Grassley Outlines Goals for Charitable Governance, Transparency

Prepared Remarks of Sen. Chuck Grassley
On Charities and Governance
Buchanan Ingersoll & Rooney, Washington, D.C.
Tuesday, March 10, 2009

Good morning. I want to thank Buchanan Ingersoll & Rooney for hosting me here today,
particularly Chairman Thomas and Bob Winters who I understand is the one who made this
happen. Chairman Thomas and I worked closely together to enact significant legislation
impacting charities, including the JOBS bill, Tax Increase Prevention and Reconciliation Act,
and most importantly, the Pension Protection Act of 2006. Aside from legislating, Chairman
Thomas and I conducted oversight of certain types of charities. While I am sure there were
others, the two that I remember we shared a joint interest in were college athletics and taxexempt
hospitals. I think it’s fair to say that we believe in strengthening the charitable sector by
making charities more accountable for the significant tax breaks bestowed on them in the tax
code. So I am pleased to be here with him and all of you today to discuss my work in this area
so far and talk about some of things that continue to concern me.

Over a hundred years ago, Alexis de Tocqueville wrote about the unprecedented
influence of the nonprofit sector here in the United States. And I believe that the strength of the
sector remains unrivaled in the world even now. The generosity of private donors, whether they
are an individual, a corporation or charitable foundation, is also beyond comparison. This
generosity, and the belief that these donors can act more efficiently and effectively than
government, is what makes the independent sector here the envy of other nations. Just as we are
known the world over for our generosity and the strength of the charitable sector, we are also
known for expecting – and demanding – accountability, especially when it comes to government
intervention and expenditures.

I am probably best known among this group for my oversight of the IRS and charitable
organizations. But, throughout my career, I have conducted extensive oversight of other
government agencies and programs including the Departments of Health and Human Services,
Defense and Justice, the Food and Drug Administration, Federal Bureau of Investigations and
the Securities and Exchange Commission. I view it as my constitutional duty to conduct
oversight, regardless of who is in the White House or which party controls Congress. As a
legislator, I work to improve accountability in two ways. The first obviously is to legislate but
the other is to conduct oversight through hearings and investigations. When it comes to charities,
I have done both, but there is a lot left to do.

As Chairman of the Finance Committee, I started looking into charities and the tax laws
that govern them because I was concerned about the abuse of charities and charitable deductions.

I have learned much as a result. I learned that charities like supporting organizations and donor
advised funds were raking in a lot of money and engaging in self-dealing transactions. But they
weren’t subject to the same rules as private foundations. I learned that certain charities like credit
counseling organizations, hospitals, student loan organizations or veterans charities were acting
no differently from for-profit, commercial entities. In some cases, they existed solely for the
benefit of their founders. I learned that the boards of tax-exempt organizations like the Red
Cross, The Nature Conservancy, American University and The Smithsonian were not engaged in
setting strategic direction for the organization or were not actively monitoring conflicts of
interest or excessive compensation. I learned that charities desperate for sources of revenue
would facilitate tax shelter transactions or the abuse of charitable contribution deductions such as
vehicle donations. While the different legislation I mentioned earlier stopped many of these
abuses, charities themselves also implemented reforms on their own. I have asked many
questions and asked my staff to put out proposals for reform for discussion. As a result, there
has been unprecedented dialogue between the charitable sector and Congress. I personally have appreciated the work of the Panel on the Nonprofit Sector, spearheaded by Diana Aviv and Sister Carol Keehan at the Catholic Health Association. Both of these women avoided the chicken-little approach and engaged me in intelligent, thoughtful conversation about reforms. The reports from the Panel on the Nonprofit Sector guided Congress in determining what issues needed further attention before legislating. Similarly, Sister Carol’s input regarding hospital legislation convinced me to ask my staff to rework the legislative proposal on charitable hospitals.

Charities are an integral part of American society. They often step in to fill the void by providing
services that the government or the private sector does not provide. They are on the front lines
every day, in good times and in bad. They feed the hungry, shelter the homeless and provide care
for the most vulnerable in our society. While touring the flood-ravaged areas in Iowa last
summer, I saw firsthand how important local charities and volunteers were to the response and
recovery efforts. It reminded me that those closest to a problem are frequently those who know
best how to respond. We also saw this in the response to Katrina. The churches and other
community organizations there were able to provide food and shelter more quickly than FEMA
or the Red Cross. They probably could have done even more if they had the capacity or there
was a system in place for them to be accountable for taxpayer and government money.

The federal government acknowledges the important role that charities play in American
society by supporting the development and growth of this sector in many ways. The most
notable are the tax subsidies found in the tax code, including income tax-exemption for certain
organizations, deductions for contributions to charities, and tax-exemption for interest on bonds
issued by them. In addition, agencies, such as Health and Human Services and Housing and
Urban Development, not only partner with charitable organizations but also provide direct
financial assistance to them. We also have the Corporation for National and Community Service
which promotes community service through programs such as AmeriCorps and Senior Corps.
This significant federal government support of the sector is what drives me to continue asking
questions and to consider legislation.

