BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT APRIL 13, 2010 ITEM E1 WELFARE EXEMPTION CLAIM HEARING CLAIM FOR ORGANIZATIONAL CLEARANCE CERTIFICATES filed by ALLIANCE MEMBER SERVICES, INC. (Case No. 472460) and NONPROFITS' INSURANCE ALLIANCE OF CALIFORNIA (Case No. 472465) Reported by: Beverly D. Toms CSR No. 1662 1 1 2 P R E S E N T 3 4 For the Board Betty T. Yee of Equalization: Chair 5 Jerome E. Horton 6 Vice-Chair 7 Barbara Alby Acting Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John Chiang 11 State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board Proceedings 14 Division 15 For Board of Lou Ambrose 16 Equalization Staff: Tax Counsel 17 Andrew Jacobson Tax Counsel 18 Richard Moon 19 Legal Department 20 Ladeena Ford County Assessed Properties 21 Division 22 For Petitioner: Barbara Goode 23 Attorney at Law 24 Pamela Davis Taxpayer 25 26 ---OOO--- 27 28 2 1 Sacramento, California 2 April 13, 2010 3 ---oOo--- 4 MS. YEE: Next case. 5 MS. OLSON: Our next case is E1a, Alliance 6 Member Services, Inc. and E1b, Nonprofits' Insurance 7 Alliance of California. Please come forward. 8 MS. YEE: Okay, thank you. Good afternoon, Mr. 9 Ambrose. 10 Mr. AMBROSE: Good afternoon Madam Chairwoman 11 and Members of the Board. This is the matter of the 12 petitions appealing the denial of the claims for 13 Organizational Clearance Certificates for Alliance 14 Member Services, Inc. and Nonprofits' Insurance Alliance 15 of California. 16 And the issue is whether the petitioners have 17 established that the County Assessed Properties Division 18 erred in determining the petitioners do not qualify for 19 Organization Clearance Certificates because petitioners 20 are not organized and operated exclusively for 21 charitable purposes pursuant to Revenue and Taxation 22 Code Section 214. 23 MS. STEEL: Thank you very much, Mr. Ambrose. 24 Good afternoon. 25 MS. GOODE: Good afternoon. 26 MS. YEE: If you'll introduce yourselves for 27 the record, you have ten minutes for your presentation. 28 MS. GOODE: Okay. My name is Barbara Goode. 3 1 I'm an attorney in San Francisco. 2 MS. YEE: Okay. 3 MS. GOODE: I'm here representing the 4 Petitioners and my client, Pamela Davis, is here with 5 me. 6 MS. YEE: All rightee. Thank you. 7 MS. GOODE: We're both going to speak. 8 MS. YEE: Great. Please proceed. 9 MS. GOODE: Okay. So, thank you. Good 10 afternoon. We -- I want to just clarify when we first 11 came up on this matter for appeal we had more issues 12 pending with the County Assessed Properties Division 13 than we have today. Originally when we came up on 14 appeal there was an issue about whether or not my 15 clients were essentially operating a commercial 16 business. And then a second issue was whether or not 17 they were providing the community benefit that's 18 required to get the Organizational Clearance 19 Certificate. 20 In the last week the -- the Board staff decided 21 to drop the argument that my client was operating a 22 commercial type business. So, today we're only here to 23 talk about the community benefit test as part of whether 24 or not they should be entitled to their Organizational 25 Clearance Certificate. 26 So, focusing on that, I also wanted to point 27 out in the appeal summary that Mr. Ambrose prepared he 28 describes the -- the parties' arguments and he describes 4 1 the argument for the staff as pointing out that thus far 2 there has not been a judicial opinion that addresses the 3 kind of work that -- that my clients do. 4 And I wanted to highlight that because I find 5 that to be fairly obvious since my client is the first 6 of its kind of an organization ever and -- and what it 7 does is so unique it's not really surprising that there 8 could not be a prior judicial decision about it. 9 So, I thought it would be very helpful since 10 what they do is fairly unusual and it was the subject of 11 a special legislation to allow it to be organized that 12 my client speak a little bit more directly and 13 personally to what the organization does. 14 MS. YEE: Okay. 15 MS. DAVIS: Pamela Davis. I'm the CEO and 16 founder. And NIAC, Nonprofits Insurance Alliance of 17 California, was actually the -- it grew out of my 18 graduate thesis at U. C. Berkeley. And my thesis was is 19 that we could reduce accidents and injury to the public 20 that were caused by nonprofit organizations if we pooled 21 the resources that nonprofit organizations ordinarily 22 would spend for liability insurance and would use those 23 resources to insure -- take care of them for the 24 liability but more importantly to provide management 25 services to these nonprofit organizations so that they 26 would be able to have fewer accidents and injuries to 27 the public while they were doing their services. 28 And I thought that we could save money for 5 1 nonprofits by doing this and at the same time I also 2 thought that nonprofits would be good for this because 3 their whole mission is really to do good for the public 4 and take care of the public, and they would be 5 interested in trying to do that more safely. 6 When I first started NIAC I honestly wasn't 7 sure how things would turn out. We went ahead and we 8 were insuring what we consider the most risky of 9 nonprofits. We were insuring foster family agencies and 10 we are still group homes, day care centers, senior 11 centers, programs for really troubled teens and this is 12 considered a very risky thing to do. 13 But my original funding came from the Ford 14 Foundation and others, and -- and they decided that they 15 wanted to see us start because they thought that if we 16 were successful in California that with its litigousness 17 and also its broad nonprofits we could help nonprofits 18 throughout the country. 19 Two things they were interested in is, one, 20 nonprofits were unable at that time to get affordable 21 liability insurance. They wanted us to do that. But 22 also they wanted to see whether or not through our 23 management assistance programs we could actually reduce 24 the number of accidents and injuries that happened 25 through nonprofit services. 26 And ten years after we started, that was in 27 about 1999, ten years later, we started in 1989, we had 28 2,000 nonprofit organizations in California insured -- 6 1 working through this charitable pool and I can say that 2 we really felt after ten years this thing was really 3 going to work, that putting together pooling for these 4 risks plus providing these services we could see that 5 accidents and injuries were much lower than the experts 6 had predicted they would be. 7 So, we really felt that we had something that 8 was working for nonprofits and for the general public in 9 terms of the claims. 10 In 1999 and 2000 our model proved to be so 11 valuable that we were granted $10 million. A $5 million 12 grant from the Gates Foundation, the Bill and Melinda 13 Gates Foundation, and $5 million from the Packard 14 Foundation. We were a 501(c)(3) nonprofit. They gave 15 us this $10 million to expand what we were doing into 16 other states. 17 They -- at that time insurance was more 18 available but they were particularly impressed with what 19 we've been able to do to reduce the accidents and 20 injuries. 21 In 2000 we actually purchased a building in 22 our -- Santa Cruz for operations and we were able to 23 issue a community development bond to purchase and 24 rehabilitate that building. Santa Cruz County supported 25 our work to do that because they saw the community 26 benefit that we were providing to the public through the 27 nonprofits in Santa Cruz and then by extension the 28 thousands of nonprofits across California. 7 1 We do more than risk pooling. I think I've 2 pointed that out. Just this last year, for example, 3 things that we've provided on the management and the 4 services side to reduce risk we've trained 1600 5 volunteers and employees through a webbed training 6 resource. We have trained 500 volunteer and employee 7 drivers to help them drive more safely. We've provided 8 2,000 consultations to the management of nonprofits to 9 help them govern better. 10 We have spoken at dozens of places to thousands 11 of people. We've distributed 3,000 booklets here of 12 various types on -- to educate in terms of how to 13 operate more efficiently and more effectively and not 14 cause accidents. 15 Those are all done completely free of charge. 16 We charge nothing for those. 17 We also provided -- trained another thousand 18 people through webinars, and we charged only for the 19 service of the technical there. 20 So, finally, I'd just like to say that now 21 after 20 years we really see this concept is working not 22 only to keep accidents and injuries down in nonprofit 23 operations but we believe and we know we're saving 24 nonprofit dollars. 25 We now have 7,000 nonprofit organizations in 26 the California pool. And over the last four years since 27 2007 we have actually been able to give back 17.1 28 million in return premiums to those organizations 8 1 because we're not paying money on any claims. We're 2 actually not having the injuries and we're allowing -- 3 then allowed to give the money back to nonprofits to use 4 for the community benefit through their operations. 5 So I'm really pleased with what that simple 6 thesis has done for our community. 7 MS. YEE: Anything else at this point? 