Testimony to the Minnesota House of Representatives, February 9, 2005

by Jon pratt, MCN Executive Director

The Minnesota Council of Nonprofits opposes House File 593, which singles out nonprofit employers with a salary limitation.

The Council produces the Minnesota Nonprofit Economy Report every fall, and sponsors the Minnesota Nonprofit Salary and Benefits Survey to provide timely and reliable information to nonprofit employers as they set salaries and employee benefits.

Minnesota is a great state for charitable and nonprofit activity – we are at or near the top of virtually every U.S. measure of giving, volunteering and participating in community organizations.

• 4,700 nonprofit organizations

• 251,000 employees

• 9.8% of the workforce

Minnesota nonprofits have a regional and national presence, and are a net generator of dollars to the state, attracting students, theatre goers, foundation grants, and federal dollars to the state.

The irony of this proposal is that the true compensation issue in the nonprofit sector is low compensation.

The Minnesota Nonprofit Economy Report for 2004 again showed that there is a persistent and substantial wage gap between nonprofits and other workers in the economy - 12% less than the average weekly business wage, and 9% less than the average weekly government wage.  MCN’s Minnesota 2004 Nonprofit Salary and Benefit Survey shows that the executive director compensation in Minnesota is $72,259. 

Minnesota is recognized throughout the US as a leader for its highly innovative and effective organizations – and is a target destination for international visitors wanting to learn about the U.S. nonprofit sector.

With the fall of the Berlin Wall and the demise of the Soviet Union, there is a Worldwide concensus that a successful democracy with a market economy needs a strong nonprofit or Non-Governmental Organizations.

Nonprofit organizations, even though their revenue streams can include charitable donations, in kind contributions and volunteer labor, and while they don’t have shareholders and don’t distribute profits, they still exist in the market economy.

One of the frustrations of market economies is that they result in price differences based on scarcity – and labor mobility allows employees to freely change employers.  The same labor market exists for nonprofit organizations.

(Of course, the alternatives to a market economy have their own problems – and intervening in a market economy with selective price controls creates a further set of problems – especially if it only applies to one part of the market – such as a single state, such as Minnesota , or one type of employer – such as nonprofit employers.

• As a practical matter, nonprofit Salaries are also set in the Marketplace --  Nonprofits compete in a labor market for the best talent they can get.

• These organizations are also highly regulated to insure that they are transparent and accountable to the public, with parallel oversight by the Internal Revenue Service and the Attorney General.

• Federal law sets out how nonprofit organizations are to set compensation and report it to the public

• IRS Form 990 is open to public inspection – charitable organizations IRS Form 990 tax return is available on the Internet at Guidestar.org, with salaries of top five employees as well as all officers and directors.  These same salaries are at the Minnesota Attorney General’s web site.

• To set salaries, the IRS set out guidelines to implement the  Intermediate Sactions legislation passed by Congress in 1996.

Federal law prohibits the provision of unreasonable compensation (including all cash and non-cash remuneration and benefits) by 501(c)(3) and 501(c)(4) nonprofit organizations. Legislation passed by Congress in 1996 and IRS regulations finalized in 2002 established “intermediate sanctions,” which include fines against board members and nonprofit managers, for excessive compensation violations. The principal enforcement priority is directed at employees paid over $80,000 per year and sets out practices for the setting of reasonable compensation.

1. The compensation is approved by members of the organization’s governing body (usually the board of directors), free of participation by any parties who have a conflict of interest with respect to the “disqualified person”;

2. The governing body obtained and relied upon appropriate data as to comparability or fair market value with respect to the services being provided; and

3. The governing body adequately and contemporaneously documented the reasons for its decision in setting the level of compensation.

IRS regulations state that appropriate data includes, but is not limited to, compensation paid by similarly situated organizations, both taxable and tax-exempt, for functionally comparable positions; the availability of similar services in the geographic area of the applicable tax-exempt organization; current compensation surveys compiled by independent firms; and actual written offers from similar organizations competing for the services of the disqualified person.

Grants and Contract Administration

For organizations signing state contracts there is an additional important level of review, the Grants and contract administration – with extensive oversight prior to signing of any agreement.  With any state funding there is a system of review and contract conditions.  Concerns about effective use of funds would be better addressed in that process – which shows how much the state gains from its relationship with nonprofit organizations.

The state gets a valuable bargain by leveraging more money when it contracts with nonprofits – more funds are applied to serving public needs because these organizations mobilize volunteers, charitable contributions and in kind donations alongside state dollars – making them go further.

By second guessing the boards of nonprofit organizations competing for talent in high demand occupations, this bill would spoil some of the most effective partnerships state government has with the citizens of the state.

The Council of Nonprofits supports rigorous enforcement of laws that make nonprofit organizations transparent, open, honest and accountable, prohibiting excess compensation, mandating audits, and preventing fraud. 

House File 593, however, will put Minnesota at a disadvantage, and by selecting out one subset of employers, do positive harm to what has been a Minnesota success story.

Learn how to manage your organization's risk.
More about the Nonprofit Risk Management Center
View the Top 10 Signs Your Nonprofit Needs to Start Doing Something about Risk Management