arcane subjects, they bring their own perspective to the discussions -- as they have every right to do. But no-one brings the perspective of "small" nonprofits to the discussions. And often the ways the law-makers and administrators find to accommodate the concerns of the nonprofits they hear from have the unremarkable consequence of making the rules more complicated, the definitions more abstract, and the procedures more round-about. These outcomes are, no doubt, irritating to the large organizations involved in the process. They are baffling to the small ones who never got near the table in the first place.

The consequence of this process continuing through most of a century has been, I fear, to create a huge population of small nonprofits whose leaders are desperate law-breakers, unable to comply with the rules they know must apply to their operations and constantly fearful that their harmless but still actionable failures of accounting, reporting and management will be discovered to the lasting detriment of their ability to serve their missions. The gotcha games that dissidents or policy opponents play with available "accountability" data give a grim credence to this fear.

Posted to Cyber-Accountability on January 24, 2002. For more information about this discussion forum, see http://cyb-acc.com.

The first Nonprofit Schmoozefest of 2002 will be held this coming Monday evening (Jan. 28) at Seattle's Town Hall -- 8th and Seneca. The Evergreen State Society has taken over the arrangements for these monthly informal gatherings of people who are interested in the nonprofit sector. If you can drop by any time between 5 and 8 on Monday evening you'll have a chance to meet a good group of folks with lots of interests in common. Sue Donaldson, Director of the Forum at the Evans School, will be our guest that evening; Dan Kessler, Chair of the Society's planning group for this activity, will hold a roundtable discussion on the program for those who want to offer their ideas. There is no charge (though donations are accepted). Bring your own beer or wine; softdrinks and snacks provided.

For more information about the Nonprofit Schmoozefest, see http://www.npsfest.org/

Mel Jackson, Dean of University Relations for Antioch University Seattle, will be our guest for the Civil Society in Everyday Life breakfast meeting on February 19 from 8 to 9:30 am in Bellarmine Hall, the 1891 Room, on the Seattle University Campus.

Putnam Barber, President
The Evergreen State Society :: http://www.tess.org/
PO Box 20682
Seattle, WA 98102-0682
206 329-5640 :: pbarber@tess.org