According to a survey of Louisiana residents released last month by Louisiana State University, faith-based organizations and nonprofits got higher marks than government for their hurricane recovery efforts. While not surprising given the abysmal government response, the findings raise larger questions about the role of the federal government in providing resources to the nonprofit sector. Nonprofits face major long-term budget challenges at the federal level that will continue to make it more difficult to serve the people and missions they exist to serve. Even as tax and budget cuts are starting to have an impact on nonprofits, we see efforts to limit the advocacy voice of groups. This has come in the form of restrictions on the federal grantees' use of private funds, and slippage of election reforms into nonprofit issue advocacy. Moreover, as Congress begins to tackle allegations of corruption, particularly among lobbyists and elected officials, nonprofit advocacy rights may also wind up curtailed. One bill in the House that included a new affordable housing fund created enormous anxiety and action within the sector. Reminiscent of the 1990s Istook amendments that silenced the advocacy voice of nonprofits, this bill would have restricted nonprofits from receiving affordable housing funds if they engaged in voter registration and other nonpartisan voter activities, lobbying, or produced "electioneering communications" with their private funds. Broader than the Istook amendments, the bill's language would have cut off grants to nonprofits that "affiliated" with any other entity doing such activities. The definition of affiliation contained in the affordable housing provision was so broad as to implicate board members, coalition partners, and those giving certain amounts of money--including state government grants. The provision passed the House in a closely contested vote. Now it is up to the Senate. While attacks on advocacy such as the affordable housing fund provision took place, Congress stepped up efforts to investigate the governance and oversight of charities. At the encouragement of the Senate Finance Committee, Independent Sector formed a panel to propose recommendations for improving governance and oversight of the sector. Other groups, such as the National Committee for Responsive Philanthropy (NCRP) and the Philanthropy Roundtable, developed recommendations of their own. The NCRP recommendations targeted foundations, and the Philanthropy Roundtable raised concerns about developing new requirements when existing requirements are inadequately enforced. Many groups raised concerns about the impact of such proposals on small nonprofits. As the year draws to a close, congressional proposals for reform will likely be pushed into 2006. A new area of concern emerged for the nonprofit sector this year: anti-terrorism financing. The Combined Federal Campaign (CFC), the government's workplace charitable giving program, had earlier told applicants that they must check their employees and others they give money to against a variety of terrorist watch lists. In addition to the civil liberties issues involved, major concerns were raised about the accuracy of these lists. The ACLU and 12 other organizations, including OMB Watch, challenged the CFC requirement. This year, the CFC concluded that eligibility was not contingent on checking terrorist watch lists, but on certifying compliance with anti-terrorist financing laws. The CFC also suggested nonprofit participants follow guidelines developed by the Treasury Department. These guidelines, Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities have faced widespread opposition since their introduction in 2002. A number of nonprofits and foundations worked with the Treasury Department during 2005 to revise the guidelines. Last week, the Treasury Department issued a new revision that in many respects moves in the wrong direction. The overall effect is to place charities in the role of government investigators and informers, diverting resources from charitable activity to what may prove to be useless information collection and reporting. The revised guidelines reflect a larger problem with the federal government's approach to anti-terrorist financing issues: instead of focusing resources on following investigative leads, the government is collecting vast amounts of information in the hope that something will turn up--in essence, looking for the proverbial needle in a haystack. This does not effectively prevent diversion of funds to terrorist networks. Many policy developments in 2005 had implications for the nonprofit sector. To follow is an overview of the most influential developments related to OMB Watch's work. A New Attack on Advocacy: Private Fund Encroachment

• Legal Services: Litigation challenging the constitutionality of limitations on the advocacy rights of government-funded nonprofit legal services groups advanced recently with oral arguments before a federal appeals court. On Nov. 2, the U.S. Court of Appeals for the Second Circuit heard oral argument in Velazquez v. Legal Services Corporation (LSC), a lawsuit brought on behalf of a coalition of lawyers, indigent clients and New York City officeholders, arguing the government has no business regulating the privately funded, constitutionally protected activities of legal service programs. The attorney for the Justice Department argued that the government had an important interest in having legal services programs focus exclusively on the categories of case the government chooses to fund. This statement cuts to the heart of why the outcome of this case is important to the nonprofit sector. If the federal court upholds the LSC restrictions on the use of the private funds of nonprofit legal services programs, the Velazquez case could open the door for an attempt by Congress to limit the use of the private funds of a wide variety of federal grantees, restricting whatever it deems threatening or out of line with its intentions.
• Affordable Housing Fund Anti-Advocacy Provision: Restrictions on the use of private funds were not exclusive to the courts. On Oct. 26, H.R. 1461, the Housing Finance Reform Act, passed the House 331-90, despite a provision that disqualifies nonprofits from receiving affordable housing grants if they have engaged in voter registration and other nonpartisan voter activities, lobbying, or produced "electioneering communications." Organizations applying for the funds are barred from participating in such activities up to 12 months prior to their application, and during the period of the grant even if they use non-federal funds to pay for them. Most troubling, affiliation with an entity that has engaged in any of the restricted activities also disqualifies a nonprofit from receiving affordable housing funds under the bill. Led by the affordable housing community, nonprofit groups rallied against the appalling anti-advocacy provisions. After losing a close House fight by five votes, the nonprofit sector continues to work to ensure the language is not included in the Senate version. The Senate bill, S. 190, currently does not contain an affordable housing fund provision, to which the anti-advocacy language could be attached.
• Head Start: Language in the Head Start Improvements for School Readiness Act, S. 1107, creates new barriers to voter registration by expanding the current prohibition on use of program (i.e., federal and matching) funds to private funds. Moreover, the provision appears to expand the reach of the prohibition from specific Head Start programs to the program's sponsoring agency. This revision has significant implications for how Head Start grantees may use their private funds; as such funds might be considered part of the program. Head Start grantees are already prohibited from using Head Start program funds for any type of political activity, including voter registration. A coalition of nonprofit organizations sent a letter to the sponsors of the legislation, Sens. Michael Enzi (R-WY), Edward Kennedy (D-MA), Lamar Alexander (R-TN) and Chris Dodd (D-CT), asking for clarification that the provision only pertains to federal Head Start funds.

