Statement of First Nations Development Institute, Longmont, Colorado

Thank you for the opportunity to submit testimony for the record of this important hearing on whether charitable organizations are effectively serving the needs of diverse communities. 

Our statement reviews the involvement of First Nations Development Institute and other non-profit organizations in serving the needs of American Indian people and reservation communities.  It then assesses the potential of non-profits to stimulate and develop Indian reservation economies, and the role of traditional and alternative philanthropic organizations in this effort.  First Nations believes that tribal government funded charities are poised to play a key role in addressing the needs of Indian Country.  Our statement concludes with a call to Congress, especially the Ways and Means Committee, to enact corrective tax legislation in order to remove barriers to the effective operation of charitable organizations that are formed and funded by Indian tribal governments.  Such legislation is broadly supported and could be enacted at virtually no revenue cost to the federal Treasury. 

First Nations Development Institute – 27 years of Successful American Indian Reservation-based Development

First Nations Development Institute is a national American Indian-led 501(c)(3) non-profit organization that was founded in 1980. Through a three-pronged strategy of educating grassroots practitioners, advocating systemic change, and capitalizing Indian communities, First Nations Development Institute is working to restore Native control and culturally-compatible stewardship of the assets they own – be they land, human potential, cultural heritage, or natural resources – and to establish new assets for ensuring the long-term vitality of Native communities. First Nations was founded with the belief that: "when armed with appropriate resources, Native peoples hold the capacity and ingenuity to ensure the sustainable economic, spiritual, and cultural wellbeing of their communities."

Throughout its 27-year history, First Nations’ mission has been, not only to eliminate poverty, but to build healthy and sustainable reservation economies.  Although the reasons for reservation poverty are multiple and complex, only solutions provided by Indian people, for Indian people, through the control of their assets, and crafted by their own development strategies, within the values of their own cultures, will succeed.  First Nations’ strategic intent has always been to be the leader in empowering and training Indian leaders and Indian people in their ability to control their assets and become self-sufficient and self-sustaining communities.  

First Nations Development Institute sponsors a comprehensive range of economic development programs, including programs that provide tribes and Native non-profits the training and tools required to effectively organize and develop the institutional capacity necessary to become active partners in giving and receiving philanthropic dollars. Recognizing the large cultural and funding gaps between mainstream foundations and Indian communities, First Nations Development Institute began its unique and innovative grant-making program in 1994.  As of August, 2007, First Nations’ grant-making program has given over $13 million dollars to over 500 tribal and Native non-profit programs (this includes 515 grants to 331 organizations).

Always working to lead the way in addressing Indian Country’s most pressing issues, First Nations created and implemented its "Strengthening Native American Philanthropy" (SNAP) program in 1995 to actively address the need for more information about the emerging Native non-profit and grant-making sectors. Through SNAP, First Nations has been able to perform innovative research and collect much needed data related to American Indian controlled foundations including philanthropic grant-making foundations sponsored by tribal governments. Through the programmatic side of SNAP, First Nations has also provided five American Indian foundations the support and start up assistance required to become long-term self-sustaining organizations.

In 1994, First Nations launched the First Nations’ Eagle Staff Fund, a grant-making and technical assistance effort that brought together a collaboration of philanthropic organizations interested in supporting Native economic development.  In 1996, after two full years of grant-making, First Nations assessed the applicants, as well as those receiving grants and were surprised with the results.  The majority were Native non-profit organizations instead of the anticipated tribal governments. 

Emerging Non-Profit Sector and Potential for Economic Development

Over the past 30 years, the Native non-profit sector has grown significantly in size, scope and effectiveness.  First Nations’ own Native Asset Research Center (one of Indian Country’s premier research organizations), in an effort to identify this growing phenomenon so that they could conduct outreach, launched a two-year study of the emerging Native non-profit sector.  Based on 1995-96 IRS and internal data sources, over 1,500 Native-controlled non-profit organizations were identified.