8 MS. GOODE: Well, I wanted to just probably 9 reiterate the obvious but, you know, a -- a risk pool is 10 simply a very large mutual organization where everyone 11 is required to put in the amount of money that they 12 think -- and this is done in a more professional way, 13 but is the estimate of what the claims experience is 14 going to be. And if they can operate in a better way 15 well then they don't spend the money and they give it 16 back. 17 So, who knew that when it started it was going 18 to be 7,000 nonprofits, but it just I think speaks to 19 the power of the idea and the -- the usefulness because 20 if it were only just providing something like an 21 insurance policy I think it wouldn't -- it wouldn't have 22 grown like that. 23 The last little point I wanted to make is, you 24 know, this organization was originally granted its OCC. 25 Then when the procedure changed and it had to be 26 reviewed at the State level, it was granted the OCC 27 again. It refurbished its building with the community 28 development bonds and that was on the basis it had its 9 1 OCC. It was only recently when their AMS organization 2 applied for its exemption, and it really owns things 3 like computers, it owns just a small amount compared to 4 what the real property is, and that application was 5 denied and then suddenly the risk pool found that its 6 applica -- its OCC was revoked. And so that's 7 procedurally we're trying to get it back. 8 MS. YEE: Very well. Thank you very much. 9 We're going to give you time on rebuttal. 10 Okay, Department. 11 MR. JACOBSON: Yes. Madam Chair, Board 12 Members, my name is Andrew Jacobson, with the Legal 13 Department. To my right is Mr. Richard Moon, also with 14 Legal. And to his right Ms. Ladeena Ford of the County 15 Assessed Properties Division. 16 We agree with the Appeals Division that 17 Petitioners do not qualify for Organizational Clearance 18 Certificates because Petitioner's activities only 19 provide indirect community benefits by reducing overhead 20 costs for nonprofit organizations rather than providing 21 activities directly to the community as a whole. 22 Now under the community benefit test an 23 organization must either lessen recognized burdens of 24 government or it must provide a direct benefit to the 25 community as a whole or an unascertainable and 26 indefinite portion thereof. 27 In the present case Petitioner's activity of 28 providing liability insurance is not a traditional 10 1 government burden that's been recognized in case law. 2 Similarly, the class benefited in this case is not 3 general and unascertainable but rather it is 4 Petitioner's member nonprofits. 5 In addition, Petitioners do not create a 6 community benefit because the benefits it creates are 7 indirect and the welfare exemption should not be used to 8 reduce overhead costs for nonprofit organizations 9 instead of funding actual exempt activities performed by 10 nonprofit organizations. 11 In the present case as the Appeals Division has 12 noted Petitioners do not have a basis in case law for 13 their claims that they create a community benefit. 14 Indeed, under a series of cases decided by the 15 California Court of Appeal, the primary benefits must 16 accrue to the community in general and not secondary 17 benefits. 18 Under the Alcasera (phonetic) case, for 19 example, union-sponsored construction schools impact on 20 the general community was peripheral to the true 21 beneficial purpose of training and job placement for the 22 activities performed. Similarly, under the California 23 College Mortuary Science case the Court found that this 24 activity only conferred a secondary benefit on the 25 public community as a whole and the primary benefit was 26 to the union and the members of the school. 27 The Court stated in its holding, quote, "The 28 taxpayer's fine and apparently locally unique training 11 1 in embalming in every phase of the funeral service 2 industry does not benefit primarily the community as a 3 whole or an unascertainable or indefinite portion 4 thereof, but benefits instead primarily a definite 5 segment of the -- of the community, namely the funeral 6 service industry." End quote. 7 In this case Petitioners similarly provide 8 their primary benefit to their member insureds and not 9 to the community as a whole. 10 Now, the Appeals Division also noted the House 11 of Rest case in its brief and we wanted to address that. 12 We feel that the House of Rest case actually supports 13 the Department's position in that in the House of Rest 14 case the organization that housed missionaries returning 15 from foreign service actually performed these activities 16 by operating the house whereas Petitioners only are 17 claiming to provide benefits through their member 18 insureds. 19 For example, one of these insureds which they 20 brought up in their brief, the Maloney-wilding 21 Foundation, runs group homes in San Diego County under 22 contract with the State. 23 When -- in this case it is the Maloney-wilding 24 Foundation and not petitioners that actually perform the 25 community benefit creating activity in this case. 26 The House of Rest opinion also diverges from 27 the current case in that in that organization the 28 organ -- the organization was an integrated part of the 12 1 Presbyterian church's missionary activities in terms of 2 its larger mission spreading the gospel. By contrast 3 Petitioners are a service provider to a wide variety of 4 nonprofit organizations from soup kitchens to museums 5 that are not integrated in any way. Therefore we see 6 this as being quite different. 7 In conclusion, Petitioners only potentially 8 lessen overhead costs for members rather than funding 9 actual activities for the benefit of the community as a 10 whole or an indefinite unascertainable portion thereof. 11 Therefore the Department urges that the Board deny the 12 petition. Thank you. 13 MS. YEE: Thank you, Mr. Jacobson. You have 14 five minutes on rebuttal. 15 MS. GOODE: Okay, sure. First of all, I think 16 that Mr. Jacobson started out saying that they agreed 17 with the position of the Appeals Division, but I don't 18 think that their -- the decision of the -- position of 19 the Appeals decision -- Division was necessarily opposed 20 to my clients. 21 I -- reading from the summary they say that we 22 can't demonstrate that we have met with the test for the 23 California Appellate Courts as thus far interpreted and 24 that was my opening point. I don't think that there 25 really is going to be anything that's interpreted so far 26 about a risk pool. 27 But going more to the -- the specifics of the 28 argument, we have this point about direct and indirect 13 1 and characterizing the liability portion of what they do 2 as being somehow a reduction of overhead. And I think 3 that that's -- that's a very kind of misleading way to 4 approach this because, yes, it does look somewhat like a 5 product. You do get an insurance policy. But all of us 6 want to have risk reduced. It's -- nobody wants to pay 7 for risk. 8 The benefit is bringing risk down and not 9 spending any dollars in -- in the nonprofit community 10 for injuries to people. So, when -- when this bill was 11 passed, and I would refer you to the supplemental brief 12 that we filed in February because we went more -- in 13 more detail into the legislative history. But the -- 14 the bill to organize the risk pool went through without 15 any -- any opposition. And several government 16 organizations wrote in in support of it. And I quoted a 17 letter from the Alameda -- Alameda County which says, 18 "The County currently is funding more than 50 19 community-based organizations with general 20 revenue-sharing dollars. Your legislation would offer 21 them a measure of relief from souring insurance costs. 22 Right here. The organizations provide a vital community 23 service in the fields of health -- mental health, 24 alcohol and drug social services. Their survival is 25 needed." 26 Well, that's because these organizations are 27 performing a municipal function. We refer to the Mi 28 Casa Homes from San Diego County because they're under 14 1 contract with the County. They must in order to meet 2 the contract requirements provide the liability 3 insurance. 4 By reducing that cost we're reducing the 5 County's expense and the same thing in Los Angeles 6 County, we put forward an argument about the adoption 7 programs from the Families Program in Ingleside. All of 8 these municipal organizations are reducing the -- the 9 dollars that are general revenue-sharing dollars. 10 So I think it's a very argumentative position 11 to characterize this as some kind of a club of members 12 trying to get some advantage over the competition. 13 The fact that there are 7,000 nonprofits is 14 almost a public in and of -- in and of itself. But the 15 power that when it's magnified goes beyond that. 16 I also wanted to point out that when I look 17 through the thousands of organizations that had 18 Organizational Clearance Certificates I found that there 19 were the 19 United Ways. Well, that's also an 20 organization that benefits the public by moving on 21 through other nonprofits. And I don't think that 22 that's -- that's really -- as a concept I don't think 23 that's at all unusual. I think it's very much in the 24 spirit of the -- the constitutional provision and the 25 Revenue and Tax provision which are to be interpreted 26 broadly. 27 MS. YEE: Okay. Thank you, Ms. Goode. 28 Ms. Davis, any further comment? 15 1 MS. DAVIS: I don't think so. I don't -- I 2 don't have any particularly. 3 MS. YEE: Okay. I'm sure we'll have questions. 4 MS. DAVIS -- any questions. 5 MS. YEE: Yes. Great. Thank you. 6 Questions or comments, Members? 7 MS. STEEL: Question. 8 MS. YEE: Ms. Steel. 9 MS. STEEL: To the Department, that it seems 10 like I agree with taxpayers that Appeals Division 11 actually believes that the case should be granted. 