Full text of OMB Watch comments to the Department of Housing and Urban Development on proposed rules governing federal grant rules for religious organizations receiving funds under HOME Investment Partnerships, Community Development Block Grants, Hope for Homeownership of Single Family Homes, Housing Opportunities for People With AIDS, Emergency Shelter Grants, Shelter Plus Care, Supportive Housing and Youthbuild. For background information see see our summary of the proposed rules. February 18, 2003 Office of the Rules Docket Clerk Office of General Counsel Room 10276 Department of Housing and Urban Development 451 7th Street SW Washington, D.C. 20410-0500 Re: Proposed Rule, Participation in HUD Programs; Providing for Equal Treatment of All HUD Program Participants; Doc. No. FR-4782-P-01; FR Doc. 03-133; RIN 2501-AC89 Dear Sir or Madam, OMB Watch, a nonprofit organization that promotes government accountability and civic participation, is submitting comments on proposed charitable choice regulations because of our long standing interest in the partnership between nonprofits and government in providing services to people in need. We support the administration’s goal of creating a level playing field in competition for federal grants. But we are opposed to preferences for faith-based organizations over secular organizations, discrimination based on religion and rules that do not address the needs of grassroots, community based organizations. Our work in the area of government grant rules goes back to 1983, when OMB Watch was formed. Since then we have provided technical assistance on this subject to thousands of nonprofits in the form of workshops, speeches, publications and telephone and e-mail communications. In our work promoting civic participation in the nonprofit sector, we have actively defended the right of nonprofits to advocate on the issues of the day, and assisted many nonprofits with separating their advocacy work from government funded social service work. We have brought this experience to bear in our review of the proposed regulations, and have specific recommendations that we feel would enhance accountability and facilitate the goal of making competition for federal grants more open and fair. Our recommendations also address issues relating to the Establishment Clause in the First Amendment of the Constitution, which establishes the wall between church and state. Specific suggestions are italicized. General Comments We believe the proposed regulations do not address the needs of small, grassroots and community based organizations that have been disadvantaged in competition for federal funding, and should include a prohibition on grant conditions that make it difficult or impossible for small organizations to apply for or receive grants. It must be noted that these regulations propose to increase competition for federal funding at a time of diminishing federal financial commitment to our nation's social safety net. This is a cause of grave concern to us, and to the people served by the nonprofit community. Shifting diminishing funds from one provider to another through increased grant competition will not expand the reach of services. Guiding Principles While the concept of equal treatment of faith-based and secular organizations in competition for grants is a good one, the government cannot ignore the First Amendment's requirement of separation of church and state in writing rules that allow grants to houses of worship. Care must be taken to protect religious organizations from undue intrusion by government, and to protect vulnerable persons in need of services from unwanted religious proselytization. Therefore, the final regulations must strike a balance between the goals of fair grants competition and protection of religious liberty. To achieve this balance, HUD should look to a code of conduct developed by a group of faith-based organizations in 2000 for congregations receiving federal funds to provide social services. The code requires that congregations only participate in federal programs to the extent the activity is part of their overall mission. It also requires compliance with federal regulations, transparency with the public, protection of the religious character of the provider and financial accountability. It prohibits coercion of beneficiaries to participate in religious activity. (See A Code of Conduct, The Christian Century, July 5, 2000, at 2000 WL 9857739.) The proposed regulations should be tested against these standards. Summary of Key Points In summary our key points are that: ? All federal grantees – faith-based and secular – must qualify as a tax-exempt organization under 501(c)(3) of the Internal Revenue Code, and must file annual publicly available tax returns (i.e., IRS Form 990). ? All federal grantees – faith-based and secular – must comply with accounting standards established in OMB Circulars A-122 and A-133 in order to insure that no federal funds are used for unallowable religious activity and that larger grants will trigger a single-entity audit. ? More specific guidance is needed to ensure that government funded services do not contain religious content or are not presented in a religious context, and that program beneficiaries are not subjected to religious indoctrination. ? The use of indirect funding (e.g., vouchers) is not a “free and independent choice” that should allow accountability principles. In other words, indirect funding should not become a back door approach to allow the commingling of federal funds with religious activity. ? Faith-based and secular grantees must face high standards and be treated equally. For example, the acceptance of federal funds should require all recipients to practice non-discrimination in hiring as it relates to those funds. Rules should not favor religious congregations that cannot separate their religious character, when, in fact, such organizations can establish affiliated organizations that meet required standards of independence. ? The rules interchangeably use the terms “religious organizations” and “faith-based organizations” without definition. They should provide definitions and note that faith-based organizations have