Nonprofits fight to roll back ethics law

Kevin P. Coughlin/Office of Governor Andrew M. Cuomo

A lawsuit filed March 6 by the Nonprofit Coordinating Committee of New York and the Lawyers Alliance for New York is the latest challenge to a state ethics proposal, signed into law by Gov. Andrew Cuomo in August, that requires some nonprofits who aid groups engaged in lobbying to disclose the identities of their donors.

Under Executive Law 172-e, when a 501(c)(3) makes a direct financial contribution or an in-kind donation, such as staff time or office space, that totals more than $2,500 to a 501(c)(4) engaged in significant lobbying efforts, disclosure regulations come into play. The 501(c)(3) must then report the name of anyone who donated more than $2,500 to their organization to the Department of Law, which forwards the report to the Joint Commission on Public Ethics for publishing on its website.

501(c)(3) nonprofits are granted tax exemptions for charitable purposes, are limited in the amount of political lobbying they can participate in and are forbidden from existing for the benefit of private interests. 501(c)(4) organizations may lobby as their primary activity without jeopardizing their tax-exempt status. Funds in their care are sometimes referred to as “dark money” because 501(c)(4)s can receive unlimited contributions without making the source of these donations public.

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Tamping down on public corruption and dark money would seem to be a mission shared by social services and political nonprofits. But opponents say that while well-intentioned, the law’s disclosure requirements are overly broad and could unintentionally create a chilling effect on donors who prefer to give anonymously while creating more burdensome reporting requirements for nonprofits.

Sharon Stapel

“At the end of the day this is about how people donate money to nonprofits in New York state,” said Sharon Stapel (left), president and executive director of the Nonprofit Coordinating Committee of New York.

The lawsuit by the Lawyers Alliance and NPCC joins similar challenges filed last December by the American Civil Liberties Union and the Citizens Union. Unlike those challenges – brought by 501(c)(4)s – this newest challenge is being brought by two 501(c)(3)s.

All allege the new law violates their First Amendment right to free expression.

Stapel said the litigants had little problem with the government mandating the disclosure of political speech for 501(c)(4)’s – so long as it constitutes a “reasonable and legitimate interest” of the state – but it seems unjustifiable to tell nonpolitical nonprofits to disclose their donors when there’s such a tangential connection to political activity.

The disclosure requirements are tied to a series of ethics reforms which developed following high-profile scandals in Albany, most notably those leading to the convictions of the leaders of the state Senate and Assembly and the indictment of a key aide to Cuomo. When arguing in support of the laws, legislators cited the U.S. Supreme Court’s 2010 Citizens United decision, which cleared a path for much looser regulation of campaign spending. “Through enhanced enforcement and increased penalties for political consultants who flout the law, this new legislation will root out bad actors and shine a spotlight on the sordid influence of dark money in politics,” Cuomo said in a statement at the time.

“When people donate their money to nonpolitical organizations, they have the right to do that in any way they’d like, whether they want a ticker tape parade or whether they want to remain anonymous.”

NPCC, a resource organization with nearly 1,500 members across the New York City area, and the Lawyers Alliance hope the law is struck down; it has already changed nonprofits’ behavior. In one example cited in the joint legal filing, an unnamed community foundation that is a member of NPCC, suspended their grants to a 501(c)(4) so as not to be required to disclose its donors.

In addition, Lawyers Alliance, which helps nonprofits with legal issues such as leases, incorporation documents, contracts and governance, has begun limiting themselves to providing 501(c)(4) clients under $2,500 worth of services, according to their senior policy counsel Laura Abel. It would take just one qualifying interaction to require the Lawyer’s Alliance to reveal all of its largest donors.

“We’re not aware of any other law like this in the country,” she said.

Though both types of groups are nonprofits, they operate under different rules. Under the Internal Revenue Service tax code, 501(c)(3)s encompass organizations with religious, charitable, humanitarian, educational and other purposes. Donations are tax deductible and government lobbying is restricted. By contrast, 501(c)(4)s, which can include everything from local homeowners associations to sprawling political action groups, are often formed specifically to lobby government on behalf of the causes that fall within their scope.

“These sweeping provisions go far beyond electoral transparency and accountability; instead, they impermissibly burden the everyday, citizen-to-citizen dialogue at the heart of (the) First Amendment,” the 501(c)(4) Citizens Union’s filing states. And the changes were unexpected. The bills were introduced by state Senate Majority Leader John Flanagan and Assembly Speaker Carl Heastie on June 17, 2016 and voted on the very same day under a legislative loophole that can speed votes on measures that may otherwise require days of deliberation, the Lawyers Alliance said.

“Nobody in the nonprofit sector knew this was coming,” Abel said.

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The restrictions affect 501(c)(4)s that spend more than 3 percent of their expenditures and $15,000 a year on lobbying. The legislative package also had other wide-ranging consequences for such groups that included lowering the threshold for political action committees to disclose their donors, requiring more regulation of 501(c)(4)s communications and installing new requirements for independent expenditure committees.

In the era of super PACs, the Citizens United ruling and pay-to-play allegations up and down the state, there was pressure to enact significant ethics reforms.

Progressive groups urged the government to crack down on the flood of unchecked money flowing into races on behalf of candidates, saying that it allows wealthy or connected donors to unduly influence politicians and elections.

But people generally give to nonprofits for less suspicious reasons.

“(There) are as many different reasons that donors would want to be anonymous as there are anonymous donors,” Stapel said. Reasons can include privacy, donors not wanting their network to know about their wealth and donors not wanting employers, friends or family members to know about their support for a particular cause.

“The bigger thread here is that we as a society – both in New York state and in the United States – have decided that when people donate their money to nonpolitical organizations, they have the right to do that in any way they’d like, whether they want a ticker tape parade or whether they want to remain anonymous,” Stapel said.

In fact, the privacy precedent dates back to 1958, when the U.S. Supreme Court ruled in NAACP v. Alabama that if the state forced advocacy organizations to disclose their members it could lead to those supporters being attacked. The recent ACLU lawsuit raised the threat of danger to its members while challenging the ethics law, saying the group had received a direct message on Facebook threatening the organization.

Adding to the uncertainty are questions of how far back the enforcement would stretch – if the legislation is upheld. The first reporting period ended in December and the next reporting period ends in June, though the state Attorney General’s office indicated it wouldn’t hold nonprofits to the law until litigation is wrapped up, according to the New York Civil Liberties Union.

A spokeswoman for the state Attorney General’s office said it was reviewing the most recent filing, but couldn’t comment on any details surrounding the rule.

The court consolidated the case with the New York Civil Liberties Union and Citizens Union cases being heard by U.S. District Court Judge Richard M. Berman.

A preliminary court hearing was held March 16.

The governor’s office did not return an email seeking comment.

This article originally appeared on New York Nonprofit Media.