posted on: Wednesday, September 10, 2008

What Congressionally Chartered Organizations Have In Common:
Big Trouble
By Gary Snyder

What is it with these congressionally chartered organizations? We have seen numerous congressionally chartered organizations fail to carry out the responsibilities delegated to them by the federal government.

What are Congressionally Chartered Organizations?
A congressionally charter is a law passed by Congress that states the mission, authority and activities of a group. Being chartered by Congress is like bring incorporated at the federal level. They are listed in Title 36, Subtitle II, of the U.S. Code. 9 (thus called ‘Title 36 corporations’)

Congress has issued federal charters since 1791, sometimes creating corporate entities but more often recognizing a wide range of groups that already are incorporated at the state level. There about 100 charters.

The charters are honors. The main attraction for national organizations is that it tends to provide an ‘official’ imprimatur to their activities and to that extent it may provide the prestige and indirect financial benefit.

To be eligible for a charter, an organization generally must engage in activities that are clearly in the public interest and be of a unique type.

In recent years, some in Congress have expressed concern that the public may be misled by its chartering process into believing that somehow the U.S. government approves and supervises the corporations, when in fact this is not the case. At present, federal supervision of congressionally chartered nonprofits are limited. They are required to have independent audits annually and annual reports of their activities, with both reports submitted to Congress.

Many of the very recent controversies often comes down to fundamental issues of managerial accountability and fiduciary responsibility.

There are many controversies but a few stand out. In 2000, the Boy Scouts of America had an assistant scoutmaster who professed and practiced a homosexual lifestyle. The U.S. Supreme Court ruled that the Boy Scouts are within their First Amendment rights as a private organization to exclude from a leadership position a person who was fundamentally in disagreement with its purposes as an organization.

But most recently, four organizations have embarrassed the Congress in the way that they have conducted themselves.

The Smithsonian Institution, a congressionally chartered nonprofit organization, was forced to create a Committee on Governance after the chief executive or secretary incurred lavish and extravagant expenditures. These expenses included charted jets, $160,000 to redecorate an office, more than $1 million in housing allowances and household expenses of more than $600,000 over several years. It was dragged though the press because of pressure for change in leadership and governance by the Senate Finance Committee.

Another stalwart nonprofit-- the federal chartered American Red Cross—also under the pressure from Congress recommended sweeping changes to it governance. The high profiled problems included political appointees, rich opportunities for cronyism and conflict of interests, turnover of chief executives, on average, every 2 years or so, steep severance payouts, sex scandals, poor monitoring of finances, in constant trouble with the Federal Drug Administration for the quality of its blood bank, severe fines (tens of millions of dollars) and more. The deficit at the Red Cross surpasses $200 million.

The nation is currently faced with further financial uncertainty because of two other congressionally chartered organizations but privately held, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The two firms recently suffered billions in losses due to the unprecedented number of defaults and foreclosures in the U.S. housing market. Both were put under conservatorship of the U.S. Federal government. It has been widely touted as one of the most sweeping government interventions in the U.S. history. Because of distrust in their leadership, the government dismissed their chief executives, board of directors and elected a new board.

There is a history of problems at Freddie Mac. It had understated it earnings by billions of dollars and was fined $125 million. An oversight report indicated that the company’s earnings were manipulated. Two years ago, it was fined $3.8 million, the largest ever assessed, because of illegal contributions.

Ending the Chartering Process?
All of the aforementioned-chartered organizations have asked the government for some sort of bailout.

The House Judiciary Committee, the key committee in the process, in 1992, concluded that the chartering process served no useful purpose. It issued a moratorium. However, bypassing the committee, Congress chartered at least three new nonprofits organizations.

Many of the congressionally chartered organizations have lost their way. I expect much discussion about the value of the designation. It has become an embarrassment and certainly a distraction from the good work of the activities of other chartered charitable, historical and educational organizations.


Gary Snyder is managing partner of Nonprofit Imperative and author of Nonprofits: On the Brink and Nonprofit Imperative. He can be reached at gary.r.snyder@gmail.com. His website is: www.garyrsnyder.com.