Op-Ed: State's red tape is choking nonprofits

Op-Ed Published in Crain’s New York Business

By Eric T. Schneiderman

Think of a multibillion-dollar industry hamstrung by absurd, expensive, outdated rules, yet one that New York state relies on to address some of its most pressing needs. It's not financial services or health care. It's New York's vast network of nonprofit organizations, and reform is long overdue.

New York is home to many of the most effective, innovative and influential charities in the world. The state's nonprofit sector generates close to $200 billion in economic activity each year. In this difficult economy, nonprofits create jobs; they employ more than one in six New York workers, from scientists to social workers.

Yet we burden this industry with red tape. Just following state laws and regulations costs nonprofits up to 30% of their operating budgets. Other charities never get started, scared away by maddening bureaucratic barriers to entry. It's economically foolish and morally wrong.

We can do better. My office and leaders of the nonprofit community, working with state Sen. Mike Ranzenhofer and Assemblyman James Brennan, have proposed a package of reforms to reduce administrative burdens and improve accountability and governance. The Nonprofit Revitalization Act would free our charities to do more of what they do best.

In the age of electronic communication, current law requires charities to circulate a blizzard of paper notices and hold in-person board meetings. The act will let nonprofit boards use 21st-century technology like email and Skype to carry out their responsibilities, and let organizations e-file annual disclosures.

The act will also slash compliance and organizational costs. New York requires even relatively small charities to hire auditors to review their finances. That can eat up a staggering percentage of their budgets. Our reform exempts charities with revenues up to $500,000. Furthermore, it makes it simpler for nonprofits to merge, sell real estate and take other such measures without a court order.

Starting a New York nonprofit is so difficult that one prominent lawyer has joked that advising a client to incorporate here should qualify as malpractice. Many must get “preapproval” from one agency before filing incorporation papers with another. Applicants are rejected for typos and minor mistakes, forcing them into an expensive -merry-go-round of lawyers, resubmissions and delay.

For most nonprofits, our reform will eliminate preapproval. For all, applications will be dramatically simplified. And applicants will be allowed to let state agencies correct small errors on their behalf, rather than forcing them to start over.

The proposal also bolsters fraud prevention, curbing self-dealing and conflicts of interest, and protecting whistle-blowers. It gives my office tools to stop improper transactions and unwind insider deals.

New York owes a debt of gratitude to its charities for the profoundly important work they do for people and our economy. As models of service and innovation, they deserve a legal framework to match.