12 That's the way I read. So, maybe, you know, I misread 13 or maybe I misunderstood here. That's one. 14 And second one is where the law says that 15 indirect benefit and direct benefit to the nonprofit 16 organizations that, you know, why this taxpayer's 17 company is indirect benefit, so they are not -- you 18 know, they cannot get the tax clearance certificate 19 here. 20 Can you explain a little more about that. 21 MR. JACOBSON: Yes, certainly, Ms. Steel. With 22 regard to the Appeals Division's conclusions we are 23 simply interpreting the language in their brief, and 24 we -- we looked at the language which says that 25 Petitioners have -- do not have the support of 26 California Appellate opinions as -- stating that they do 27 not provide a community benefit. 28 But that's our interpretation. 16 1 With regard to indirect benefits, I would 2 probably reverse the question and I would say that in 3 every case that I have looked at the courts -- the facts 4 included direct benefits, such as the sale of tickets to 5 buyers at a community theater, the offering of tours and 6 hunting activities for the general public on Catalina 7 Island; the operation of the -- of the Getty Museum for 8 the enjoyment of people that are going to look at the 9 arts and so forth. 10 By contrast, when I look through the case law 11 it's not as narrow I think as Ms. Goode indicates. I'm 12 not looking for the exact fact pattern in this case of 13 a -- of an insurance risk-sharing pool. Rather we're 14 looking simply for cases in which the Courts have seen 15 organizations that provide indirect benefits as actually 16 satisfying the community benefit test. And I haven't 17 seen that in the case law. 18 MS. STEEL: It's not really clear here. 19 MR. JACOBSON: It's -- 20 MS. STEEL: It's depends on how you interpret. 21 Who says that you cannot really enjoy arts and travel 22 and, you know, if it's a nonprofit? 23 MR. JACOBSON: Well, again, it's a community 24 benefit test. And so I think the way that we view the 25 community benefit test since the welfare exemption was 26 created by a referendum we view that those benefits have 27 to accrue to individuals, and particularly -- 28 MS. STEEL: Do you know why we gave them the 17 1 first time? 2 MR. JACOBSON: You know, that would be 3 difficult for me to say. Does the Department have any 4 idea? It was awarded in 1990, so they've had it for 5 quite a long time. 6 MS. FORD: It was -- they received exemption 7 under the old administration and so the OCC was issued 8 when we went to the new administration. 9 And at that time we were looking at 10 approximately 30,000 claims a year. And so we did 11 not -- we were not aware exactly what they were doing, 12 otherwise it would have been an issue at that time. 13 We -- we have found other organizations that 14 have had certificates that we deemed that were issued in 15 error that we have reviewed since they were issued in 16 2003. 17 MS. STEEL: There were other nonprofit 18 organizations that we revoked their licenses, too? 19 MS. FORD: Yes. There are other organizations 20 that we have revoked since they were issued in 2003, 21 when we discovered that they were issued in error. 22 In this one we just happened to take a look at 23 it because Alliance filed a claim for OCC and we 24 discovered that they were affiliated with NIAC. 25 MS. STEEL: Just last question one more time 26 that indirect benefit, how you going to explain about 27 the United Ways then? 28 MR. JACOBSON: Yes, that's a very important 18 1 point and I want to go back to Ms. Goode's point, too, 2 we absolutely want the law to be applied equally to all 3 OCC claimants and holders. 4 MS. STEEL: I mean now you going to take 5 their -- I mean, that's not why I'm asking you but 6 everything has to be, you know, the same and -- 7 MR. JACOBSON: Yes, yes. The way I would 8 distinguish that is that in actuality I mean it's not -- 9 the case law doesn't have any case of indirect benefits 10 but to be honest, County Assessed Properties Division 11 has been more lenient than the Courts in that respect 12 that we have actually allowed the community benefit test 13 be satisfied by organizations that make grants because 14 we feel that those are sufficiently direct benefits that 15 even though they are going be to awarded to nonprofit 16 organizations that these benefits are going directly 17 into programs to reduce homelessness or to -- to create 18 more open time for art museums or provide literacy 19 training and so forth, since a lot of these grants are 20 actually targeted at particular programs. 21 By contrast in this case the benefits that 22 they're talking about are very obtuse ones that 23 potentially save -- is nonprofits overhead. But I just 24 don't -- we don't see the causal link to the actual 25 programs that these organizations are funding. 26 MS. STEEL: So you think the programs are 27 different, United Way's and what they are doing -- I 28 mean, you know, program itself is different but, you 19 1 know, that indirect benefit is different, that's why you 2 are saying -- just really you keep saying something but 3 I just really cannot get it. 4 MR. JACOBSON: I'll be -- I'll be happy to -- 5 MS. STEEL: -- answer just -- 6 MR. JACOBSON: -- to clarify. 7 MS. STEEL: Can you just give me the facts 8 and -- because I really -- you -- you been telling me 9 something, but I really cannot grab it because what's 10 the difference here and why certain organizations get it 11 and why certain organizations has -- you know, their 12 license been -- has to be revoked. 13 And why indirect benefits and both companies -- 14 both nonprofit and both that they are going to the -- 15 on -- what they call -- you know, under-served 16 communities. And why so much different and somebody 17 gets it and somebody doesn't get it? Just give me the 18 facts. Just, you know, it seems like it's not really 19 fair for certain organizations and certain organizations 20 get it, so -- 21 MR. MOON: Ms. Steel, obviously we haven't 22 looked at each of the 19 -- if there are even 19 -- 23 MS. YEE: Mr. Moon, can you introduce yourself. 24 MR. MOON: I'm sorry, Richard Moon for Legal. 25 We haven't looked at all of the United Ways that -- that 26 are listed as having OCCs, so we don't know exactly what 27 they do or how they're doing it. 28 My understanding, though, of what they do is 20 1 that they provide services to nonprofits that directly 2 affect the activities of the nonprofits that they're 3 servicing, are providing to their beneficiaries. 4 Here we see it as different because this 5 organization Petitioners are providing insurance which 6 doesn't affect directly the activities that the 7 beneficiaries are providing but are rather -- 8 MS. STEEL: But beneficiaries are giving them 9 the benefit to the under-served communities and people. 10 MR. MOON: That's right, and that's why we're 11 calling it an indirect benefit. So, for example, the 12 group homes that they're insuring are providing a 13 benefit that arguably they can do better with a reduced 14 insurance liability cost. But the benefit that the 15 actual activity of providing insurance that the 16 Petitioners are giving is merely reducing the overhead, 17 the insurance liability as opposed to providing a direct 18 activity. 19 MS. STEEL: But their benefit is not profit, 20 it's not going to certain people. It's going back to 21 the community. 22 MR. MOON: Yeah, this is not a profit argument. 23 MS. STEEL: Right. 24 MR. MOON: The community benefit argument that 25 we're making is that the -- the benefit that's being 26 given needs to be more direct. So you had asked the 27 question where that comes from and there's no explicit 28 requirement in Section 214 that says it has to be a 21 1 direct community benefit. But as we view that 2 requirement the two cases that Mr. Jacobson had 3 mentioned previously dealing with the electrician's 4 trade school and the -- and the mortician's trade 5 school, we believe -- we believe essentially states 6 that the benefit has to be direct to the beneficiaries 7 that are getting it in the first instance. 8 So, for example, with the -- with the mortuary 9 case what the Court said was that arguably that the 10 benefit accrues to the community because there's a 11 benefit to having trained morticians. But the primary 12 benefit goes to the actual morticians that are being 13 trained and to the trade association, and to employers 14 who would potentially employ those trained morticians. 15 And similarly here, our argument is that the 16 Petitioners are providing insurance liability coverage 17 and when we look at who's benefiting from that insurance 18 liability coverage, the primary benefit or the direct 19 benefit is going only to the member nonprofits and not 20 to the -- to the beneficiaries that those member 21 nonprofits are serving. 22 MS. STEEL: But it's not -- just the last 23 question -- I keep saying last question, but this is 24 going to be my last one. Lower premiums that, you know, 25 nonprofit organizations pay to the taxpayers, this one 26 goes straight -- this funds to the benefit to the 27 community. 28 So I think that way -- you know, this law -- I 22 1 mean any kind of law that, you know, you can -- it's 2 dependent on how you interpret the law. 3 So, if that benefit goes to the community then 4 it's a direct benefit. 5 MR. JACOBSON: Well, I think in the appeal 6 summary, I think that's the question. And we believe 7 that it's -- it's not direct enough to warrant the 8 welfare exemption. 9 MS. STEEL: So my question was, what's the 10 exactly direct -- how you going to interpret that. So 11 there is no clear line, that's what I'm saying here. 12 So it's dependent how you look at it because 13 you look at these as a direct benefit then it is a 14 direct benefit. But when, you know, Department is 15 saying this is not then this is not. So there's no 16 clear line between direct and indirect benefit. 