October 26, 2012
Newly proposed legislation would close a loophole that allows publicly funded nonprofits to shield financial arrangements their executives have with private management companies.
Under the proposed amendment to the state’s procurement code, charities must disclose all “ownership interests, operating agreements, partnerships or other relationships” they have with for-profit entities.
State Rep. Greg Harris, D-Chicago, said he filed the legislation in response to a series of Tribune reports showing that pay rates for executives at 18 major state-funded nonprofits continued to rise at double the rate of the private sector in 2009 and 2010.
The stories also disclosed that an increasing number of charities were skirting public disclosure of what they pay their leaders by forming private, for-profit management companies through which salaries and benefits were paid.
Harris said he plans to amend the bill to make sure it specifically includes a requirement that nonprofits disclose what they pay their executives through for-profit arms.
“I think (the newspaper’s) reporting highlighted the fact that there were a lot of groups that were making money in ways we had not anticipated,” said Harris, who filed the bill this week.
One example the Tribune cited focused on Bridgeway Inc., a Galesburg organization that provides services to the physically and mentally disabled. Tax documents showed that CEO James Starnes’ compensation more than doubled over a four-year period, surpassing $428,000 in pay and benefits, the newspaper reported.
But last year, the tax forms revealed nothing about his compensation because the organization began paying his wages through a related for-profit company whose documents are not publicly available.
Despite the fact that Bridgeway Inc. and a host of related nonprofits depend on state funding for the bulk of their budgets, Starnes would not reveal what he is currently paid, saying his salary was private information.
Until now, efforts to deal with the practice have been limited.
In July, the Illinois Department of Human Services, which funds many nonprofit groups, began requiring all tax-exempt organizations that receive $250,000 or more from the agency to release pay data for all employees, including those paid through private companies.
Next year, the requirement will extend to any nonprofit that receives $25,000 or more in DHS funding.
Harris, who is the chairman of the House’s Human Services Committee, said his bill would extend a similar disclosure requirement to “the vast majority” of nonprofits receiving state funds or grants, regardless of the rules of the agencies that fund them.
Illinois disbursed more than $9.8 billion to nearly 6,000 nonprofit organizations in fiscal 2011.
The reforms are a step toward greater transparency, according to Daniel Borochoff, president of Chicago-based CharityWatch, which evaluates and rates nonprofit organizations. The group has long decried the lack of transparency for publicly funded nonprofit groups.
“If the industry wants to hide their salaries, then they ought to be a for-profit, not be tax-exempt,” Borochoff said. “If they want the privilege of tax exemption, part of the price they need to pay is disclosure of the compensation.”
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