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At The Non-Profit Bar

History is replete with famous rivalries. Alexander Hamilton and Aaron Burr. Joseph Stalin and Leon Trotsky. Each has its own story that rocked the world. The rivalry between California Attorney General Bill Lockyer and New York Attorney General Eliot Spitzer may not be as well known, but it certainly has rocked the non-profit world.

It seems Lockyer was in a race against the headline-grabbing Spitzer to pass a Sarbanes-Oxley-like law that would clean up the financial shenanigans in the non-profit sector. He succeeded. California's Non-Profit Integrity Act became effective Jan. 1, 2005. Spitzer's own effort is still on the legislative drawing board in Albany, N.Y., perhaps because he was busy putting corporate executives in jail and announcing his candidacy for governor.

Lockyer is the clear winner in his race with Spitzer, but the jury is still out as to whether his haste has made waste. Even after much last-minute watering down in Sacramento that eliminated especially burdensome reporting requirements on smaller non-profits, the Act remained tough enough that an editorial in the San Jose Mercury News called it "the equivalent of a Category 4 hurricane that's been downgraded to a tropical storm," and added, "'no longer bad' is not reason enough for Gov. Schwarzenegger to sign [it]."

That the Act became effective only three months after its passage is evidence of its sponsors' desire to make their mark quickly. However, Lockyer has promised to soften the law later (this could have been easily avoided had there not been a race to be first). Meanwhile, the accounting profession--already booming with new business from SOX--is anticipating an influx of new non-profit clients. But because California is the 800-pound gorilla of the country's state economies, the accountants are getting calls from non-profits in all 50 states. This is because, according to the attorney general's guidance statement, the provisions in the Act also apply to "foreign corporations that do business or hold property in California for charitable purposes."

The result? Thanks to the sheer size of California's economy, we now have a de facto national law governing the corporate governance, fund-raising, executive compensation, audit requirements, accounting standards and more of the non-profit sector. Thus spake Schwarzenegger.

To be sure, the meaning of "doing business in California" will not pull every charity, foundation or unincorporated association in the country into the Act's lair. But it will capture a lot of them because the Act will apply even if a small percentage of a charity's donations come from California. Already big charities are retaining local counsel to figure out how onerous the burden will be and whether they can avoid it altogether. Avoidance would be the much-preferred choice for many because noncompliance could lead to penalties or even revocation of a charity's fundraising registration.

No doubt the coming months will see a shake-out as lawyers, legislators, regulators and charity executives absorb the implications of California's attempt to do a good thing. The Act's unintended consequences will show themselves and probably spur reform of the reform. One likely outcome is that the high cost of the new audit and reporting requirements on small- and mid-sized non-profits will eat up so many program dollars aimed at feeding the hungry or healing the sick that even the most zealous reformers in Sacramento will back off a bit. Politicians aren't usually happy to be tagged with taking food out the mouths of babes so that accountants can more easily afford their beachfront retreats.

But things could go in another direction if New York and other states think they've been one-upped by California and decide to pass their own laws to reform the non-profit sector. Such legislative machismo would inevitably lead to greater demands on Congress to sort it all out with a national corporate governance law for non-profits.

That might be a good thing, depending on your regulatory philosophy. Or, California might find itself in the same position regarding non-profits that Texas is now in regarding school textbooks. Because Texas buys the books for all of its public schools, publishers have no choice but to conform their national editions to the Lone Star State's sometimes peculiar take on history, science and everything in between.

Will we have Californization of the non-profit sector? If so, one might ask, what hath California wrought? Ask your lawyer.



Bruce D. Collins

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