Nonprofits use creativity, resolve to weather COVID-19 shortages

A recent study by the Nonprofit Finance Fund found that COVID-19 is expected to leave deep and lasting impacts on nonprofit organizations around the nation.

Nonprofit respondents indicated they were expecting significant changes in demand for services, reduced staff capacity, and conditions that threaten their long-term financial stability.

According to a similar study conducted by the Center for Social Innovation at UC Riverside in early April, many organizations are in a “triply challenging position, navigating increased demand for the services they provide and the addition of new services, while at the same time facing the prospect of declines in revenues from charity events and managing many staff now working from home.”

The report also noted that many nonprofits have severely cut back staffing and the services they provide. One survey respondent anticipated “a reduction in funding by as much at 75% before June 2020, as funding from schools and government will be cut.”

But, despite the serious financial challenges facing local nonprofit leaders, their resolve to continue responding to clients’ needs during this time has not wavered.  After all, it is in the DNA of nonprofits to step up when others step back. The need to expand services is not foreign to nonprofits during times when demands increase and revenues decrease.

In March, Santa Ana-based Think Together recognized that parents of students in their learning center had lost their jobs, so they pivoted from traditional afterschool programs to help families cover groceries and basic essentials.

“We’re also partnering with school districts and educational leaders to narrow the digital divide and bring innovative school programs across the state,” said Randy Barth, Think Together’s founder and CEO.

Throughout Southern California, nonprofits are adapting their services to balance keeping employees, volunteers and clients safe while continuing to meet increased demand.

While most residents are sheltering at home, nonprofits are on the frontlines ensuring the safety and well-being of our communities’ most at-risk – while donning masks and gloves and struggling to maintain social distancing.

Food banks are working double-time to distribute food to vulnerable individuals, hospitals are shifting practices and engaging the community to provide protective gear and quality health care, and housing organizations are moving people off the streets.

“If there are any lessons to be learned from the COVID-19 crisis, it is that home equals safety,” said Anne Miskey, CEO for Union Station Homeless Services in Pasadena. “During this time, we are working to ensure those who are experiencing homelessness have what they need to remain safe, including meals, shelter and medical care.”

But nonprofits are inherently integrated with the community, and their work is often dependent on the generosity and cooperation of many partners. Companies, churches, and government entities are working together to respond to the unprecedented needs brought by COVID-19.

Corporate foundations are loosening restrictions and pledging increased donations to assist with relief efforts, individuals are stepping into new virtual volunteer roles, and churches are engaging their members to give back during this time.

Some organizations have been able to capture limited relief from the Paycheck Protection Plan, and federal tax stimulus payments have been helpful to individuals who have lost hours or jobs during this time.

But the needs continue to be great and the question remains how deeply COVID-19 will impact nonprofits and their services over the coming months and years.

“Nonprofits are the unsung heroes in our communities, working tirelessly behind the scenes to ensure families have stable homes, children are educated and safe, and seniors receive food and health care,” said Vici Nagel, CEO for the Academy for Grassroots Organizations. “I hope others will pray for these heroes every day, continue your usual giving as best you can, and consider giving even more if possible.  When this crisis leaves us, we are going to need these unsung heroes to help our communities get back on their feet.”

Gregory Bradbard is an advocate for breaking the cycle of poverty as president of the SoCal-based Hope Through Housing Foundation, HTHF.org.

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Nonprofit boards and your personal liability

In our last two columns you’ve read about some of the responsibilities of a director on a nonprofit’s board. You may now be thinking, “But why? I’m a volunteer!”

And so enters the lawyer to tell you why in two words: personal liability.

When is a board member liable?

While a board member is a volunteer and afforded substantial protection by law, when duties to the organization are violated (whether through acts or omissions), when certain taxes aren’t paid (notably, payroll taxes), or when a board member engages in self-dealing transactions with the organization or allows others to do so, personal liability may arise.

What are their legal duties?

A nonprofit board member, sometimes called a “trustee,” is a fiduciary — a person who must act for the benefit of another. In this case, a board member is charged with acting for the benefit of the public. It is a serious duty, and a breach of the duties can result in both personal liability and the loss of the entity’s tax exemption.

So what are those duties? In general, a board member owes the duties of care and loyalty.

The duty of care

The duty of care requires the following:

  • Exercising proper business judgment based on the best interest of the organization (not its board members and certainly not yourself)
  • Being properly informed on all matters voted on, and attending the meetings
  • Appropriate information flow in and out (you’re obtaining all information you need to make an informed decision), and you’re not disclosing confidential information to anyone
  • Following the organization’s Articles of Incorporation and Bylaws

A board member who violates their duty of care (for example, does not attend meetings, or ask questions about matters they don’t understand, or who, through inaction, allows a behavior detrimental to the organization to continue) can be held personally liable for any damage that occurs. There is a California case where a board, because they couldn’t agree on which investment adviser to hire, allowed a multi-million-dollar gift to sit in a non-interest checking account for two years. This caused the organization to lose significant income, and the board members were held personally liable for that. And, they were removed from the board by the Attorney General.

The duty of loyalty

This requires a board member’s faithful pursuit of the interests of the organization they serve and not the financial or other interests of the director or another person or organization. California law prohibits self-dealing transactions between board members and non-profits.

Serious fines can be imposed against the organization and board members if a transaction is entered into between the organization and an interested director, without steps taken to assure that the corporation did it for its own benefit in a fair and reasonable way that was approved in good faith by a majority of directors then in office (not just those at the meeting where the vote is taken), Did they know material facts? And, prior to approval, did the board consider and determine in good faith after reasonable investigation that they could not have obtained a better deal elsewhere?

Say, for example, the organization needs to paint its building. Director Dave is a long-term board member who happens to own a painting business. Dave offers to paint the building for $X and get it done in the next 48 hours. Board members cannot simply decide Dave is a good guy and deserves some business in return for his years of service, plus, he’s willing to do it quickly so why bother looking elsewhere.

No, the board needs to get bids from other painters and make sure that Dave’s price and quality is the best deal. Does the building need to be painted quickly or does that just to suit Dave’s schedule? Is the price fair? Is Dave properly licensed and bonded?

In other words, board members need to do the same due diligence they would for their selves. If they don’t, they could be liable for the funds lost by the organization. And abstaining from the vote won’t help you — if you don’t feel the board has done its due diligence, you will only be spared personal liability by voting “No.”

The IRS wants a word, too

Board members can also encounter unexpected tax liabilities. The IRS has its own rules against self-dealing (or what it calls “Excess Benefit Transactions”). If a “disqualified person” (someone who in the previous five years was in a position of influence over the organization, such as major donors, board members and executive staff) engages in a transaction with the organization that was to the benefit of the disqualified person, the IRS can exert a penalty against not just the disqualified person, but the entire board, for as much as 200% of the amount of the transaction. If Director Dave had been paid more than the going rate for his painting services, he and the board could face these penalties.

And finally, perhaps most shockingly, board members can be held personally liable for the unpaid payroll tax liabilities of the organization. If payroll taxes are not paid, the IRS will look to all responsible parties — the CEO, the CFO, and often board members — to recover the taxes. This is a very good reason for checks and balances for non-profit financial matters and regular audits.

Emphasis on service

It’s a privilege to serve on a non-profit board. First and foremost it’s a service to the community. To perform that service, always look out for the organization first. And. you should also be certain the organization carries Directors & Officers Liability insurance. It’s the smart thing to do.

Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I).” You can reach her at Teresa@trlawgroup.net

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