For-Profits Use Nonprofit Structure to Avoid Earmark Ban
In response to intense criticism of congressional earmarks, House Appropriations Chair David Obey (D-WI) announced a ban on all earmarks to for-profit organizations. These companies and their congressional patrons wasted little time in funneling earmarks to nonprofit organizations in order to circumvent the ban. Using nonprofits to circumvent the ban on earmarks raises questions about the practice itself, as well as the policy of ending all earmarks to for-profit corporations.
In March, the House Appropriations Committee announced that it will not approve requests for earmarks that are directed to for-profit entities, and agency Inspectors General will audit at least 5 percent of all earmarks directed to nonprofits to ensure for-profits are not masquerading as nonprofits. Additionally, the announcement detailed plans to create an online "one-stop" page containing all House members' earmark requests.
However, this ban has not stopped earmarks to for-profit companies. These companies have partnered with nonprofit organizations, many of which are controlled by the for-profit company that had previously received earmarks. In at least one case, the for-profit company spun off a tax-exempt nonprofit organization in order to continue receiving earmarks. In March, The Washington Post predicted this situation would occur, noting that earmarks would take the form of "cooperative ventures with nonprofits" to maintain the transfer of money to businesses.
The New York Times recently highlighted several examples of earmarks going to nonprofits serving as a pass-through to a for-profit company. In some cases, a member of Congress intervened to encourage the nonprofit to serve as a fiscal agent. In one case, according to the Times, the day after Obey's announcement, the vice president for marketing of a defense contracting firm, Imaging Systems Technology, created a nonprofit, the Great Lakes Research Center, that specializes in work similar to the for-profit company. (Notwithstanding the Times claim, the Center’s website says it was started in 2009, before Obey's announcement.) The Center’s executive director is the vice president for marketing at Imaging Systems Technology, and the address of the Center is the same as the for-profit company.
Subsequently, Rep. Marcy Kaptur (D-OH), a member of the Appropriations Committee, requested $10.4 million in new earmark requests for the Center. In the past four years, she was able to get $8.4 million sent to Imaging Systems Technology, which is based in her district. The Times notes that Kaptur has received campaign contributions from those working at Imaging Systems Technology, a family-owned company.
Kaptur, along with other members pushing earmarks to nonprofits, argue that they are not looking for ways to circumvent the ban. Instead, they have encouraged companies to form partnerships with universities, think tanks, and other nonprofits so that funding can continue for potentially breakthrough technologies that will yield jobs while providing tools for protecting the nation.
All told, the Times identified requests totaling $150 million that would indirectly benefit for-profit companies. In July, the Huffington Post Investigative Fund found 18 instances where seven members of the House Appropriations Committee "are seeking to keep alive previous earmarks to businesses by listing a university, research center or other nonprofit as the recipient this time around." These earmarks did not include the Kaptur provision mentioned by the Times. Coincidentally, three of the seven members mentioned in the Investigative Fund's report made their requests just after being cleared of ethics charges earlier in 2010.
In uncovering this information, the Investigative Fund and the Times seem to suggest unsavory activities are occurring. Yet it is not unusual for nonprofits and for-profits to partner. Moreover, if a member of Congress feels a piece of work is essential, it should not be surprising that he or she would encourage a for-profit company to partner with a nonprofit organization in order to be eligible for an earmark. The irony in forcing for-profits to partner with nonprofits is that these "partnerships" mean that less money is going toward the targeted purpose of the earmark, and more taxpayer dollars are flowing into overhead.
Moreover, as the Investigative Fund’s piece notes, efforts to ban earmarks to for-profit entities will do little to prevent earmarks as a whole, given that 90 percent already go to nonprofit institutions. Lawmakers will always look for ways to direct spending to their districts, or perhaps, help those who have offered campaign contributions. Open government advocates like OMB Watch say real reform would make the process more transparent and changes would be written into law, as opposed to being short-lived as committee-imposed rules.
The Earmark Transparency Act (H.R. 5258 and S. 3335) would allow the public to more easily take notice of the earmarking process. Currently, there is no comprehensive list of earmark requests, which makes it hard to find out which members of Congress are requesting earmarks for whom. In 2009, Congress required that members disclose their earmark requests online, but the information is not in one place. It is up to each member to post his or her earmarks on his or her own website.
Obey's March announcement included a promise to provide a "one-stop" link to all House members' earmark requests. It remains unclear how this will be executed. OMB Watch has signed onto a petition that calls on Congress and the Obama administration to make public all earmark information in one place. This data could be used to make the process more transparent.