Institutional Dissonance in the Nonprofit Sector

Our political and economic system contains three seemingly distinct sectors: public, proprietary, and nonprofit. This division masks serious issues of who should provide welfare services, schooling and health care; who should build infrastructure; who should control private wealth. The nonprofit law takes a laissez faire approach to permissible nonprofit activities, leading many to lament the increasing \u27commercialization\u27 of the nonprofit sector. However, an examination of historical as well as current activities engaged in by firms in all three sectors reveals that the basis terms of the social debate are eternal, while institutions dominant at different times and in different places resolved the sectoral debate in different ways. Rather than amend nonprofit corporate law to lock in \u27nonprofit\u27 activity, society might better target subsidies to desired services, provided either in the nonprofit or for profit sector

Entrance, Voice and Exit: The Constitutional Bounds of the Right of Association

Despite the central role of organized groups as intermediary bodies in American society, the constitutional right of association is surprisingly recent and limited. As the Supreme Court struggles to define the bounds of \u27the\u27 freedom of association, it is time to take a critical look at a difficult set of questions. First, many private organizations engage in various types of selection criteria, but what subjects the Jaycees to State anti-discrimination laws but insulates the Boy Scouts of America? Second, the typical American nonprofit organization is a corporation that lacks both shareholders and members, so are there any \u27associates\u27 whose rights are entitled to protection, or is the corporation\u27s freedom of speech all that constitutionally matters? Third, regardless of whether an organization comprises members, not all (few?) private entities operate \u27democratically\u27; does the law care? Finally, even if voice is democratic, how do we protect dissenters if exit is not voluntary? As we examine the structure for regulation of association and the role of the courts, we will appreciate the limits of the law in remedying private discriminatory and anti-democratic behavior. In general, the associational jurisprudence draws from our broader political structure that enshrines individual autonomy as its core norm. This Article does not, however, attempt to set out a normative prescription for creating political and moral values. For every advocate of group rights and group autonomy is an advocate of individual autonomy and protection from group tyranny. In the end, the debate leads me to caution that while we have a social and political obligation to exercise vigilance over how associations form and operate, we must recognize that our fundamental constitutional norms protect the rights of organizational autonomy in governance and functioning. The greatest challenge to a liberal society –a topic beyond the scope of this Article – will be whether and how to protect the rights of minority members of illiberal groups

Whose Public?: Parochialism and Paternalism in State Charity Law Enforcement

This piece was inspired by the increasing tendency of State attorneys general – backed up by courts and legislatures – to effectively confiscate the assets of wealthy nonprofits through overreaching enforcement actions. The article develops a legal framework for ascertaining the proper State role. It reviews many case studies including, most notoriously, the thwarted diversification of the Milton Hershey School Trust out of Hershey Foods Corporation (an investment worth over $5 billion) – thereby preserving the local operations of a publicly traded company. While few state attorneys general have the funding and inclination to engage in aggressive charity enforcement, the very lack of state involvement with the organization and operation of nonprofit entities might explain how legislatures, attorneys general, and even courts can misconstrue their proper roles in the regulation of charities and other nonprofits. Assets of nonprofit organizations are not governmental assets. Rather, a given nonprofit serves the indefinite class of beneficiaries chosen by its creators, funders, governing board, and, in some cases, members – but not by the local community, the state, or any other public that constitutes the constituents of an attorney general, a legislature, or a judge. Inevitably, if the proper legal bounds of legitimate enforcement do not become clearer, the role of charities in society could suffer. Charities facing state attorney general inquiry worry about loss of donations, loss of contracts and patronage, and retention of staff and volunteers. If, though, charities too quickly accede to state demands over matters of discretionary governance, the sector as a whole can see a degradation in charities\u27 willingness to take risks, and in volunteer board members\u27 willingness to serve

Charitable Endowments and the Democratization of Dynasty

Charitable endowments and other passive investments exceed $425 billion. Why do many donors require that the principal of their contribution must be held in perpetuity, and that only the income may be used for charitable purposes? Why do most charity managers voluntarily accumulate operating surpluses, and reinvest a portion of real endowment income? This Article suggests that rather than looking at how charities use their endowment income, we should focus on what happens to the endowment principal. It appears that the taste for perpetual charitable endowments persists as the happy co-incidence of donors\u27 desire for immortality for themselves and their cultural beliefs, the professional staff\u27s desire for employment and authority, and society\u27s (apparent) desire for narrowly controlled investment capital. To explain charitable endowments, however, is not to justify them. If society views these as wasteful, it can reduce subsidies to them. Moreover, society might better direct subsidies to any provider of public goods, regardless of the organizational form of the provider

Hocking the Halo: Implications of the Charities\u27 Winning Briefs in Camps Newfound/Owatonna, Inc.