This year marks the 40th anniversary of the enactment of the 1969 private foundation
rules. In these 40 years, we have seen explosive growth in charities and charitable giving. What
we haven’t seen, though, is the law, and the enforcement of the law, keep up with that growth.
In the 1960s, Congress was concerned that private foundations were not paying out enough.
Congress was also concerned that donors to them were using them for their own benefit or to
fund questionable investments, including family businesses.

However, since the 1969 Act passed, we have seen an explosion in other types of grantmaking
vehicles like supporting organizations, donor-advised funds, endowment funds, and
more recently, venture philanthropy funds. Since some of these walk and talk like private
foundations, it’s fair to ask why the private foundation rules shouldn’t apply to them. For
example, some are struggling because of poor investment decisions. Harvard’s investment in
illiquid private equity and hedge funds means they have to take out a loan or issue bonds to
increase liquidity. Those who invested with Madoff appear to have boards that may have looked
the other way in return for the promise of high earnings.

Both of these examples raise the question of why the jeopardy investment excise tax
should only apply to private foundations. On the other hand, some of the rules create perverse
incentives for private foundations to give out more money. For example, a large foundation that
decides it wants to continually fund a small charity may actually “tip” that charity into private
foundation status. Or, if it increases its payout, it may be subject to an increased excise tax on its
investment income a few years down the road. And for those foundations that view the 5 percent
threshold as a floor rather than a ceiling, there is no reward. They get treated the same as those
who treat the 5 percent as a ceiling and don’t pay out any more. It would seem that these are
unintended consequences of the 1969 rules. Discussing changes to these rules is timely since
many charities are struggling with liquidity during this economic crisis.

In contrast to Harvard’s endowment fund or those who invested with Madoff, many
charities are struggling with liquidity for other reasons. Credit lines are no longer accessible,
charitable donations and grants have decreased, or the state and local governments with which
they have contracts have not paid up. Congress was asked to consider some proposals in the
stimulus bill. But I wasn’t convinced they were the best solutions or would actually help
charities. The federal bridge loan fund proposal -- to help small charities that are not being paid
timely on their contracts with state and local governments -- is worthy of consideration.

However, it begs the question of why various grant-making entities and funds couldn’t pool their
resources to do the same thing or just increase their payouts. Maybe we should work toward a
law that mandates that states have to be timely in their payments. I filed an amendment to the
stimulus bill that required states to be current on their payments before accepting any federal
money from the F-MAP slush fund. Since all Republican amendments were being voted down, I
didn’t see the point in offering it. Contract fulfillment is not technically not in the Finance
Committee’s jurisdiction, but I’d like to find a way to help charities get the money they have
been promised.

As I just stated a few minutes ago, the proposal to simplify the private foundation excise
tax is also worthy of consideration but not necessarily as stimulus. Some foundations have
decided it’s the right thing to do to increase payout now and worry about the additional excise
tax later. That makes me wonder whether foundations that are lobbying for this rule change
would actually increase their giving if Congress were to enact it today.

There is also a proposal to loosen private rules and regulations to allow them to more
easily fund certain for-profit entities. There is very little information about these new entities,
known as low-profit, limited liability companies, or L3Cs. Neither the Finance Committee nor
the Ways and Means Committee has conducted any hearings about them. So I was a little
surprised that the loosening of the tax rules for them was proposed as a stimulus initiative. It’s
too early for us to consider this proposal.

Finally, the proposal to expand the IRA rollover provision to increase the amount and
allow individuals to roll over into donor-advised funds seemed more about assisting individuals
reduce their tax liability than assisting charities on the front lines. If we are trying to get more
money out to the charities and people in need, it’s hard to see how rolling over money into a fund
with no payout requirement gets money to where it can help the most.

The question of the effectiveness and efficiency of the tax breaks for giving to charity is
an important one. The President’s budget proposal to limit the deductibility of charitable
contributions for so-called wealthy individuals is shining a spotlight on this issue. Some argue
that such a limitation would not impact charitable giving. Others argue that it would. There is
agreement that the proposal is complex. I question the wisdom of providing any disincentives
for giving during this economic crisis. I’m sure we will all hear about this more as the Finance
Committee explores this and other budget proposals. At this point, it is not clear what, if any,
legislation regarding charities or charitable deductions will be enacted in this Congress.
However, as I mentioned earlier, legislation is only one tool in improving accountability.

In conducting oversight, I believe that sunshine is the best disinfectant. The more
information that is available to the public and to Congress, the better. So, I will continue to work
with Chairman Baucus to conduct hearings and I will continue to write to specific charities to
better understand their activities. I also expect my staff to continue drafting legislative proposals
and conduct roundtable conversations.

Finally, I will continue to press the Internal Revenue Service to improve reporting
requirements for charities, particularly for private foundations and colleges and universities and
to improve its enforcement efforts, including its compliance studies. Improving the
accountability of charities through increased transparency, whether through hearings,
investigations or reporting requirements, will instill greater confidence in the donors who fund
and support them. We must ensure that our long and successful tradition of philanthropy remains
the envy of the world. This has been the heart of my efforts over the last seven years and it is
what I will continue to push for. Thank you for your attention and I’d be happy to take
questions.

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