California’s Nonprofit Integrity Bill Signed Into Law
Gov. Arnold Schwarzenegger signed the “Nonprofit Integrity Bill” into law on Sept. 30, 2004. The new law, which becomes effective Jan. 1, 2005, creates significant new challenges for California nonprofit organizations. Sponsored by California Attorney General Bill Lockyer, the legislation is intended to increase donor confidence by enhancing the financial accountability of charities and ensuring that a larger share of the funds collected by professional fundraisers will go to charity. Critics, on the other hand, maintain the new law will merely increase expenses and administrative burdens on the organizations that must comply with it.
The new law affects over 85,000 nonprofit charitable corporations and charitable trusts currently registered with the Attorney General’s Registry of Charitable Trusts and subject to the Attorney General’s supervisory and enforcement powers. It also extends those powers to unincorporated associations. By amending the existing filing, registration, and reporting requirements for nonprofits, as well as the rules governing charitable solicitations, the new law requires many California nonprofit organizations to make fundamental changes to their internal operations. Most notably, the new law requires all charitable organizations that are required to register with the Attorney General and that receive or accrue gross revenue of $2 million or more in a fiscal year to obtain an independent financial audit for that year. While this threshold is significantly higher than the $500,000 minimum proposed in the original draft of the bill, the audit requirement will nevertheless have a significant impact on a large number of organizations.
The new law does not alter the existing exemption from registration, filing and reporting with the Attorney General’s office for religious corporations and other organizations that hold property for religious purposes, and any charitable corporation organized and operated primarily as a religious organization, educational institution, hospital or Knox-Keene licensed health care service plan. The new law helpfully extends the exemption to cover unincorporated associations organized and operated primarily for such purposes.
The new law makes the following significant changes for charitable corporations, unincorporated associations and trustees:
- Applicability. Unincorporated associations must now comply with registration, filing, and periodic reporting requirements, and are subject to the Attorney General’s supervisory and enforcement powers. These rules previously applied only to charitable corporations and trustees.
- Timing to File. The new law significantly shortens the time period during which an organization must register with the Attorney General after receiving any property for charitable purposes from within six months of receipt to within 30 days of receipt.
- Audit Requirement. Every charitable corporation, unincorporated association, and trustee not exempt from the registration, filing, and reporting requirements, that receives or accrues $2 million in gross revenue in the fiscal year must file annual, audited financial statements for the year with the Attorney General and make them available to the public. Even if the entity takes in less than $2 million, disclosure to the Attorney General and the general public is required if the entity chooses to have its financial statements audited.
- Audit Committee. Charitable corporations subject to the audit requirement must appoint an audit committee, which must be separate from any finance committee and is responsible for recommending to the board of directors an independent, certified public accountant to perform the audit, reviewing the accountant’s findings, and determining whether to accept the audit.
- Compensation Review. The compensation of any president or chief executive officer and any treasurer or chief financial officer of a charitable corporation, unincorporated association or charitable trust must be reviewed and approved by the organization’s board of directors, or an authorized committee of the board, to ensure that it is just and reasonable.
- Fundraising Contracts. A charitable organization must enter into a written contract for each fundraising campaign or event for which it hires a professional fundraiser. The contract must contain provisions that are specifically required by the Attorney General, according to the category the professional falls within. For example, if the contract is with a commercial fundraiser, for a fixed fee, it must identify not only the amount of the fundraiser’s fee, but also a good-faith estimate of the percentage of contributions that the fee represents and the assumptions upon which that estimate is based.
All contracts with professional fundraisers must provide for the charitable organization’s right to cancel, without penalty, for 10 days following execution. The charitable organization is also required to notify the Attorney General of any such cancellation. All contracts must further provide for the charitable organization’s right to terminate for cause, at any time, or without cause, with 30 days’ written notice. A charitable organization may also void its contract for a fundraiser’s failure to satisfy registration requirements with the Attorney General before soliciting any funds.
- Solicitations. The new law prohibits any misrepresentation of a charitable organization’s purpose, its nature, or its beneficiaries. Certain conduct is specifically prohibited in connection with a solicitation or charitable promotion. For example, falsely characterizing goods or services as having the endorsement or sponsorship of a particular person, without his or her written consent, or using the mere fact of registration with the Registry of Charitable Trusts to imply an endorsement of or approval by the Attorney General, is prohibited.