Pending Oregon Legislation Raises Debate Over Administrative Cost Ratios

May 12, 2011 | By Liza Casabona | Post a Comment

The state legislature in Oregon is currently deliberating a bill that raises some interesting questions for nonprofits and charitable organizations. If enacted, the Oregon bill, would establish an administrative cost ratio for charitable organizations that requires them to spend at least 30 percent every year on program services (averaged over a three-year period).

Under the proposed law, if an organization failed to do so, the state attorney general would have the power to take away the tax-deductible status of donations made to the organization. The law already passed the state Senate and the state House referred it to committee last month.

The Association of Fundraising Professionals recently issued a statement opposing the law as it is currently written, arguing that government discrimination against charitable organizations based on spending formulas is unconstitutional, according to a previous Supreme Court ruling.

But aside from the legal and logistical questions raised by the bill, it begs a host of more philosophical questions about how organizations spend their money, not least of which is whether 30 percent is an unreasonable amount to expect an organization to dedicate to program services. How do organizations spend their money if not on program services? And how essential are those functions that aren’t strictly speaking considered “program services”?

In all likelihood, this is neither the first nor last legislative look at this issue, and I would wager that it’s been the topic of more than a few dinner conversations or good-natured debates. At least one recently published book about international aid questioned the use of a model that favors bureaucratic, international agencies and organizations that may spend as much or more on administrative costs as they do on actual assistance for their target audience.

AFP has already drawn their line in the sand opposing the law because, “a potentially arbitrary administrative cost threshold overlooks more important aspects of nonprofits, including their mission, and ignores the fact that some highly effective nonprofits, particularly very small nonprofits, may have high administrative costs. Furthermore, some charitable organizations that support necessary, yet unpopular missions may have higher administrative costs due to the additional challenges they may face.”

What do you think? Would this kind of law impact your organization? Is 30 percent a reasonable amount to require groups to spend on services? Is an arbitrary administrative cost ratio too simplistic for the charitable/nonprofit universe?

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