17 MR. JACOBSON: Well, I suppose to some extent 18 it is a matter of you saying potato and I saying potato 19 but I think in this particular case there -- there is -- 20 is a factual line that we can see, and that is that the 21 insurance liability coverage that the organizations are 22 providing are only -- are only serving to reduce the 23 overhead of the nonprofit members and not going directly 24 to the activity that those nonprofit members are -- are 25 doing. 26 MS. STEEL: Well, we can go back there that, 27 you know, lower premiums. It's lower than other 28 insurance companies and that goes directly to the 23 1 community. 2 Well, I'm -- I'm done. 3 MS. YEE: Well, before I call Ms. Alby, isn't 4 another distinction, though, here -- and we can talk 5 about kind of gradations of direct or indirect, but to 6 me it seems like a distinction here is the -- it's the 7 members that actually provide the funding for the 8 insurance that's being provided back to them at the 9 reduced rate. There's nothing kind of new or kind of 10 additional grants that are being provided by the -- by 11 the organizations here, before us here. 12 And so -- and this is the thing that I'm trying 13 to kind of get my arms around. When the Legislature 14 enacted the authorization for the self-insurance pool I 15 can't imagine they had anywhere in their mind the whole 16 property tax welfare exemption at the time. 17 MR. JACOBSON: Yes, I agree. 18 MS. YEE: But -- but to me the distinction is, 19 and probably even distinct from many United Ways, is 20 that these entities before us today do not make grants. 21 They are essentially administering the self-insurance 22 pool with the members' funds. And so there's -- 23 that's -- that's where I kind of get lost in terms of 24 the direct versus the indirect. 25 So that's -- but is that a distinction to 26 consider? 27 MR. JACOBSON: Yes. I mean, again, I think we 28 could probably use different vocabulary but the crucial 24 1 distinction is that we see the United Way providing 2 funding for actual programs where they're, you know, 3 targeting particular parts of the community or the 4 community in general whereas in this case this is almost 5 like having a public power authority or something to 6 that extent. There might certainly be a cost benefit 7 which is being passed on to the members in this case, 8 but we don't have any type of trail showing this leads 9 directly to any increased activities that benefit the 10 community as a whole. 11 So I think for that reason we would like to 12 draw the line at this point because clearly the -- we 13 have found in the past that some benefits that -- which 14 pass through another entity are -- we do want to see 15 those funded for public policy purposes and we do see 16 them as conferring a community benefit. 17 But in this case we really do want to draw the 18 line because we just don't see this -- this cost benefit 19 from overhead that this is actually going to benefit the 20 community through increased activities. 21 MS. YEE: Okay. Let me -- let me give you a 22 moment, Ms. Goode. Let me follow up. I -- this is a 23 very, very difficult case. And -- and I -- but I do 24 went to draw out the distinctions because this is a very 25 unique arrangement that was authorized by the 26 Legislature and I want to be sure that we all understand 27 the purpose and intent of that special authorization. 28 Ms. Goode alluded to it but I think I still do see a 25 1 distinction and it's -- and it's a difficult case from 2 the perspective of what Ms. Steel has observed, and that 3 is obviously lower insurance premiums does mean for many 4 of these nonprofit organizations having a larger 5 capacity to do the work that they're doing for 6 charitable purposes. 7 So that's what makes this particularly hard. 8 But I would agree with you, Mr. Jacobson, that this -- 9 this model -- you know, what the benefit that's 10 conferred is -- is quite different than what we normally 11 would see through another OCC applicant. 12 Ms. Goode, do you want to comment on -- on 13 what's -- 14 MS. GOODE: Yes, just very briefly. And again 15 I would really urge you to take a look at the 16 supplemental brief in February which has a lot more of 17 the legislative history. I don't think that you can 18 read the legislative history and -- and think that this 19 was just -- just some kind of a pass through 20 organization. Especially when you look at all of the -- 21 the support it had including the municipalities. The -- 22 the Los Angeles City Council wrote saying, you know, we 23 need to fund these 126 public service programs. The 24 diversion of our funds into commercial liability 25 insurance reduces the amount that these organizations 26 have available for services. 27 And I also wanted to point out that when my 28 client spoke, she spoke about the millions of dollars 26 1 that have been returned to these organizations directly 2 for their services. 3 I -- I think part of the problem here is 4 that -- well, I would argue that we provide more direct 5 service than, say, the United Ways, but I'm not really 6 here to talk about that. I think the problem is trying 7 to parse out a direct versus indirect. But that's not 8 really in the statute, you know. 9 Direct versus indirect when you're talking 10 about community organizations, and you're talking about 11 their overall ability to benefit the public, I don't -- 12 I don't think that you can make your way through that. 13 It's not -- it's really not an obvious distinction at 14 all. 15 The -- the Gates and the Packard Foundations 16 gave $10 million dollars to my clients to expand what 17 they were doing out of California. 18 Now these foundations, they can give their 19 money directly to these other service-providing 20 organizations. They did that because they saw that was 21 going to promote the larger community benefit. They 22 weren't there making a distinction between direct and 23 indirect, which I think is -- is part of the confusion. 24 MS. YEE: Yeah. 25 MS. GOODE: It's unnecessary confusion. 26 MS. YEE: I did not pay a whole lot of 27 attention to the grants that came in, particularly for 28 expansion outside of California because the community 27 1 benefit test is for specifically benefits conferring in 2 the States. But -- but I -- I understand your point, in 3 terms of the acknowledgement. 4 MS. GOODE: And -- and their money was also 5 used in California -- 6 MS. YEE: Yes. 7 MS. GOODE: -- obviously. 8 MS. YEE: Yes. Okay. Ms. Alby. 9 MS. ALBY: Thank you, Madam Chair. I was 10 actually going to address the same issue that you just 11 did, and that was the Legislature. I want a little 12 repeated history on that but since you -- the Chair's 13 done a great job of bringing that forward. 14 On our own -- in our own summary brief here, 15 it's the 12th page, it says -- regarding the community 16 benefit, "With respect to the nature of the community 17 benefit required, the Court of Appeal observed in Clubs 18 of California, supra, the Courts are likely to require 19 only an indirect public benefit if the organization 20 serves an interest historically regarded as being 21 closely tied to the public welfare." 22 And what I hear this agency -- this 23 organization allows to happen that is very much an 24 indirect -- the board is direct benefit to the public. 25 MR. JACOBSON: I think we would respectfully 26 differ in that respect. Mainly because in this case 27 this is not -- that only applies if you have a 28 traditionally recognized government benefit, and as 28 1 Mr. Ambrose noted in the appeals brief that's usually 2 when it's been recognized either in statute or in the 3 case law. 4 In this case I don't have any sense that the 5 provision of liability insurance is in any way a 6 traditional burden of government in the same way that 7 the provision of housing for indigent -- indigent people 8 or the running of hospitals or -- the provision of 9 homeless shelters and things of that nature. So -- 10 MS. ALBY: Or day care or group homes such as 11 your -- you insure those kind of folks. That sounds 12 like what interpretation actually -- rather than what 13 I'm reading here, could the taxpayer respond to that a 14 little bit? 15 MS. DAVIS: I guess I would -- in hearing all 16 this as the founder I guess I'm really close to this 17 organization, but in hearing all this in terms of direct 18 versus indirect, to hear that a foundation that simply 19 just funnels money into the nonprofit sector would 20 qualify and yet we who are in the field every day 21 training staff of nonprofits, training volunteers, 22 trying to help them do what they do so carefully so that 23 they don't hurt the public, so that they don't waste 24 their money on large lawsuits, and to hear that that 25 somehow is not benefiting the nonprofit sector, and yet 26 all I had to do was be a wealthy person and have a 27 foundation and giving money away and then that would 28 qualify, it just -- it just -- I just find it amazing. 29 1 Because what we're doing is in the trenches day 2 after day trying to help the nonprofit sector operate 3 more efficiently, not hurt the public and do what they 4 do in the most difficult of circumstances. 5 And I just can't imagine that if I just were a 6 wealthy person I could give the money away that my 7 benefit would be much greater. 8 MR. JACOBSON: Could I -- could -- Madam Chair, 9 with permission could I have -- jump in here for a 10 moment? 11 MS. YEE: Please. 