Allocating State Authority Over Charitable Nonprofit Organizations

Abstract

This essay considers the allocation of state authority to enforce the legal obligations particular to charities and their leaders among state officials, including attorneys general, judges, and legislators, and private parties. It first describes the existing allocation. It then reviews the most common criticisms of this allocation, which primarily focus on two concerns: politicization and lack of sufficient enforcement. Finally, it evaluates the most notable proposals for re-allocating this authority, including reallocation of this authority in part to private parties.

This essay conclude that reform proposals have two fundamental flaws. First, proposals aimed at countering the political nature of state attorney general decisions fail to consider both the advantages of that nature and the existing restraints placed on it by state courts and resource limitations. Second, proposals aimed at addressing the admittedly low level of oversight provided by state attorneys general assume that there is significant undiscovered malfeasance at charities, the countering of which would justify the burdens these proposals would place on all charities, even though empirical data supporting this assumption are lacking.

That said, this essay supports more modest reforms. These are: requiring all attorney general negotiated settlements to be submitted to state courts for approval, permitting derivative suits by current fiduciaries, as is the law in most states, and by a significant proportion of members, as is the law in some states, and modestly expanding donor standing to allow substantial donors (but not their successors or heirs) to enforce explicit written terms on substantial gifts. These reforms would strengthen existing state oversight while being unlikely to significantly burden most charities.

Keywords: charity, nonprofit, attorney general, relator, donor, standing

JEL Classification: K29, L31