This landmark First Nations’ study, The Emerging Sector: Non-profits in Indian Country, showed that almost 83% of the organizations responding (a 35% response rate) were founded since 1970 as compared to 75% in the general society, indicating younger Native organizations.  And if the trend of Native non-profit start-up were to continue through the second half of the 1990s as it had in the first five years, then more Native non-profits will have been founded in the 1990s than in any previous decade. (http://www.firstnations.org/ publications/TheEmergingSectorDraftApril2003_webversion.pdf)

The majority, or 51% of the organizations, identified as being located in urban areas.  However, 60% of all organizations indicate they serve both an urban and a rural/reservation-based constituency.  This could indicate continuing close links between urban and rural/reservation communities as well as the continuing migration of Native peoples between rural/reservation-based communities and urban centers.  A closer look reveals that those groups that serve only a rural/reservation-based constituency are of more recent origins than the general group.  This is an indication of a trend of more Native non-profits at the reservation-level.  This has significant implications for the economy of reservations and the role and relationship with tribal nations.

Reservation-based non-profits accounted for three percent of employment in the tribal economy.  This is compared to the overall U.S. economy where six percent of all employment is in the non-profit sector.  Given the average $250,000 in annual revenue, one can begin to estimate the economic impact this growing sector plays in the Native economy.  These 1,500+ non-profits would represent $387.5 million in annual economic impact.  Using a dollar multiplier, which is presumably higher for non-reservation based non-profits, elevates the impact of the Native non-profit sector.  Given that 46% of these non-profits are rural or reservation-based, where dollar multiplier is typically not much higher than 1:1, the impact is $178.25 million annually for reservation economies. An additional $209.25 million flowing to non-reservation/urban communities, where the dollar multiplier is typically higher, (e.g. a conservative estimate of 2:1), makes the economic impact attributed to the non-reservation non-profit sector of $418.5 million annually.

The overall impact of the American Indian non-profit sector in 1994 was approximately $600 million annually.  Ten years later, we believe that the growth in the sector (based on a conservative 5% annual growth rate) would place its economic impact approaching $1 billion annually.

Potential to Meet the Unmet Needs of Reservation Non-Profits

Despite the increased and best efforts by Tribes to self-finance the emerging American Indian non-profit sector, the sector continues to struggle to receive an equitable share of public philanthropic dollars.  According to the National Indian Gaming Association, the vast majority of gaming operations engage in some form of philanthropic activity, accounting for at least $100 million in 2004 alone. There are at least 53 Native-controlled grant-making foundations in the nation, and the majority of them, or 33, are affiliated with tribes (only 17 are gaming tribes). These 53 Native grant-making organizations provide funding for a broad range of social, economic, educational, and cultural programs.

Although there are a few well-heeled national foundations that have clearly been leaders in providing funding for American Indians, they stand nearly alone among their peers. Multiple studies show a severe deficit in grant-making to American Indians, a deficit that is out of proportion with the population and its needs.

A 1998 Foundation Center study found that the total foundation funding allocated to American Indians from 1992 through 1996 varied between 0.5 and 0.9 percent of total giving.  More recently, a 2002 Foundation Center study confirmed this same trend for the period 1997 through 2000, with funding allocated to American Indians ranging between 0.5 and 0.8 percent of total giving.  According to Sarah Hicks and Miriam Jorgensen in “Philanthropy in Indian Country: Who is Giving? Who is Receiving?”: 

The American Indian grantmaking by large U.S. foundations accounted for a mere 0.287 percent  of independent, corporate, community and operating foundations’ overall grantmaking resources in 1989, a statistic which apparently rose to 0.302 percent  in 2002…Even if it were possible to include grants under $10,000 and grants from smaller foundations in the analysis, it is unlikely that grantmaking to American Indian issues totals any more than 0.5 percent of the U.S. foundation sector’s overall resources. This percentage calls attention to the substantial gap between the amounts of funding directed toward Native America (less than 0.5 percent) and the population size (1.5 percent of the total U.S. population). In the face of still other considerations – such as the proportion of American Indians who are poor, tribes’ major institution-building and service provision needs, and the sheer volume of innovative approaches to social and civic concerns evolving in Native America – [the] lack of foundation engagement is truly startling.

Even worse, a 1996 study by Ewen and Wollock found that in many cases, funding by mainstream foundations to Native issues “does not even go to Native people or organizations, but rather to non-Indian museums or universities that study Indians.”  Foundation giving to American Indians in 2000, when reviewed by foundation type, showed that private foundations gave 0.6 percent, corporate foundations 0.3 percent, and community foundations a mere 0.2 percent.