been receiving federal funding – both directly and as subgrantees – for many years, complying with existing accountability standards. The new rules seem to be directed to religious congregations and should be so noted. ? No federal funds should be used for any part of the acquisition, construction or capital improvement of a house of worship, or building that will be partially used for religious activities. Specific Comments 1. Definitions of "Religious Organization" and "Faith-Based Organization" The terms "religious" and "faith-based" organization are both used in the proposed rule, without a definition of either. The rule should provide a clear definition that distinguishes between houses of worship and associations, conventions, affiliates or other organizations that are related to houses of worship or have a religious purpose. This is necessary for accountability reasons and to give the public adequate notice of what entities are subject to the rules. The Internal Revenue Code and associated regulations have established definitions defining religious organizations. These entities enjoy special privileges not accorded other nonprofit organizations in order to protect them from government intrusion. Among these privileges are exemptions from requirements to file for recognition of tax-exempt status with the Internal Revenue Service (IRS) and from filing annual IRS information returns (Form 990), which reports financial and programmatic activities that establish continuing exemption. Congress, in its oversight capacity, has required non-religious nonprofits to make their annual Form 990 returns and tax-exempt applications available to the public. As a result, donors, charity regulators and taxpayers can find basic information about nonprofits, such as their address, members of the governing board, budget size, and activities. However, this information is not available for organizations that qualify as religious organizations under the tax code. Once religious organizations apply for or receive public money, the public should have the right to basic information about them. The regulations should define "religious" and "faith-based" organizations by reference to the tax code in order to create clarity and consistency. This will facilitate reporting rules for religious organizations that receive public funds that establishes and an equal level of public accountability with secular nonprofits. Equal rights to compete for grants create equal responsibilities to be accountable. 2. Equal Treatment The proposed rules state that religious organizations are eligible to compete for federal grants "on the same basis as any other organization". However, no guidance is provided to define what is consistent with the Establishment Clause. (See comment below regarding separation of religious and government funded activities.) The proposed rules state that federal, state and local governments are prohibited from discriminating against religious organizations applying for HUD funds on the basis of their religious character. While this is a legitimate goal, it fails to distinguish between discrimination and application of special rules required to protect the character of religious organizations, make grants to them consistent with the Establishment Clause, and guard the religious freedom of program recipients. Such special rules address financial and programmatic separation of religious and government activities and make funding houses of worship possible. They do not constitute discrimination. 3. Direct and Indirect Funding The proposed rules prohibit use of HUD funds for inherently religious activities, and requires religious organizations to conduct these activities in a separate time or location from government funded programs, but only if the funds are used "directly". While the rule does not define "directly", the Supplementary Information states that this applies to grants and cooperative agreements to nonprofits to carry out social service programs. The Supplementary Information further states that "indirect" funding mechanisms, such as vouchers and certificates, are not subject to the requirements in this rule, and can blend their religious activity with government funded social services. Thus, the proposed rule opens the door to government funded worship and proselytization, something the administration has claimed it does not support. OMB Watch opposes this approach, and urges HUD to require that all government funded services be free of religious content. Any other approach creates serious breach of the wall between church and state. Proponents of the indirect/voucher approach claim it allows blending religious and government services because a person in need is exercising a "free and independent choice” in redeeming a voucher with a religious service provider. This assumption, that a person goes to a religious organization for social services because they wish to participate in religious activities, cannot withstand the test of real life, for several reasons. First, the myth of "free and independent choice" incorrectly assumes that people in need will be able to "shop" for services. While indirect/voucher based services create an appearance of choice by providing resources directly to program beneficiaries, the net result is the same as direct funding of pervasively religious services. For the vast majority of social services, there is no "marketplace", as the indirect/voucher concept assumes. Vouchers and certificates make sense when the services being provided are ones used by the public as a whole because there is likely to be a sufficient number of providers to give program beneficiaries real choices. Any services targeted to HUD recipients that are not used by the public at large, and are not available on a scale that makes "choice" real, should not be exempt from these rules under the “indirect” exception. Under the indirect/voucher approach, the federal government abdicates responsibility for ensuring an adequate infrastructure for administering and delivering social service programs. What would happen if no providers were able to offer services in a particular city or town? In the end, for most HUD related services, the indirect/voucher approach does not result in "free and independent choice" among providers. Consequently, it is not appropriate to allow religious content to be included in delivery of services paid for with government funds, whether provided through a program funded with a direct grant or with an indirect/voucher mechanism. 