New California Law Further Restricts Nonprofit Organizations From Engaging in Campaign Activity

by Best Best & Krieger LLP

Restricted Resources Include Cash, Office Supplies and Other Property Received From Local Agencies

A new California law prohibits nonprofit organizations from using monies and other property received from local agencies for campaign activities. SB 594, signed into law by Gov. Brown last week, applies to all nonprofit organizations incorporated under California law, including chambers of commerce and labor unions, and certain other nonprofit organizations exempt under federal law. While it does not apply to nonprofit organizations exempt under Section 501(c)(3) of the Internal Revenue Code, these organizations are already prohibited from supporting or opposing any candidate for public office and may only engage in activities that “influence legislation” to a limited extent.

SB 594, which takes effect on January 1, 2014, prohibits nonprofit organizations from using “public resources” in any communications that expressly advocate for or against a state or local ballot measure, or for the election or defeat of a candidate, or that constitutes a campaign contribution. Public resources include cash, office supplies and any assets owned by a local agency, including equipment and compensated employee work time. Notably, the term excludes funds received in exchange for consideration for goods or services, a provision that caused a flurry of opposition until it was omitted. SB 594 also creates additional reporting requirements for a nonprofit organization that has received more than 20% of its annual gross revenue from one or more local agencies during the current or previous two fiscal years. In order to engage in campaign activities, these reporting nonprofit organizations are required to create a separate bank account for all funds received and to be used for campaign activity. They must also disclose certain information to the public and the California Franchise Tax Board (FTB), and are subject to an audit by the FTB for compliance with these obligations.

SB 594 carves out certain exceptions, allowing nonprofit organizations to use public resources to adopt a position or resolution supporting or opposing a ballot measure or candidate, including incidental costs such as posting the position/resolution on the organization’s website, communicating the position/resolution to its members, or issuing a press statement. Additionally, SB 594 does not preclude the nonprofit organization from using public resources for the establishment and administration of a sponsored committee. However, based on its definition of “establishment and administration,” SB 594 still prohibits a nonprofit organization from committing public resources to the sponsored committee to be used by the sponsored committee for campaign activities. Similar to the rights of public agencies, SB 594 clarifies that nonprofit organizations may still expend public resources on informational activities that provide an accurate, fair and impartial presentation of relevant facts on a ballot measure.

Failure to comply with SB 594 could prove costly to nonprofit organizations. SB 594 provides for a civil penalty equal to $1,000 for each day that a violation occurs plus three times the value of the unlawful use of public resources. SB 594 provides that a civil action to assess and recover the civil penalty can be brought by the Attorney General, any district attorney or any city attorney of a city having a population in excess of 750,000. We anticipate vigorous enforcement of SB 594 since the recovered civil penalty will be retained by the entity represented by the party filing the civil action.    

SB 594 was initially opposed by several local and statewide non-profit organizations, which submitted letters and rallied their members as part of a joint coalition that included the League of California Cities, the California State Association of Counties, the California School Boards Association, the Community College League of California, and many more. SB 594 was subsequently amended to redefine “public resources” to clarify that this does not encompass nonpublic revenues. This amended version of SB 594 received almost a unanimous vote from both the California Senate and Assembly.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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