American Indian foundations play an important role in directing philanthropic dollars toward economic and social development projects in Native communities.  Take for example the Cherokee Preservation Foundation, which was established on November 14, 2000, as part of the Second Amendment to the Tribal-State Compact between the Eastern Band of Cherokee Indians and the State of North Carolina.  The Cherokee Preservation Foundation's purpose is to improve the quality of life of the Eastern Band of Cherokee Indians and strengthen the western North Carolina region. The Cherokee Preservation Foundation is funded by gaming revenues generated by the Eastern Band of Cherokee Indians. It is an independent foundation that is not part of or associated with any for-profit gaming entity. The Foundation’s focus is on project planning and capacity initiatives that will enhance the Cherokee culture, facilitate economic development and job opportunities, and improve the environment. The Foundation is helping the Eastern Band of Cherokee Indians and its neighbors address challenges that include the loss of jobs from manufacturing plant closures, potential environmental degradation due to increased traffic and localized growth in specific areas, the deteriorating growth of small and medium businesses in the region, and a decline in visits from tourists to Cherokee cultural events and institutions. Since Cherokee Preservation Foundation began making grants in 2002, it has awarded 375 grants totaling more than $30.7 million.

American Indian charitable giving is needed to help fill in the deficit in non-Native philanthropic giving in Indian Country.  As noted above, however, most American Indian non-profits are affiliated with Tribes and, as such, are hampered because they do not enjoy the same status as other government sponsored non-profits.  The fix is simple, of negligible cost and simply makes good sense. The problem and proposed solution are explained below.

A Fix to the Tax Code Is Needed to Foster Effective Native Philanthropy

Due to a glitch in the tax code, Indian tribal government support provided to charitable organizations is not treated the same as federal, state, and local government support.  Further, tribal foundations structured as "supporting organizations” are not treated the same as foundations set up by units of federal, state, and local governments.   This failure to treat tribal government grants as "public support" could result in a donee charity failing the public support test and being classified as a private foundation. 

In this statement for the record, First Nations Development Institute provides the background for the problem, as well as an explanation of two proposals: (1) treating tribal government charitable funding as public support and (2) treating tribal foundations as supporting organizations.   These proposals are not only good policy, they are also low-cost.  A Joint Tax Committee revenue chart shows that the proposals would cost only $1 million in foregone tax revenues over 10 years.   See Joint Committee on Taxation, May 20, 2004 “Estimated Budget Effect of H.R. 1528, The “Tax Administration Good Government Act,” as Passed by the Senate on May 19, 2004” (Fiscal Years 2004-13). (http://www.house.gov/jct/x-35-04.pdf, the tribal philanthropy provision score is shown at VII.2).

Background

When an Section 501(c)(3) organization is formed, it is not only necessary to qualify as a charity in order to secure and maintain tax-exempt status, it is also critical to determine the sources of the charity's support in order to be classified as a public charity as opposed to a private foundation.  Why would one care about "public charity" vs. "private foundation" status?  For a number of reasons, including the ability to utilize tax-exempt financing, to receive grants from private foundations and certain other donors, and to operate in the governmental arena without being subject to burdensome tax rules aimed at regulating privately funded and controlled foundations. 

Unfortunately, there is a glitch in the Tax Code with respect to 501(c)(3) organizations (when such organizations are formed under state or tribal law) if they are funded primarily by Indian tribal governments or controlled by such governments.  While the Tax Code generally treats government grants and other funding as "public support" (for purposes of classification of the supported 501(c)(3) as a public charity, it does not treat tribal government funding the same as funding from the federal, state or local governments. 

This omission was never intended--it was simply that no one thought about the possibility of Indian tribal governments providing funding for charities when this section of the Code was drafted.  Similarly, another route to public charity status--being structured as a "Supporting Organization" to a federal, state, or local government--is also technically closed to charities set up to support tribal governments because of the failure of Section 7871 to address the public charity status of tribal organizations.   

