California nonprofits serving as fiscal sponsors (and potentially any California nonprofits with negative unrestricted net assets) must be aware of the new law that may require them to maintain directors’ and officers’ liability insurance and disclose annually to the Attorney General how they comply with their charitable trust responsibilities. These requirements are triggered if three conditions are met:
- The organization is subject to the California Supervision of Trustees and Fundraisers for Charitable Purposes Act (generally applicable to charitable corporations and other entities holding property for charitable purposes);
- The organization holds restricted net assets (fiscal sponsors generally hold restricted assets for each project they sponsor); and
- The organization has negative unrestricted net assets (i.e., the organization has insufficient unrestricted assets to cover all of its liabilities).
The new requirement was codified in California Government Code Section 12599.8, which became effective on January 1, 2013:
For any year that the balance sheet of a charitable organization shows that it holds restricted net assets, while reporting negative unrestricted net assets, the organization shall provide an explanation of its compliance with its charitable trust responsibilities and proof of directors’ and officers’ liability insurance coverage to the Attorney General’s Registry of Charitable Trusts.
While the legislation was designed to address concerns of underwater fiscal sponsors, the language of the statute was modified in part to address the issue that there is no legal definition of “fiscal sponsor” and there are many different relationships that are all referenced as fiscal sponsorship relationships. The end result, however, is legislation that covers a broader group of nonprofits with negative unrestricted net assets and any restricted net assets. Restrictions on assets can easily be created by a donor (placing a specific restriction on her or his gift), a grantmaker (conditioning the gift on specific grant purposes), or even the nonprofit itself (which might be the result of the nature of a charitable solicitation – e.g., “Please donate to our youth arts program”).