4. Separation of Government Services From Religious Activity The proposed rules also provide that "inherently religious" activity must take place at a separate time or location from government funded services, and be voluntary. This does not provide sufficient guidance to religious organizations, federal agencies or the public to determine when a grant to a religious group is consistent with constitutional safeguards. The recent White House Office of Faith-Based and Community Initiatives' publication Guidance to Faith-Based and Community Organizations on Partnering with the Federal Government also does not go far enough in explaining how religious activity and government funded programs must be separated. It is easy to identify and separate solely or primarily religious activities with no social service component, such as services or Bible study classes, from government funded programs. That is what the proposed rule requires in its "inherently religious" standard. But that alone will not adequately address the church-state issues in the context of government funding for religious organizations. The real questions that must be addressed are: ? What constitutes religious content in a social service program, and ? When is the context or character of a program religious in nature? How are these questions answered when an agency considers a grant application or a religious organization considers applying for federal funds? Supreme Court cases provide further guidance, establishing a principle that the government cannot fund programs with religious content, context or character. See Hunt v. McNair, 413 U.S. 734 (1973), Bowen v. Kendrick, 487 U.S. 589 (1988) and Agostini v. Felton, 521 U.S. 203 (1997). For example, in the Bowen case the Supreme Court found that although the services offered were not "inherently religious", the trial court should determine whether educational materials used in the program "have an explicitly religious content or are designed to inculcate the views of a particular religious faith." This focus on religious aspects of otherwise secular programs was reinforced by the test the Court used in the Agostini case: whether the government funds were used for services that "resulted in governmental indoctrination." The Roundtable on Religion and Social Welfare Policy, a nonpartisan research organization sponsored by the Rockefeller Institute of Government, the George Washington School of Law and Search for Common Ground USA, has published comments on the proposed regulations that examine these legal issues. (See http://www.religionandsocialpolicy.org/publications/publication.cfm?id=24.) Authors Ira Lupin and Robert Tuttle note that "Training, education, counseling and other service activities are not ‘inherently religious’, but they may be conducted in highly religious ways." They recommend a "focus on religious indoctrination and the ‘specifically religious’ conduct that might produce such indoctrination." In Appendix C of their report they provide Model Contract Provisions that HUD should draw on as a resource in writing its final regulation. It should be noted that these regulations are not inventing something new. "Faith-based" organizations such as Catholic Charities, United Jewish Communities and Lutheran Services have been receiving federal funds for decades. These organizations are separate 501(c)(3) affiliates of religious groups that have followed the same grant rules that apply to all nonprofits. What is new about "charitable choice" is that it permits houses of worship to receive direct government grants. In order for this to be constitutional, it must be limited to congregations that can offer government funded social services in a manner that does not have religious content, context or character. If a congregation's program is "so permeated by religion that [their] secular side cannot be separated from the sectarian" side, the Establishment Clause of the Constitution bars them from receiving the government funds. (See Roemer v. Board of Public Works of Maryland, 426 U.S. 736, 759 (1976).) 5. Religious Character and Independence The proposed rules clarify the right of religious organizations to use non-federal funds for religious activities and retain the religious nature of their organization by having a religious mission statement or name, using space for government services without removing religious art or symbols and having religious criteria for selection of members of their governing body. This proposed rule should provide more guidance to define the line between mere display of religious art and active proselytization through such media. In addition, the rule should not give favorable treatment to religious organizations by exempting them from organizational requirements that apply to secular nonprofits applying for grants under the same program. Any organization, religious or non-religious, that feels it cannot meet a program's organizational requirements without changing its character has the option of creating an affiliate organization that can meet the criteria. 6. Employment Practices The employment discrimination provision in the proposed rules interpret civil rights laws upside down, misapplying an exemption meant for religious staff positions to publicly funded positions. Since the Establishment Clause does not allow the publicly funded program to contain religious content or operate in a religious manner or context, there is no rational relationship between qualifications for staff positions and religious affiliations, belief or practice. The justification for the exemption does not exist in the context of federally funded social service programs. It is an approach that has been rejected by the courts. HUD should eliminate this provision from the proposed rules. 