CDCs AND ADVOCACY May 15, 2010

Increasingly, the Boards and staff of community development corporations (CDCs) want to influence public policy. This advocacy can involve anything from pressing the North Carolina General Assembly to increase financial support for CDCs through the state budget to working with the state’s Department of Corrections to develop more effective reentry programs for people being released from incarceration. In whatever public policy advocacy they do, it is important that CDCs remember at least four key points:

CDCs can and should engage in public policy advocacy—as community-based

organizations, CDCs are uniquely positioned to make sure that all voices are heard in the process.

Public policy advocacy may require special tracking and reporting to the IRS—as 501(c)(3) organizations, CDCs can engage in advocacy, but lobbying is subject to special rules that you need to be aware of and comply with.

Public policy advocacy may require registering with, and reporting to, the NC Secretary of State—under North Carolina law, lobbyists need to be registered with the state.

Not all public policy advocacy is lobbying and the definition of lobbying is different under state and federal law—the law governing advocacy by nonprofits is complex and your CDC may need to consult with an attorney. This document is intended to give you an overview and may answer many common questions.

As a 501(c)(3), what do you need to know about lobbying? Under federal law, nonprofits can engage broadly in public policy activity, but “direct lobbying” and “grassroots lobbying” are regulated. Direct lobbying involves a communication with a legislator or the legislator’s staff about specific legislation, including budget and tax matters. Grassroots lobbying involves a communication with the public that expresses a view on legislation and includes a request that the public take action on the legislation. In other words, the federal rules on lobbying focus on regulating activities designed to influence specific bills in the context of the legislative process.

Example 1: Your Executive Director contacts your state Senator to urge her to support additional funding for a bill involving the state’s Housing Trust Fund. This is lobbying

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under federal law because it is a communication with a legislator about specific legislation.

Example 2: Your Executive Director contacts the Division of Community Assistance to support your municipality’s application for project funding under the Small Cities CDBG Program. This is not lobbying because the communication is with an administrative agency and is not about legislation.

CDCs, like all 501(c)(3) organizations, can engage in some lobbying without putting their tax-exempt status at risk. The amount of lobbying you can do depends on whether your organization has made the 501(h) election. If you have, then depending on the size of your CDC you can spend up to 20% of your budget on lobbying. If you haven’t made the 501(h) election, your organization can lobby freely so long as it is an insubstantial part of your overall activities. Because there is no bright line that you can use to determine how much lobbying is “too much” under the insubstantial part test, if your CDC expects to engage regularly in lobbying, you should strongly consider making the 501(h) election. So long as you track your lobbying expenses carefully and report them to the IRS as required, your CDC should not face any issues under federal law as a result of your lobbying activities.

When do I need to register as a lobbyist under North Carolina law? Lobbyists and principals need to register with the North Carolina Secretary of State under certain conditions. They must also file reports on their activities. First, the activity in question must constitute lobbying. The definition of lobbying under NC law includes any attempt to influence either legislative or executive action through direct communication with a legislator, legislative staff or any civil servant. It also includes developing goodwill with any person in these categories if done for the purpose of influencing legislative or executive action in the future. Second, there must be sufficient lobbying activity to trigger the registration requirement. An employee of a CDC will have to register as a lobbyist if they spend more than 5% of their time lobbying in any 30-day period, including the time they spend preparing to lobby. If your CDC hires a contract lobbyist, that contractor will have to register regardless of how much time they spend lobbying on your behalf. If your CDC has any employees that need to register as lobbyists or if you hire a contract lobbyist, then your CDC will need to register as a principal with the NC Secretary of State.

Thus, the state law requirements related to lobbying are different from the federal tax laws regulating the lobbying activities of nonprofits. Some of the key differences include:

NC law defines lobbying to include executive, as well as legislative activity. The NC rules only apply to state-level lobbying, not to federal or local advocacy. The NC rules cover developing goodwill in addition to efforts to influence

decision-making. Encouraging others to take action, i.e., grassroots advocacy, is lobbying under

federal law, but not under state law.

These differences can lead to very different results under state and federal law.

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Example 1: Your Executive Director spends 15% of her time over a two-month period advocating with your county commissioners to get approval for the County to apply for funding of one of the CDC’s projects through the Small Cities CDBG Program. This is not lobbying under state law because the communication is directed to local government. It would, however, likely be lobbying under the federal law governing tax-exempt organizations. Example 2: Your Executive Director spends 2% of her time over a two-month period advocating with the Division of Community Assistance to approve your municipality’s application for project funding under the Small Cities CDBG Program. While this activity is lobbying under state law, it does not trigger any registration or reporting requirements, because the Executive Director only spent 2% of her time on the activity. If she had spent more than 5% of her time on this activity in any 30-day period, then registration and reporting would be required. Note that no matter how much time the Executive Director spent on this activity, it will not be classified as lobbying under the federal law governing tax exempt organizations because the Executive Director’s communications are directed to an administrative agency and are not about legislation.

Conclusion CDCs have an important role to play in public policy advocacy. By engaging at the local, state and federal levels in the development of policy and programs and in decisions about how public resources will be allocated, CDCs give voice to the needs of their constituents. The Initiative encourages all CDCs to participate in the process to the greatest extent possible. At the same time, we want all CDCs to know the state and federal laws, rules and regulations that apply to this work so that you can be sure to comply.

We hope that this brief overview provides you with a basic understanding of some of the key rules. At the same time, we know this is a complex area, so if you have any questions about the legal effect of a proposed activity, please contact the Initiative or an attorney knowledgeable about this area.