Elections and Issue Advocacy

• IRS Audits: Recent audits by the IRS as part of its Political Intervention Program (PIP) have led to growing concern and legal confusion about the difference between statements by individuals and statements attributed to organizations, and what constitutes genuine issue advocacy, as opposed to partisan electioneering. In 2004, the IRS initiated the new PIP process to review cases of potential violations on the ban on partisan activities by 501(c)(3) organizations. The process came under fire when the National Association for the Advancement of Colored People (NAACP) was audited because its chair criticized President Bush during a July 2004 convention speech. The concern about muzzling charities picked up steam this year as the pastor of All Saints Episcopal Church in Pasadena, CA announced in November that the IRS was conducting a formal examination of the church's tax-exempt status, due to an anti-war, anti-poverty sermon delivered two days before the 2004 presidential election. (http://www.ombwatch.org/article/articleview/3167/1/403)
• Federal Election Commission Regulations: A diverse coalition of charities filed an amicus brief on Nov. 14 in the Supreme Court case Wisconsin Right to Life v. Federal Election Commission urging the court to protect the right of nonprofits to broadcast grassroots lobbying communications. The multi-party amicus brief was filed on behalf of 35 conservative and progressive charities (exempt under 501(c)(3) of the federal tax code). The brief argued that the electioneering communications restrictions deny charities the right to petition the government for redress of grievances, which is protected by the First Amendment and that the Bipartisan Campaign Reform Act cannot be constitutionally applied to 501(c)(3) charities because such organizations cannot engage in partisan electioneering. The FEC also began a rulemaking proceeding to review the "electioneering communication" exemption for 501(c)(3) organizations, after it was the subject of a court challenge by BCRA's sponsors. The outcome of this rulemaking may have a direct impact on whether charities can engage in issue advocacy 30 days before a primary and 60 days before a general election.

Lobbying Reform

• In response to recent scandals involving congressional travel paid for by a nonprofit serving as a conduit for a registered lobbyist, Congress may be stepping up lobbying reform legislation. Legislation introduced in the House and Senate is aimed at lobbyists in general but may result in changes for charities, particularly in regard to reporting of grassroots lobbying and disclosure of donors.

Anti-Terrorist Financing Issues

• Combined Federal Campaign: The Office of Personnel Management's Combined Federal Campaign (CFC), the federal government's workplace charitable giving program, finalized a rule change on Nov. 7 that moved away from its previous requirement that all participating charities check their employees' names and those entities they contribute to against government watch lists. The American Civil Liberties Union joined forces with 12 national nonprofit organizations, including OMB Watch, in challenging the requirement to check terrorist watch lists. The suit was put on hold when the Office of Personnel Management (OPM) proposed in March to change the requirement. OPM proposed that participating charities certify that they are in compliance with existing anti-terrorist financing laws. The final rule was consistent with the March proposal: "OPM does not mandate that applicants check the Specially Designated Nationals (SDN) list or the Terrorist Exclusion List (TEL)." Unfortunately, the OPM rule encourages charities to follow the Treasury Department's anti-terrorist financing guidelines (see below).
• Treasury Department Anti-Terrorist Financing Guidelines: On Dec. 5, the Treasury Department released a revised version of its November 2002 Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities. The Treasury Department announcement requested public comment on the revisions by Feb. 1, although the revised guidelines immediately replace the 2002 version. The Treasury Guidelines have been the focus of criticism from a number of nonprofits, and a working group of nonprofits and foundations worked with the Treasury Department, in an effort to improve the guidelines. In addition, the Georgetown University Public Policy Institute hosted an event discussing the impact of the guidelines and other anti-terrorism financing requirements on the charitable sector. Unfortunately, the new guidelines move in the wrong direction calling on nonprofits to check a terrorist watch list for employees, recipients they give money or in-kind support to, and employees of recipient entities. The guidelines also call on nonprofits to report anyone on the list, as well as "any suspicious activity" by individuals or groups, to the government.

In the wake of Katrina, charities and foundations scrambled to figure out how to aid the victims of Hurricane Katrina, helping them get housing, jobs, transportation, health care, education for their children, post-trauma counseling, and other services. Charities also focused on long-term outcomes, the work of nonprofits can help prevent the massive devastation wrought by Hurricane Katrina. Good charitable giving legislation should only be Congress' first step in aiding charities in getting the resources they need when Congress and the nation is asking so much of them. Congress also must do more than rely on the nonprofit sector's disaster preparedness and relief programs. Congress cannot expect a vibrant nonprofit sector to provide services in the face of disaster or step in when there are budget cuts, and in the same breath not allow the sector to speak out on issues without the fear of retribution. When government seeks to limit free expression under the very programs it deems beneficial to underserved communities and individuals--whether it involves legal representation for the poor or civic engagement for affordable housing recipients--government exerts a level of control antithetic to our democracy.