7. Nondiscrimination Against Program Beneficiaries The language in the proposed rules prohibit religious organizations providing services with HUD funds from discriminating against program applicants or participants on the basis of religion. It is unclear whether the language applies to both direct and indirect funding. The regulation must clearly state that no person receiving services paid for with federal dollars can be discriminated against based on religion, whether the program is operated under a grant or indirectly through vouchers or certificates. Any other interpretation violates the Supreme Court's clear holdings that government cannot sponsor religious indoctrination. (See discussion of separate services above.) Further detail is needed to clarify that the same services will be offered to all participants, regardless of religious affiliation, belief or practice. The rule should state that government funded services must be segregated from religious activity in a coherent manner, so that religious activities are not offered in intermittent, although separate, segments that would require beneficiaries to wait for government funded services to resume, or be forced to passively participate in the religious activity. HUD services are crucial to the well being and livelihood of program participants, and service providers have an essentially unequal power relationship with them. For this reason, the regulation should prohibit religious providers of HUD services from inquiring about the religious affiliation or beliefs of program applicants or participants. 8. Accountability and Intermediaries The proposed rules are not adequate to ensure financial accountability of religious grantees or protect their non-federal activity from undue intrusion by the state. OMB Watch believes that application of existing federal cost principles and audit procedures embodied in OMB Circulars A-122, Cost Principles for Nonprofit Organizations, and A-133, Audits of States, Local Governments and Nonprofit Organizations, to religious organizations can help achieve the degree of financial separation necessary to protect the wall between church and state. Federal cost principles are carefully designed to preclude passing any element of an unallowable cost (such as lobbying) through to the government. These cost principles also apply to federal grant funds (except block grants) that are passed through state or local governments, as well as any matching funds raised from non-governmental sources. Religious organizations receiving federal funds must be able to demonstrate, through cost allocation procedures, that no federal funds are used for religious activities, including costs that indirectly support religious activities. The rule should require religious organizations to segregate government funds in a separate account. If a religious organization receives more than $300,000 in federal funds in a fiscal year it should be required to either comply with the single entity audit rule in OMB Circular A-133 or establish a separate organization exempt under 501(c)(3) to carry out the social services program with federal funds. The rules should go beyond fiscal accountability and require that all grantees have an equal obligation to comply with health, safety, accreditation and other regulations to the same extent. Any other approach could result in diminished quality of service, or endanger the health and safety of program participants. There is no religious interest in unsafe buildings or unqualified staff that would justify exempting them from requirements that must be met by all other grantees. 9. Acquisition, Construction or Rehabilitation of Buildings and Structures The proposed rule would allow HUD funds to be used for acquisition, construction or rehabilitation of buildings that are used for both HUD program and religious purposes. This is a can of worms that should not be opened. Current law, guided by Supreme Court cases, restrict capital improvement funds for structures that are permanently dedicated to exclusively secular purposes. See Tilton v. Richardson, 403 U.S. 672 (1971) and Committee for Public Education v. Nyquist, 413 U.S. 756 (1973). Partial government funding of buildings used for worship and other religious activities raises a host of problems that are best avoided, and does nothing to simplify or streamline the process for religious organizations. For instance, what happens once the government no longer funds a program within such a building? Is the religious organization required to continue the program, or seek another organization to set up shop in its house of worship? What kind of record keeping would be necessary for a religious organization to demonstrate it has not exceeded the allowable portion of religious use of the facility? Will designated space be set aside where religious activity is prohibited? How would religious and non-religious activities be defined? Would a house of worship be required to open its building to the general community for meetings, events or programs? Who would own the non-religious interest in the building? These questions are only examples of the kinds of complications this proposed rule would create. The Establishment Clause was intended to avoid this level of entanglement. HUD should revise the rule and bring it into line with current law, so that no partial government funding of structures used for religious activities is allowed. 10. Regulatory Flexibility Analysis These proposed rules will impact a large number of nonprofit organizations, both faith-based and secular, that wish to partner with government in providing HUD services. These organizations are small entities under the definition provided in the Regulatory Flexibility Act. As a result, HUD is required to conduct a regulatory flexibility analysis regarding this proposed rule. Conclusion We urge the Department of Housing and Urban Development to strengthen the proposed rules so that public accountability will be enhanced, program participants and staff will be protected from discrimination, and separation of church and state protected. Yours truly, Kay Guinane, Counsel and Manager Community Education Center OMB Watch 1742 Connecticut Ave. NW Washington, D.C. 20009 202/234-8494 Fax: 202/234-5150 kguinane@ombwatch.org