12 MR. JACOBSON: Yes. I think what Ms. Davis 13 refers to is a very different way from which we see the 14 issue. I mean, she refers to how her organization 15 benefits the nonprofit sector and we absolutely agree 16 with that. What we would say is the nonprofit sector is 17 not the community for purposes of the community benefit 18 test. And that's a very different finding that you 19 would make. That's the difference between the 20 legislation that we discussed where the Legislature 21 clearly decided creating nonprofit insurance pools was 22 beneficial to the nonprofit community, which is one of 23 many different types of communities in California, both 24 for profit and nonprofit, which the Legislature creates 25 benefits. And the community benefit test, which very 26 specifically is a quid pro quo where the -- the voters 27 of the State have agreed to allow decreased funding for 28 the counties in exchange for the provision of these 30 1 services which -- for the provision of these activities 2 for which they will benefit. 3 MS. YEE: Ms. Davis and than let me follow up 4 with a question. Please. 5 MS. DAVIS: I would just say that if -- if that 6 is the case then none of these organizations like United 7 Ways or foundations or anything -- because they give 8 their money just to nonprofits. They don't touch 9 individuals. So those organizations, all they do is 10 give money to other nonprofits. And than if they 11 qualify then -- and under -- under his perspective they 12 should not qualify because they're not giving money 13 directly to the -- 14 MS. YEE: And I guess I would make the 15 distinction again, it's not the -- the funds of the 16 members. I -- I just really see a distinction between 17 this model here and the United Ways. And I mean 18 we're -- and I understand the debate that we're 19 currently having, but this is just such a unique, you 20 know, kind of a model where we're dealing with the 21 members' funds. 22 MS. DAVIS: Yes, but those members' fund if it 23 weren't for us would be insurance company profits. And 24 then I could then be the insurance company, turn around, 25 create a foundation -- 26 MS. YEE: I understand. 27 MS. DAVIS: -- give them back to the nonprofits 28 and I would get an OCC. 31 1 MS. YEE: Yeah, I understand that. Let -- I 2 want to see if the Department can comment on Ms. Davis's 3 point. Talk a little bit about the training services 4 and education that they actually do with the member. 5 MR. JACOBSON: Well, I mean our understanding 6 is we -- we did look at the activities in fairly great 7 detail and our understanding was that the webinars 8 were -- while members of the community -- of the broader 9 community certainly were welcome to participate in 10 those, they were really focused on reducing liability 11 for the members themselves and that this was really a -- 12 this was really a secondary activity to their -- their 13 vastly primary activity of running this nonprofit risk 14 pool -- pool for its members. 15 MS. YEE: Okay. Mr. Horton. 16 MR. HORTON: The -- it's the -- the two 17 criterias that you've articulated was lessening the 18 burden of government and general community benefit. And 19 then it seems that your testimony is that the indirect 20 benefit provision is -- is not anywhere in case law or 21 the statute. And -- is that correct? 22 MR. JACOBSON: Actually, in -- I think it's -- 23 Ms. Alby noted before indirect benefit was raised in 24 the -- the Clubs -- the Kroger versus Clubs United case, 25 1982. So, the Courts have actually addressed that. 26 MR. HORTON: But the Courts seem to -- to imply 27 that if there is an direct benefit then that's a good 28 thing. And they seem to have -- the Supreme Court, at 32 1 least, seem to have over the years interpreted 2 charitable organizations in the very broad perspective 3 even to the extent of saying if there's an indirect 4 benefit then there is a community benefit. 5 MR. JACOBSON: Yes, it -- but only -- that only 6 applies in the case of -- of traditionally recognized 7 government benefits. So we're really looking at two -- 8 MR. HORTON: So -- 9 MR. JACOBSON: -- alternative tests. 10 MR. HORTON: -- historically, if my memory 11 serves me right, in the 1980s there was a huge problem 12 with nonprofits being able to obtain insurance. Just 13 a -- it was terrible. 14 And so, in the wisdom of our -- of the 15 Legislature they decided to create this unique animal in 16 order to address that problem. 17 So, in their perspective this would lessen the 18 burden on government if we could figure out a way to 19 pool these resources and reduce the overall burden on 20 charitable organizations. That seems to be my 21 interpretation of the intent. 22 MR. JACOBSON: Yes, and we would agree with 23 that with the exception that the burden was not on 24 governments in this case because governments don't 25 particularly provide liability insurance. The burden 26 was on the -- the nonprofit organizations which had to 27 go out in the marketplace and to purchase liability 28 insurance. 33 1 So, this is -- this is why -- I'm sorry. 2 MR. HORTON: Here we are in 2010 and the 3 government has decided to bail out banks, insurance 4 companies and on down the road. And their logic is that 5 that relieves an ultimate burden on the taxpayers on 6 government. And if we don't do this, the market will 7 fail and the entire United States will be challenged. 8 So, it seems to me that government does from time to 9 time do things of this nature in order to relieve the 10 burden on government as well as those that they 11 represent. And in that this is so unique, created only 12 for this purpose, and your argument is, is that it can 13 have an indirect benefit and still benefit the community 14 and there are cases out there that we seem to have 15 accepted. 16 I'm finding it -- and I only share this to -- 17 to allow both sides maybe to -- to articulate their 18 viewpoints on this, but I'm finding it a little 19 difficult to say that this unique organizational 20 structure established by the Legislature for the purpose 21 of addressing a specific problem that existed in the 22 1980s where nonprofit organizations were having 23 challenges obtaining insurance, had they not been able 24 to obtain insurance arguably the nonprofit would not 25 have been able to provide the services which they were 26 intended to provide from the onset because they wouldn't 27 have been able to hold up or financially survive any 28 potential liability. 34 1 Someone made that call in the 1980s in passing 2 the legislation and then the Supreme Court goes on to 3 say that you can have indirect benefit, that it's a 4 broad interpretation and we intended it to be broad for 5 that purpose. 6 So when you combine those two it seems to me 7 that the intent of the Legislature, the intent of the 8 Court was to recognize this indirect as a benefit not 9 only to government, but also a benefit to the community 10 be it -- albeit indirect, in that it deals with a 11 specific group within the community that is a nonprofit 12 oriented that does work in the nonprofit community and 13 provides services directly to the community. 14 I mean I see those connections and I'm trying 15 to separate the two and your argument seems to reconnect 16 them for me. 17 MR. JACOBSON: Uh-huh. Yes, Mr. Horton, the -- 18 again, the way I would distinguish those is just looking 19 at the case law very specifically, the -- this 20 government burdens issue in which indirect benefits may 21 be possible is completely inapplic -- inapplicable here. 22 We addressed it simply because the appeals summary -- 23 the hearing summary did raise that particular issue. So 24 we really wanted to dismiss it. 25 The only -- 26 MR. HORTON: Who prepared the hearing summary? 27 MR. JACOBSON: Mr. Ambrose. 28 MS. YEE: Appeals. Mr. Ambrose. 35 1 MR. HORTON: And so you disagree with 2 Mr. Ambrose? 3 MR. JACOBSON: No. Mr. Ambrose, I believe, 4 also stated that -- summarized our argument as saying 5 that we don't see a government benefit here. So he 6 moved on to the -- the next part of the community 7 benefit test, which is the -- the general benefit to the 8 community as a whole or an indefinite and 9 unascertainable number thereof. And so when we get to 10 that as I outlined before in response to Ms. Steel's 11 question, there really is no case law that I'm aware of 12 in which Courts have said that the community benefit 13 test for property tax purposes will be -- will be 14 satisfied by indirect benefits. 15 Now, what we've done here in the Board is we 16 have gone a little bit beyond that in terms of allowing 17 OCCs to be awarded to grant-making organizations. 18 MR. HORTON: Not to interrupt you but -- 19 MR. JACOBSON: Yes, sir. 20 MR. HORTON: -- there is case law that says 21 that the indirect benefit will be available for -- for 22 other tax exemptions that existed during that particular 23 time. I mean, as the Chair pointed out, the property 24 tax welfare exemption probably came after the overall 25 intent of the Legislature in the passage of the bill. 26 MS. YEE: It certainly wasn't consideration 27 when the bill was being -- 28 MR. HORTON: Yeah. 36 1 MS. YEE: -- being deliberated on. 2 MR. JACOBSON: Yes, we would certainly agree. 3 I mean, the welfare exemption was enacted in 1944. So 4 what we would argue is that the AB 3545, which created 5 the -- the nonprofit risk pooling arrangements was 6 really meant to create -- benefit nonprofit 7 organizations not in a way that's similar to the 8 community benefit test. Where we would argue that 9 benefit has to be to individuals. I mean, I -- we don't 10 see a lot of difference between that and, say, the 11 Williamson Act, which was created for the benefit of 12 counties that want to preserve open space and for profit 13 farmers of the very large businesses like Archer Daniels 14 Midland, which agree to keep their land in agricultural 15 production in exchange for lower property taxes. 