Overview

The nonprofit federal grant and procurement community is under increased pressure and scrutiny. On March 1, 2013, the federal government crossed the dreaded deadline for fiscal reductions known as the “sequester.” Ultimately, Congress and the President did not agree on a plan for avoiding mandatory spending cuts, thereby forcing across-the-board cuts to all federal agencies, totaling $85 billion. Without question, sequestration already has and will continue to have an adverse effect on nonprofits’ procurement and grant programs, as agencies determine which grants and contracts will be curtailed or terminated altogether. In addition to the sequester, Congress has begun to scrutinize certain nonprofit organizations exempt from federal income tax under Internal Revenue Code Section 501(c)(4).

Sequester’s Impact on Nonprofits

  • Direct Funding Impact – The most obvious impact of the sequester will be on federal funding. The Office of Management and Budget (“OMB”), in a March 1, 2013 report to Congress 1, explained that the sequester would require a “9 percent [reduction] for non-exempt nondefense programs” and “undermine nondefense investments vital to economic growth, threaten the safety and security of the American people, and cause severe harm to programs that benefit the middle class, seniors, and children.” This will no doubt have a significant negative impact on nonprofits’ ability to retain valuable staff and successfully accomplish their missions.
  • Additional Funding Losses – The impact of the sequester, however, goes far beyond the direct funding impact. In fact, the sequester will have several indirect impacts on nonprofits, including: 1) forcing the reallocation of contributions from other potential funding sources impacted by the sequester (e.g., state and local governments, other (particularly larger) nonprofit organizations, and corporate and individual donors); and 2) causing higher operational costs due to reduced federal government services. These indirect consequences will further strain nonprofits’ operating budgets.
  • A Less-Responsive Federal Workforce – Another, less-publicized, but important practical impact of the sequester may include a less-responsive federal workforce. An already slow response time from some grant and contracting officers is likely to become even slower when the majority of grant and contracting officers are subject to mandatory furloughs. These grant and contracting officers will retain the same workload, with less working hours to perform their work. Indeed, the workload for these government workers could actually increase because of the various claims that may arise from sequester-related terminations and reductions. As a result, nonprofits can expect longer processing times for the most basic services from their grant and contracting officers.

Scrutiny of 501(c)(4) Organizations

  • While not directly related to federal grant and procurement news, certain nonprofit organizations exempt from federal income tax under Section 501(c)(4) appear to be coming under increased scrutiny. For example, retiring U.S. Senator Carl Levin (D-MI) expressed concern over some 501(c)(4) nonprofits’ involvement in the election process: “[a] third item I want to tackle is a growing blight on our political system that I believe I can help address: the use of secret money to fund political campaigns.” Levin was further quoted in the New York Times expressing his view (incorrect according to most pratitioners) that the practice by certain 501(c)(4) organizations was “against the law...We’re going to go after them.” 2
  • Some state governments already are in the process of challenging the actions of nonprofits that were involved in the political process. For example, California currently is investigating the source of several million dollars that several nonprofit groups used to promote state ballot measures, while Montana recently ruled against a nonprofit that has aggressively fought state disclosure laws in Montana and Colorado.3 Other states have proposed rules that would require disclosure of donations to 501(c)(4)s active in the political process.4

Conclusion

While March did not bring good news on the federal government’s ongoing fiscal issues, some still hold out hope that the President and Congress will reach a deal to curb the across-the-board spending cuts of the sequester and avoid worker furloughs and other spending reductions. Unfortunately, as of the date of this publication, no deal has been reached and nonprofits should prepare themselves for this difficult new environment. As this matter develops, we will certainly provide updates.

Regarding the potential federal scrutiny of certain 501(c)(4) organizations, time will tell whether and to what degree Sen. Levin and others in Congress examine these organizations. But the IRS has already started an intensive, across-the-board look at this community, and all 501(c)(4) organizations engaged in political activity of any kind should take note and begin preparations for increased IRS and congressional scrutiny in the coming months.