California Proposals Would Rewrite Rules for Many Nonprofit Institutions

Cooley

March 21, 2019

As discussed in two prior posts (Part I and Part II) in our series about proposed bills in the California Assembly, a group of six Assembly members have coordinated in authoring a legislative package of seven bills impacting higher education in a state that represents one-fifth of the US economy.

Part III in our series recaps two bills (AB1341 and AB1342) that would significantly affect both in-state and out-of-state nonprofit institutions and institutions considering a conversion to nonprofit status. These bills would deliver a one-two punch to many nonprofit institutions that must work with the Bureau for Private Postsecondary Education to obtain authorization to operate, verification of exemption from authorization requirements or registration for out-of-state institutions or that contract with BPPE for student complaint purposes. These bills would also broaden the role of the California Attorney General in determining how the BPPE will recognize the tax status of institutions.

These bills, along with the other five bills introduced as part of this legislative package, are scheduled for a hearing before the Assembly’s Higher Education Committee on April 9, 2019. We strongly encourage nonprofit institutions (or any institutions considering a conversion to nonprofit status) seeking to operate or enroll students in California to either attend or stream the April 9 hearing and to continue to monitor these bills as the legislative process moves forward.

AB1341

Although comments by AB1341’s sponsor indicate the legislation is intended to target institutions converting to nonprofit status, their proposed review and approval procedures, including the expansive role of the AG, appear to affect any nonprofit institution seeking to operate in California or enroll students located in California, not just those that have recently converted.

Significantly, this bill would prohibit BPPE from approving, verifying the exemption of, or contracting to handle complaints for, any nonprofit institution that has not previously been (1) approved or determined to be exempt by BPPE or (2) determined by the AG to be a nonprofit corporation of higher education unless and until (a) BPPE provides public notice of the institution’s request and holds an advisory meeting to consider that request, and (b) the AG determines the institution meets a new definition of “nonprofit corporation” for higher education purposes. An institution determined by the Internal Revenue Service to be a 501(c)(3) tax-deductible organization would meet the new definition of nonprofit corporation unless the AG independently determines otherwise.

An institution would not qualify as a nonprofit if the AG determines that (1) the institution engaged in any activity in which the net earnings benefit any person (i.e., private inurement); (2) the institution acquired assets from another entity or previously operated as a for-profit institution, and the assets were acquired for more than their value; (3) a core function of the institution is conducted or controlled by a for-profit entity; or (4) a substantial share of the institution’s assets are committed to a joint venture with a for-profit entity.

Under these highly discretionary standards, many nonprofits that have converted from for-profit status in recent years, or nonprofits that contract for substantial services from for-profit service providers, may find that they no longer qualify as a nonprofit in California and may be unable to offer online courses to students in California under their current model. For instance, this could be the case if the AG concludes that the service provider is conducting or controlling a “core function,” which is not a defined term, or that their servicing agreement is a “joint venture” in the AG’s view of the world…. (continue reading…)