16 So in that sense we have a for profit which is 17 benefiting from State legislation which is -- which is 18 something that is -- 19 MS. YEE: Let's -- 20 MS. MANDEL: That seems a little irrelevant, 21 but -- 22 MS. YEE: Let's keep on point. 23 MR. JACOBSON: Oh, I'm sorry. 24 MS. MANDEL: You're confusing people now. 25 MR. JACOBSON: Yeah, I'm sorry, I -- 26 MS. MANDEL: It's really irrelevant. 27 MR. JACOBSON: If I could bring it back. 28 MR. HORTON: You have a -- 37 1 MS. MANDEL: Williamson Act, I don't know. 2 It's -- 3 MR. JACOBSON: Okay. 4 MS. MANDEL: -- somewhere else. 5 MR. JACOBSON: I simply wanted to differentiate 6 between benefits for the community as a whole versus -- 7 MR. HORTON: The Williamson Act sort of 8 supports the taxpayer's position. It provides -- 9 MS. YEE: Hold -- hold -- 10 MR. HORTON: But anyway -- 11 MS. YEE: Okay. 12 MR. HORTON: -- go right ahead. 13 MR. JACOBSON: Yes. 14 MS. MANDEL: I have a question. 15 MS. YEE: I guess a couple things. Let me 16 first -- I want to go to Mr. Ambrose because I think 17 we're taking a lot of liberty with what you wrote so I 18 want to be sure that this -- what is being stated is 19 indeed what you meant to -- to articulate. 20 Then, Ms. Goode, we'll give you time. 21 MR. AMBROSE: Well, with respect to the House 22 of Rest case -- 23 MS. YEE: Uh-huh. 24 MR. AMBROSE: -- I -- I don't think that my 25 reading is the same as Mr. Jacobson's. The reason that 26 I cited the case and -- and thought it was relevant to 27 the analysis is because in that case you had a separate 28 nonprofit that was apparently set up by the Presbyterian 38 1 church but was -- it was a separate nonprofit 2 corporation, I believe, that was found to be ineligible 3 because it didn't provide -- it was found by the 4 Assessor and the Board I suppose at the time not to 5 provide a general community benefit because it was 6 providing housing for missionaries of this church, and 7 it was -- it was operating in an apartment building, 8 basically, but in that case the Court found that there 9 was enough of a connection and -- and as I saw it there 10 was -- you know, analogous or, you know arguably 11 analogous to this case that -- that that organization 12 was providing an indirect benefit which served or, you 13 know, fulfilled the purposes of the Presbyterian church 14 which allowed it to accomplish its religious and 15 charitable purposes. 16 So I was citing it for that proposition. You 17 know, I don't -- I don't know that everybody would agree 18 with that reading of it, but that's, you know, why I 19 brought it up for discussion. 20 MS. YEE: Okay. 21 MR. AMBROSE: And the point that I made, if I 22 could just add -- 23 MS. YEE: Please. 24 MR. AMBROSE: -- in -- in my summary and 25 recommendation was that I just said, and I take Ms. 26 Goode's point that, you know, it's sort of the un -- you 27 know, I made sort of the kind -- you know, kind of 28 obvious point that this situation has never come up 39 1 before. The Board hasn't ever had to deal with this set 2 of facts and, you know, applying the -- the 214 rules 3 to -- to this sort of thing, but just as a -- you know, 4 to -- so -- so stating the obvious point because, you 5 know, so it's -- it's really open to -- it seemed to me 6 it's an open question. It doesn't -- it's not -- it's 7 not clear that it's -- that the law would be interpreted 8 this way. It's not clear that it wouldn't be. 9 MS. YEE: Uh-huh. 10 MR. AMBROSE: You know, that -- I guess that 11 was kind of what I was getting at. 12 MS. YEE: Okay. Thank you. Ms. Goode and then 13 Ms. Mandel. 14 MS. GOODE: Okay. You could say that the 15 Legislature didn't think about the property tax 16 exemption, but I would kind of argue if you -- I really 17 urge you to go to the legislative history and look at 18 it. There was so much support for it -- for the -- for 19 the legislation because it was lessening the benefit of 20 government. 21 And so I -- I really think that is -- is, yes, 22 they didn't write down -- we wish they'd written down a 23 lot more things, frankly, because we've been to the PUC, 24 we've been to the, you know, Franchise Tax Board, trying 25 to understand this legislation. 26 But on the issue of was this legislation a help 27 to -- to government as well these nonprofit 28 organizations? Definitely, because so much public money 40 1 was being spent to provide -- you know, was going to 2 liability insurance and -- and liability accidents. 3 The -- the other just quick point I want to 4 make is that this issue about indirect versus direct 5 benefit, the case law does say that an indirect benefit 6 can still benefit the public. And this Clubs of 7 California case is actually a very good thing to look at 8 because this is -- is a YMCA, another held organization 9 that was a for profit health club sued to force the 10 Board of Equalization to take away the OCC of the YMCA 11 because this for profit corporation was saying, hey, 12 this is just a health club in disguise. It's not a 13 public benefit. They're beating us on price. And you 14 can't give them a property tax exemption. 15 And the Court said, well, yes, they're -- they 16 are doing the same thing. You know, they're selling 17 memberships. People are coming in and exercising, but 18 they do a number of other indirect things along the way. 19 And they should still be entitled -- they benefit the 20 general public and they should still be entitled to the 21 property tax exemption. 22 Certainly, even just using that limited lens, 23 the direct so-called indirect benefits of my client to 24 the general public, okay, definitely exists to that 25 extent. I don't think that the indirect versus direct 26 is that helpful of an analysis if you're trying to draw 27 a line between benefit or not. But -- but I just want 28 to make sure that everybody is clear that the case law 41 1 the taxpayer providing the indirect benefit in both that 2 Clubs of California case and the House of Rest was -- 3 was granted the OCC as being within the larger 4 interpretation of what the -- what the law provides. 5 MS. YEE: Okay. Thank you, Ms. Goode. 6 Ms. Mandel. 7 MS. MANDEL: Thank you. When I first read the 8 materials, and I guess then after there was the 9 concession about that the -- that the Petitioners were 10 not engaged in commercial activities, then it sort of 11 seemed to me that perhaps the -- what had -- and this is 12 probably just a rude characterization, that what had 13 driven the disallowance was of a view that this was 14 commercial activity. That that -- that that was a 15 primary driver, they're just providing insurance and 16 that's something that the for-profit commercial 17 community does. 18 And then when that was taken away after review 19 of the legislative history it -- it seemed like the sort 20 of secondary position. It felt a little weaker, and I 21 don't know sort of where it all comes out, but on the 22 House of Rest case, that as Mr. Ambrose described it 23 seemed like it was -- you could call it integrated or 24 derivative exemption from the Presbyterian church. And 25 the Presbyterian church is -- a church is like an 26 obvious one for us, right, for a welfare exemption. 27 And here it seemed to me a little bit that if 28 you were going to look at House of Rest does that mean 42 1 we'd have to look at all of the underlying organizations 2 because not every nonprofit itself would qualify for 3 taxable community benefit. Just because they're 4 nonprofits doesn't necessarily mean that they meet by 5 themselves the test. 6 And so I was -- I thought that part of what you 7 might say, Mr. Jacobson, about the House of Rest case 8 was we'd have to look at all the underlying 9 organizations to see if like Presbyterian church it was 10 obvious to see if they -- if the member organizations 11 themselves met the test. 12 MR. JACOBSON: Yes, absolutely, that -- that 13 was definitely a concern of yours and we just didn't see 14 any cogent connection between the House of Rest which, 15 you know, appears to be part of the -- the overall 16 mission of the Presbyterian church if not entwined with 17 it by -- by management, by -- by membership as opposed 18 to this case where we simply have member organizations 19 that perform very different functions that have nothing 20 to do with the Petitioners' overall purpose of -- of 21 providing an insurance risk pool. 22 And we would argue that that is -- you know, if 23 you look at Petitioner's financial statements that is 24 for and away their -- their biggest product, the biggest 25 service offered, and that this -- and that they are not 26 a health organization by any means, which I -- I think 27 is really -- really, you know, potentially not correctly 28 categorizing most of the activity -- activities that we 43 1 at least reviewed during this very long one-year process 2 in which we worked with the appeal. 