Responding to the SPLC “Exposé”

By Sam Brunson

Last week, the Free Beacon ran an exposé of the Southern Poverty Law Center, making four principal claims. First, the Free Beacon said, the SPLC was keeping literally tons of money in offshore tax haven investment funds and bank accounts. Second, it spends too much on fundraising. Third, it overpays its executives. Fourth, it underspends on its mission.

The problem with the exposé? At best it misunderstands what’s going on, and at worst, it is flagrantly wrong.

I’m usually not interested in doing fact-check-style responses, but I’m going to nonetheless. The accusations Schoffstall levels sound plausible, so it’s worth explaining why and how they’re wrong.[fn1]

Tax Haven Money

The first point of the article is that the SPLC is keeping money offshore in tax haven jurisdictions, and that keeping money offshore is unethical. This part of the article conflates a couple things, though: offshore bank accounts and offshore investment entities.

Two of the experts interviewed for the story say, in essence, that it is troubling, if not unethical, for a tax-exempt organization to have offshore bank accounts, at least in tax haven jurisdictions. I don’t have an opinion on the ethics or propriety of offshore bank accounts, but there is no reason to believe that the SPLC has offshore bank accounts.

I assume the misunderstanding comes as a result of Part V, line 4a of its 2015 Form 990:

At any time during the calendar year, did the organization have an interest in, or a signature or other authority over, a financial account in a foreign country (such as a bank account, securities account, or other financial account)?

(Emphasis added.) The SPLC marked “Yes.” But note that a bank account is only one type of financial account and, while it’s possible, I suppose, that the SPLC has a bank account on the Cayman Islands, both the reporting and the 990 make that unlikely.

Rather, the SPLC is invested in private investment funds (such as hedge funds and private equity funds). I’m going to get a little wonky here, but bear with me (or, I suppose, skip ahead to the next header). Basically, tax-exempt organizations don’t pay taxes on their passive income. There’s an exception, though, for what’s called unrelated debt-financed income. A tax-exempt has UDFI when it borrows money and invests the borrowed money, and it will pay corporate taxes on a portion of its return.

Importantly, the UDFI rules treat tax-exempts as if they borrowed money even if they invest in a partnership that borrows money. On the other hand, the rules don’t treat a tax-exempt as borrowing money if it invests in a corporation, even if that corporation borrows money. (We call that a “blocker corporation.”)

Private investment funds almost inevitably borrow money. So if a tax-exempt wants to invest in a private investment fund, it invests through a blocker corporation. And because U.S. corporations pay taxes (which would reduce the tax-exempt’s return), the tax-exempt will invest through a corporation incorporated in a tax haven jurisdiction, one that doesn’t impose an income tax on corporations. Thus, the SPLC (and basically every other tax-exempt organization that invests in private investment funds) invests through tax haven corporations.

Is this a good thing? I treat it extensively in this article, but my take is no. Under current law, though, it is virtually necessary for tax-exempts to invest through offshore blocker corporations, though. While I’d prefer that the SPLC not do so (and I suspect it would prefer that, too), the problem isn’t with the SPLC, it’s with the tax law. And that means Congress, not the SPLC, needs to clean it up.

Fundraising

The article quotes Dan Gainor as saying,

“Its assets are over $328 million in 2015 and went up $13 million in just one year. It doesn’t need new liberal money. It could operate for at least six years and never raise a penny. It’s like a perpetual motion machine for fundraisers.”

A couple quick thoughts on this. First, the premise—that it has such a big endowment that it doesn’t need to raise any more money—makes no sense to me at all. Sure, it could (I guess) operate for six years on its current asset. But then the organization is dead. If it wants to exist in perpetuity, then it needs to be refreshing its assets, ideally on a regular basis.

As for being a perpetual motion machine for fundraisers: in 2015, it paid professional fundraisers $2.5 million on revenues of $58 million. In other words, its professional fundraiser costs were 4.6 percent of revenue. That’s great, but that doesn’t strike me as excessive.

Of course, it isn’t quite as lean as 4.6 percent. In total, the SPLC reported spending just under $10 million on fundraising, which is about 17 percent of revenue. Is that too high? Probably not. I mean, I don’t know what best practices for fundraising expenses are, but most of the sources I’ve looked at (for example, here and here) recommend that nonprofits own their overhead expenses and be transparent about them, but recognize that different exempt organizations have different overhead and fundraising costs. There’s probably a point at which fundraising costs indicate that an organization is basically a disguised revenue-generator for fundraisers (the Tampa Bay Times reported that its worst 50 charities spent less than 4 percent of donations on direct cash aid), but fundraising costs of 17 percent of revenue doesn’t strike me as anywhere near a scam.

Overpaid Executives

The article points out that several SPLC executives earn six-figure salaries. The CEO, for example, earns a base salary of $346,218 in 2015.

Is that excessive? Well, it’s above the mean and median pay for executives of tax-exempt organizations with more than $10 million in revenue. But it’s within a standard deviation of both. And, with almost $60 million in revenue in 2015, the SPLC is larger than a number of organizations with which it’s being classified. So, while I don’t know what the appropriate pay level for SPLC executives is, I certainly can’t say they’re being overpaid.

Underspending On Its Mission

Finally, the article argues that SPLC underspends on its mission:

The SPLC, which claims to boast a staff of 75 lawyers who practice in the area of children’s rights, economic justice, immigrant justice, LGBT rights, and criminal justice reform, reported spending only $61,000 on legal services in 2015.

I’m trying to approach the article charitably, and give it the benefit of the doubt. But this sentence is stretching my ability to do so. See, the SPLC didn’t report spending only $61,000 on legal services in 2015. The $61,000 number comes from Part IX, line 11b of its Form 990. And Part IX, line 11 reports “Fees for services (non-employees).”

In other words, the SPLC spent $61,000 on outside legal fees. But that number doesn’t include a single cent paid to its staff of 75 attorneys, all of whom, I presume, spent a significant portion of their workdays doing legal stuff that was part of the mission of the SPLC.

Conclusion

There has, over that last few years, been a significant amount of ink spilled over the merits of transparency and disclosure. While I’m personally a fan of transparency and disclosure, the Free Beacon article highlights the downside. The disclosures can easily be misread and decontextualized to tell a story that doesn’t represent what’s actually going on. That story can be accidental, or it can be deliberate. We’d do well, then, both as media and as scholars, to make sure that reportage on tax-exempts is accurate and is painted in the correct context.

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[fn1] Note that while the article talks about the SPLC, it could equally well be any other tax-exempt organization.