Massachusetts charities are a highly diverse group of organizations and trusts, from youth sports leagues to family private foundations and from major universities to large health insurers. Currently, Massachusetts does not impose any limits on the compensation paid by a charity to its board of directors, although the Internal Revenue Service reviews director compensation for reasonableness. However, this past spring, the Massachusetts attorney general, Martha Coakley, proposed legislation to regulate the compensation payable to board members of Massachusetts public charities.
Proposed Prohibition Would Impact All Massachusetts Public Charities
In its current form, the proposed legislation would prohibit any Massachusetts public charity from compensating its board members, unless it first receives approval from the Office of the Attorney General's Public Charities Division. Approval would be granted only upon a "clear and convincing" showing that compensation is necessary to enable the public charity to attract and retain experienced and competent individuals to serve as independent officers, directors or trustees.
On its face, the proposal would prohibit all public charities organized in Massachusetts, such as Massachusetts nonprofit corporations and Massachusetts charitable trusts (including private foundations), from paying directors and trustees. In addition, charities organized elsewhere (such as Delaware nonprofit corporations) but which primarily conduct their business in Massachusetts would presumably be subject to the prohibition.
The legislation specifically contemplates that the Public Charities Division will issue regulations to further define the criteria by which it will grant approval of applications for compensation. At a hearing in September, the Office of the Attorney General stated that it sought to retain the flexibility to address the needs of unique organizations for which compensation may be appropriate. As proposed, the legislation would grant the attorney general the ability to rescind such approvals.
Current Status of Legislation
The legislation is presently before the Joint Judiciary Committee. It was filed by the attorney general earlier this year, an apparent result of an investigation launched by the Office of the Attorney General in 2009 into executive and director compensation at Massachusetts' four major charitable health insurers.
If passed, this legislation would not likely go into effect until six months after passage, to allow the attorney general to issue regulations and to give charities time to prepare for any changes. Although the attorney general requested fast-track consideration for this legislation, there has not been any additional activity reported on the bill since the last hearing on September 27, 2011.
Looking Ahead: More Uncertainty
While most Massachusetts public charities do not compensate their directors and trustees, the proposed legislation creates a prohibition against compensation for all charities, without providing any guideposts for the attorney general to follow in issuing regulations for "the exceptions." Given the legislation's presumption that board service is voluntary and charitable, it remains to be seen whether the attorney general expects to grant waivers routinely to those who request them or only in extreme cases. We will continue to monitor the developments of this legislation and any resulting regulations.