3 So I think we would argue that the House of 4 Rest case in this situation is -- really is not an 5 appropriate model at all. That we would note that was 6 also a religious activity and this is -- this is a -- a 7 charitable activity and only charitable activities are 8 subject to the community benefit test. 9 MS. MANDEL: Okay. Then with respect to the 10 lessening the burdens of government and this is -- I 11 take it -- the Petitioner's argument is -- it's sort of 12 twofold. One is we had -- when the bill went through 13 the Legislature we had all these governments who said we 14 make direct grants to the member organi -- to -- to 15 organizations that would be the members ultimately of -- 16 of one of these types of charitable risk pools, and our 17 dollars are -- the dollars we want to get to programs 18 are being adversely impacted by how much they have to 19 pay for insurance, so we think you, the Legislature, 20 should -- should authorize this type of entity so that 21 more of our dollars can get to the programs. 22 That again would go to, you know, what's the 23 story on each and every member, I don't know. But I 24 think that's their argument -- that's their argument for 25 lessening government burdens, which is really kind of an 26 accounting argument and getting an accounting Professor 27 in about, you know, what -- whether these types of 28 dollars would get -- should get allocated, you know, 44 1 directly in lieu. 2 But one of the things that I didn't see in the 3 materials except the staff -- the Department had said 4 just I guess almost offhand that this is not a 5 traditional function of government providing liability 6 insurance or that it's predominantly -- insurance is 7 predominantly a commercial exercise. 8 And a lot of the things that government 9 provides were not, you know, as history goes on they 10 were not traditionally -- you know, it depends how far 11 back you go whether -- whether government's provided 12 education and all these other things. 13 But the question that I had on that was I 14 didn't see any kind of discussion about the types of -- 15 of insurance that is -- or insurance -- government- 16 administered programs in a sense, and I don't know if 17 they -- you know, we didn't have briefing on it so I 18 don't know if it's relevant or not. 19 Mr. Ambrose, I had I think sent you some 20 information. I was just kind of curious. And that's, 21 for example, after the earthquakes we have -- now have 22 the California Earthquake Authority which sounds to me 23 from looking at the Insurance Commissioner's web page 24 and the -- whatchamacallit, California Earthquake 25 Authority's web page, it looks like it's a -- it's a 26 risk pool that's administered through the Earthquake 27 Authority. 28 You know, the policies come from private 45 1 insurers, but that the -- you know, I didn't do much 2 research on it, I just -- when I read the case materials 3 I thought, well, wait, I know that there's stuff. I 4 know just from my general knowledge that the 5 insurance -- insurance for drivers that -- that there's 6 some low cost thing through the State for people who 7 can't afford it, but they're required by State law to 8 have liability insurance. 9 And I knew about California Earthquake, you 10 know, and I knew about some of these other types of 11 things that I didn't see discussed anywhere. And -- and 12 here the Legislature chose back in whatever it was, '80 13 something, to -- to authorize creation of this type of 14 nonprofit to address the liability problems of 15 nonprofits. 16 And it seemed like there are other areas where 17 the -- where maybe there has been some more direct 18 government in -- involvement than authorizing some 19 nonprofit. 20 And I -- you know, if -- if all of that 21 stuff -- if that kind of stuff is out there how does 22 that impact -- and again it wasn't really briefed 23 because it was just sort of flipped -- it isn't done or 24 it's not traditional. And -- and it raised a question 25 in my mind about whether it was a path and -- and I 26 don't think it's one that -- that the hearing summary 27 went into or I don't know if you've thought about it, 28 but if there's a question in there that you can answer 46 1 it. 2 MR. JACOBSON: I would be happy to address that 3 taking into account that I -- I haven't done a great 4 deal of research on this and that my -- my response will 5 be primarily just my knowledge of general affairs more 6 than any particular research related to this case. 7 With that said, I mean going back to Mr. 8 Horton's point before that there are particular cases 9 where we have national calamities such as we have the 10 current need for the tarp in order to take over 11 financial service institutions and so forth. 12 I would agree that there are some specialized 13 insurance markets such as the -- providing earthquake 14 insurance and actually I -- I owe the Federal government 15 $355 because I have to get my flood insurance living 16 here in Sacramento. 17 MS. MANDEL: I knew there was another one. 18 MR. JACOBSON: Yes. There are certain markets 19 that are not -- that are not served by a non -- by 20 private insurers, and in those I think, particularly a 21 State government like California, of which a lot of its 22 territory is riddled with earthquake faults, we'd 23 probably see it in its State interest to use the -- to 24 use the -- the fisc in order perhaps to sponsor some 25 type of insurance plan. 26 By contrast, in the area of liability insurance 27 in particular, we don't see any type of particular State 28 area in which -- at least that I'm aware that the State 47 1 has seen it as -- as important to provide liability 2 insurance and that the market is taking care of this. 3 Perhaps at one time in 1988, 1989, not with 4 regard to nonprofit organizations but certainly 5 Petitioners have not brought any evidence to mind since 6 then, which saying that the availability of -- of 7 liability insurance to nonprofits continues to be an 8 issue. 9 MS. MANDEL: I'm not sure. He doesn't -- he 10 doesn't think they're doing liability insurance, sir or 11 something. Right, basically? 12 MR. JACOBSON: I don't -- 13 MS. MANDEL: The State. 14 MR. JACOBSON: I don't think -- it doesn't 15 arise to -- I mean, the Government -- you know, the 16 Government does lots of different things and I think 17 what we have to limit ourselves to here is for purposes 18 of the community benefit test that this -- these are 19 needs that are recognized in legislation and also in -- 20 in Court cases. And we just haven't seen that, to my 21 knowledge. 22 MS. MANDEL: And I don't know if Mr. Ambrose 23 has a comment on that, but what about the -- you talked 24 about no -- maybe I'm dreaming from another case, but I 25 thought you talked about sort of no nexus to the program 26 and their whole point really is an accounting point, of 27 they are a nonprofit and, you know, leaving aside the 28 issue of the funds are all provided by the members and 48 1 so how does it all work. But they're basically saying 2 that ever dollar we don't have to spend buying 3 commercial liability insurance is a dollar -- every -- 4 every dollar one of our members does not have to spend 5 is a dollar that can be spent on program. And that's 6 the nexus I think they're making to -- to the provision 7 of services and equating it somehow to like grant 8 dollars that come down. And of course it is their money 9 that's going out that's coming back down somehow, and 10 less money going up. 11 And that's not -- in your view that -- that 12 type of accounting isn't adequate toward showing the 13 community benefit because it's, what, too far down the 14 chain or -- I don't want to put words in your mouth, 15 but -- 16 MR. JACOBSON: Yes -- yes, Ms. Mandel, I -- we 17 would -- the County Assessed Properties Division would 18 say that we really don't have the means to verify where 19 that money is being spent by these member nonprofits. I 20 mean, we -- we'll give Petitioners the benefit of the 21 doubt and assume that all these organizations are 22 501(c)(3) organizations that are -- have received their 23 letter for Federal income tax purposes from the Federal 24 government. 25 But we have no idea whether all these 26 organizations have been reviewed for welfare exemption 27 purposes. We're not -- we're not sure that for property 28 tax purposes they would be considered to be charitable 49 1 organizations under Section 214. 2 So it really -- it puts the County Assessed 3 Properties in a very difficult position where they 4 potentially would have to go through the balance sheet 5 of, you know, 7,000 organizations in order to determine 6 where these alleged benefits are -- are actually being 7 distributed. 8 And I note that County Assessed Properties at 9 the moment has actually asked to create an audit -- I'll 10 cease. 11 MS. MANDEL: Well -- 12 MS. YEE: Well, don't -- 13 MS. MANDEL: Yeah, don't -- 14 MS. YEE: Don't go there. 15 Thank you. 16 MS. MANDEL: Okay. 17 MS. YEE: Ms. Mandel, anything else? 18 MS. MANDEL: I -- I didn't unless -- I know I 19 had sent that information to Mr. Ambrose so unless he 20 had a -- 21 MR. AMBROSE: No, just in general, I mean I -- 22 I think it's a good point that there is a recognition, 23 you know, to quote the language, the purpose of having 24 insurance or providing insurance through the government 25 is -- has recognition, a governmental program is -- you 26 know, those programs show. 27 The point I made in the hearing summary was 28 that if you look at the -- the Leg. history of AB 3545 50 1 it seems to me arguable, at least, that that's -- 2 there's a recognition there that, you know, this is a 3 governmental program. 4 So in terms of, you know, kind of meeting the 5 test or if you want to call this a test, it seems to me 6 that that evidence would -- you know, as I say, arguably 7 satisfy that -- that requirement. So -- 8 MS. YEE: I guess I looked at it a little 9 differently and -- and I appreciate the work that was 10 put into developing the legislative history on the bill. 11 But with respect to the -- the benefits, and I don't 12 want to get away from what the bill actually did because 13 I think it's -- it's important. And that is it 14 authorized this self-insurance pool and really kind of 15 this unique creation that would not be subject to 16 insure code provisions or, you know, a regulation like 17 any other, you know, kind of insurance type entity. 