In Camps Newfound/Owatonna, the petitioner charity – with important assistance from friends-of-the-court charities – persuaded the Supreme Court to overturn a Maine statute that granted property tax exemption only to those charities primarily serving state residents. Camps Newfound/Owatonna, Inc. v. Town of Harrison, 117 S. Ct. 1590 (1997). Given this statute\u27s facial discrimination, why was victory a 5-4 squeaker? The charities naturally reasoned that coming within the Commerce Clause requires proving that charities engage in commerce (particularly interstate commerce). In their focus on the financial impact of the discriminatory statute, however, the charities never offered a positive construct of property-tax exemption that ignores the residency of the charity\u27s beneficiaries. The charities\u27 omission left them vulnerable to an attractive articulation of property-tax exemption, whose very definition limit-ed exemption to charities serving state residents. The charities might have achieved a short-run tactical victory at the cost of their long-term strategic interests. Once they decided to participate in the Camps Newfound litigation, the amici charities had no choice but to cast their activity in as commercial a form as possible. Dropping the pretense that charity is not \u27big business\u27 might simply declare what all could see if they would only look. However, the strategy of the charities in Camps Newfound might encourage society to rethink its favorable view of the charitable sector. The Supreme Court suggested that the Constitution would not prevent a state from repealing charitable tax exemptions and using state resources instead to pay direct subsidies to residents. As improbable as this result sounds, the very argument made by the charities in Camps Newfound that the charitable sector engages in commerce \u27just like the big boys\u27 jeopardizes the special protected view of charities, making society more willing to reconsider public subsidies long taken for granted by charities

Charitable Endowments and the Democratization of Dynasty

Charitable endowments and other passive investments exceed $425 billion. Why do many donors require that the principal of their contribution must be held in perpetuity, and that only the income may be used for charitable purposes? Why do most charity managers voluntarily accumulate operating surpluses, and reinvest a portion of real endowment income? This Article suggests that rather than looking at how charities use their endowment income, we should focus on what happens to the endowment principal. It appears that the taste for perpetual charitable endowments persists as the happy co-incidence of donors\u27 desire for immortality for themselves and their cultural beliefs, the professional staff\u27s desire for employment and authority, and society\u27s (apparent) desire for narrowly controlled investment capital. To explain charitable endowments, however, is not to justify them. If society views these as wasteful, it can reduce subsidies to them. Moreover, society might better direct subsidies to any provider of public goods, regardless of the organizational form of the provider

Entrance, Voice and Exit: The Constitutional Bounds of the Right of Association

Despite the central role of organized groups as intermediary bodies in American society, the constitutional right of association is surprisingly recent and limited. As the Supreme Court struggles to define the bounds of \u27the\u27 freedom of association, it is time to take a critical look at a difficult set of questions. First, many private organizations engage in various types of selection criteria, but what subjects the Jaycees to State anti-discrimination laws but insulates the Boy Scouts of America? Second, the typical American nonprofit organization is a corporation that lacks both shareholders and members, so are there any \u27associates\u27 whose rights are entitled to protection, or is the corporation\u27s freedom of speech all that constitutionally matters? Third, regardless of whether an organization comprises members, not all (few?) private entities operate \u27democratically\u27; does the law care? Finally, even if voice is democratic, how do we protect dissenters if exit is not voluntary? As we examine the structure for regulation of association and the role of the courts, we will appreciate the limits of the law in remedying private discriminatory and anti-democratic behavior. In general, the associational jurisprudence draws from our broader political structure that enshrines individual autonomy as its core norm. This Article does not, however, attempt to set out a normative prescription for creating political and moral values. For every advocate of group rights and group autonomy is an advocate of individual autonomy and protection from group tyranny. In the end, the debate leads me to caution that while we have a social and political obligation to exercise vigilance over how associations form and operate, we must recognize that our fundamental constitutional norms protect the rights of organizational autonomy in governance and functioning. The greatest challenge to a liberal society –a topic beyond the scope of this Article – will be whether and how to protect the rights of minority members of illiberal groups