To remedy this technical glitch, First Nations Development Institute supports the two tax code amendments briefly described below: 

1.      Treatment of Tribal Government Support as "Public" Support

2.      Treatment of Tribal Foundations as "Supporting Organizations"

These provisions have previously been included in a bill passed by the Senate.  See Section 153 of the Tax Administration Good Government Act (H.R. 1528, 108^th Congress, Senate-passed version).  Passage of these provisions (scored in 2004 by the Joint Tax Committee as costing only $1 million in tax revenues over a ten year period) is  critical for all of those tribal governments who are sponsors and funders of non-profit charities (e.g., health care clinics, health and wellness centers, tribal museums and cultural centers). 

First Nations calls upon Congress, especially the Ways and Means Committee, to enact two conforming tax code provisions that would put Indian tribal governments and the charitable organizations they form and provide funding for on par with those charities funded and controlled by federal, state, and local governments.

Explanation and overview of the two provisions:

1.  Tribal Government Funding Issue

            Statute:

• Section 170(b)(1)(A)(vi) of the Internal Revenue Code contains a "public support" test which can be met through the receipt of grants from the "governmental units" referenced in Section 170(c)(1).
• Section 170(c)(1) references state and federal governments, but not tribal governments.
• Section 7871 (a Code section added by the Tribal Governmental Tax Status Act) treats Tribal Governments as States for other related purposes (e.g., deductibility of contributions under Section 170), but not for the purpose of the public support test.

Analysis:

• If tribal support is not treated as public support, tribal-funded foundations may experience difficulty obtaining classification as a public charity.
• Although individual Tribes can avoid private foundation classification by using an unincorporated fund for grant-making, an incorporated charity funded exclusively by one tribe or inter-tribal foundation funded by two or three tribes could have difficulty qualifying as a public charity.

 Legislative Solution:

• Amend Section 7871 to provide that tribes will be treated like states for purposes of determining support under Section 170(b)(1)(A)(vi).  See Section 153, H.R. 1528 (Tax Administration Good Government Act) (108^th Cong., as passed by Senate on May 19, 2004).
•  Note:  H.R. 1528 was never enacted because a House-Senate conference on the bill was not held.

2.  Supporting Organization Issue

            Statute:

• Section 509(a)(3) accords public charity status to organizations formed to support organizations described in Section 509(a)(1) or (2).
• Section 170(b)(1)(A) references Section 170(c)(1), which lists various governmental units (but not tribal governments).
• Section 7871 treats Tribal Governments as states for charitable contribution purposes generally, but not for this specific purpose.

Analysis:

• For the same reasons set forth in Section B.1 above, organizations that meet the supporting organization test because they are organized and controlled by a tribal government of a federally recognized tribe should be treated as public charity.

 Legislative Solution:

• Amend Section 7871 to provide that tribes will be treated like states for purposes of determining whether an organization is described in paragraph (1) or (2) of Section 509(a) for purposes of Section 509(a)(3).  See Section 153, H.R. 1528 (108^th Cong., as passed by Senate on May 19, 2004).

In conclusion, First Nations’ research shows that public charitable organizations are generally under-serving Native communities.  This is a problem that must be addressed and First Nations Development Institute thanks the Oversight Subcommittee for its efforts to understand and assess the problem through this hearing. 

Of particular importance is to clarify that tribally-funded charitable organizations are treated the same for tax purposes other government-funded foundations and public charities. 

The Native non-profit sector in Indian Country is finding its feet.   In doing so, it is providing much needed services that governments are not in a position to provide – domestic violence assistance, alternative financing, counseling, entrepreneurship training, etc.  With private philanthropies' woeful under-investment in American Indian communities, Tribes have no choice but to create and fund their own charitable organizations.  But once they take the steps necessary to create high-impact, social-investment organizations, both tribal government donors and donee organizations need to be assured that these critical institutions will receive the same tax treatment as those found in the public and charitable sectors outside of Indian Country.

Today, we ask you to continue your support of American Indian people in rediscovering their right, and their power, to hope, dream and succeed.  Gunalchéesh (Thank you).

First Nations Development Institute submits this statement exclusively on its own behalf, and not on behalf of any individual, entity, or other organization.  The Association on American Indian Affairs and the National Congress of American Indians have worked with First Nations Development Institute in developing the legislative proposals described herein.