18 And I think where really it fell short -- the 19 history is full of what the effects would be on 20 government, to the extent that government had a 21 relationship with these nonprofit organizations. And -- 22 and I don't think anybody here disagrees with the 23 effects in terms of what that would mean relative to the 24 dollars that would then be freed up to really further 25 the charitable purposes of all these organizations. 26 But where I do think the legislation fell short 27 and what seems to fall short as we look at whether it's 28 case law or how we'd interpret it, the welfare statutes, 51 1 is I don't know that insurance -- self-insurance pools 2 falls within a charitable purpose. I mean, I'm -- I'm 3 kind of being a little bit more crass about it. And you 4 can -- you can connect the dots to get there but looking 5 at the statutes, themselves for the welfare exemption I 6 don't think you get there. 7 So, Ms. Goode. 8 MS. GOODE: I actually think my client would 9 like to talk about this more than me but, you know, 10 the -- the actual amount of injury to people went down. 11 It wasn't just a re-accounting of we're going to take 12 these dollars and we're going to like spin them around 13 and they're going to be dealt out to programs. Part of 14 the -- the -- the motivation of this idea -- and 15 government does have liability insurance pools. I'm 16 just going to get that out there. Terrorism, there are 17 many areas in which government does do liability as well 18 as property pools. 19 But the -- when this happened the actual 20 injuries to people were lessened. The -- the amount 21 of -- through the training, through the direct training 22 of people working with the public and -- and volunteers 23 the -- the cost of the -- the programs the -- went down 24 so that more could be done for their purposes. 25 MS. DAVIS: I guess -- I wanted to add 26 something more to that because I was around when the 27 legislation was being done in the mid-'80s and it was 28 not just that the counties and the funding sources were 52 1 going to save money. It was that they had to provide 2 these mandated services to the public that nonprofits 3 were used to provide these services. And if the 4 nonprofits couldn't get insurance then the counties had 5 to provide the services. And if they had to provide the 6 services they also had to provide the liability. 7 So it wasn't just, oh, maybe we can save a 8 little bit of insurance money by allowing this to 9 happen. It was we have to do these services and these 10 nonprofits can't do the services if they can't get the 11 insurance. 12 MS. YEE: Yeah, and I don't think anybody is 13 disputing that. 14 MS. DAVIS: So it was -- it was a direct -- the 15 benefits were not going to be provided. And I also just 16 wanted to say that again to treat all the taxpayers 17 fairly there was some question about whether all of our 18 members might be eligible for OCC certificates. 19 I'm sure that foundations and United Way give 20 lots of money to organizations. I mean, I would suspect 21 they don't have OCC certificates. 22 So if you would apply that standard to us I 23 would hope you -- 24 MS. GOODE: You have 501(c)(c)s. 25 MS. DAVIS: No, ours are all 501(c)(3) 26 organizations, of course. But I would say that if you 27 were applying that standard to us and say if some of 28 ours may not qualify for OCC, which I don't know that, 53 1 that certainly that same standard should be applied to 2 all the United Ways and all the foundations that 3 themselves get OCC certificates. 4 MS. YEE: Okay. Let me pose one -- one last 5 question then I'll be quiet after this, to both parties. 6 Are there other entities like NIAC out there? 7 MS. DAVIS: No. No. 8 MS. YEE: So who covers the other universe of 9 nonprofits in terms of insurance: 10 MS. DAVIS: If you'll let me explain a little 11 bit, also, I heard him say that nonprofits aren't having 12 any trouble with liability insurance. Like the 13 financial industry the -- the debacle we've just 14 experienced, liability insurance is also a very cyclical 15 business. We experienced in 2001 many, many insurance 16 companies, commercial insurance companies, dropped out 17 of the market. We doubled during that year because we 18 were picking up all the nonprofits that were being 19 dropped by commercial insurance companies. 20 We expect that to happen again within the next 21 couple of years. So to say that it's not a problem now 22 is not to say the problem has gone away. It's that the 23 insurance industry is very cyclical and sometimes there 24 will be lots of capacity on this, and sometimes there 25 won't be very much at all. 26 So right now there are commercial insurance 27 carriers writing this. During the last hard market, 28 what it's called when there wasn't much capacity, for 54 1 example commercial insurance companies, most of them if 2 not all of them in California would not insure foster 3 family agencies. We did. 4 MS. YEE: Uh-huh. 5 MS. DAVIS: We stayed there and we did it. 6 Even though there were significant issues -- claims 7 issues that needed to be dealt with, we were serving it. 8 So there are very opportunistic commercial 9 insurance companies that's their business, that's fine. 10 But it's not consistent and that's our mission, is to be 11 consistent. 12 MS. YEE: Uh-huh. 13 MR. JACOBSON: I'm sorry, Madam Chair, could I 14 interject? 15 MS. YEE: Briefly, please. 16 MR. JACOBSON: Yes, I would note, though, that, 17 yes, if the liability insurance market is subject to ups 18 and downs but so is the power market. I mean, wouldn't 19 organizations been affect -- 20 MS. YEE: Let -- I don't want to do any more -- 21 MR. JACOBSON: Okay. 22 MS. YEE: -- comparisons that aren't on point 23 so state your -- state your point kind of in response to 24 Ms. Davis. 25 MR. JACOBSON: Okay. Again, I think the point 26 is again that we have a sense here that -- we just don't 27 have a direct cause and effect benefit between what 28 they're alleging and what is supposedly happening with a 55 1 lot of these nonprofit members. And I -- we didn't see 2 any evidence to the effect that any of these funds were 3 necessarily going into the creation of -- of exempt 4 activities so therefore we just feel that this is -- 5 this is not something that was really -- this met to our 6 satisfaction when we were reviewing the appeal 7 documents. 8 MS. YEE: Okay. And then to Ms. Davis and Ms. 9 Goode, are you affiliated at all with the California 10 Association of Nonprofits or do work with them? 11 MS. DAVIS: They actually were the -- was the 12 organization that was my fiscal agent when I was 13 creating NIAC. 14 MS. YEE: Okay. 15 MS. DAVIS: But we don't have any direct 16 organizational affiliation. 17 MS. YEE: And do they still have their own 18 insurance arm? I know -- 19 MS. GOODE: No, they do -- I represent them, 20 too -- 21 MS. YEE: Uh-huh. 22 MS. GOODE: -- so I -- I know something about 23 them but they're -- they're really an association and 24 they offer like a dental and health product to -- those 25 products are hard to get so they will act as an 26 intermediary to make those products available to 27 employees of nonprofits. It's really kind of a totally 28 different -- 56 1 MS. YEE: So it's not liability insurance? 2 MS. GOODE: No, not at all. No. California 3 Association of Nonprofits is -- is more like a trade 4 association for nonprofits but it's not a -- and 5 supporting nonprofits in the same community, but it's 6 not at all a risk sharing. 7 They do have an insurance but it's buying the 8 benefits -- 9 MS. YEE: Okay. 10 MS. GOODE: -- for employees of nonprofit 11 employers. 12 MS. YEE: Okay. 13 MS. GOODE: It's not a liability pool. 14 MS. YEE: That's okay, but to the extent they 15 can negotiate kind of economies of scale and get lower 16 rates, does that -- 17 MS. GOODE: You can't do that with liability 18 insurance but -- you can't do that with liability 19 insurance. But that's all about the way health benefits 20 are priced. There aren't economies of scale that they 21 can negotiate for health. It's a different kind of a 22 market, the liability market. 23 MR. JACOBSON: Ms. Yee, I just wanted to 24 clarify that there is one other claimant that is a -- an 25 insurance risk pool -- 26 MS. YEE: Oh. 27 MR. JACOBSON: -- organization. 28 MS. YEE: That serves nonprofit organizations? 57 1 MR. JACOBSON: Yes. 2 MS. FORD: Services religious organizations. 3 They've recently filed a claim for OCC and it's pending 4 this appeal -- outcome of this appeal. 5 MS. YEE: All right. Thank you. 6 Other questions, Members? 7 Okay, hearing none may I have a motion? 8 MS. MANDEL: Take it under submission. 9 MS. YEE: We have a motion by Ms. Mandel to 10 take this matter under submission. Is there a second? 11 MR. HORTON: Second. 12 MS. YEE: Second by Mr. Horton. Without 13 objection that motion carries. 14 Thank you all very, very much. We will 15 definitely discuss your matter later today and send you 16 written notice of our decision. Thank you. 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 58 1 REPORTER'SCERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 April 13, 2010 I recorded verbatim, in shorthand, to the 10 best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding 58 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: April 28, 2010. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 59