We are a library that is a hybrid government agency (special taxing district) and a 501(c)3. Does being a 501(c)3 override local gov’t agency status as far as applying for the CARES PPP? We've reached out to several attorneys and even the SBA and we get opposite answers. Help!
I have spoken with many public libraries about their experience considering and applying for the different aid packages currently being offered in the wake of the pandemic. I also have the benefit of working with an associate attorney who once worked for the SBA, closing disaster loans.
So, in addition to the guidance being offered by New York State Library Development and the New York Library Association, which I encourage all libraries to pay ongoing attention to, I have two things to add:
First, as Mr. Rogers would say:
Remember, you are special.
Listening to the different experiences, and most importantly, reading the law, regulations and guidance, I can say that each and every library, library system, and resource group in the state of New York is differently situated under these aid packages, including PPP.
The is because, while the State of New York has created uniform frameworks for fostering libraries, within those frameworks, there is great room for self-determination and autonomy. That “room” means that every library has a different business structure, banking arrangement, budget profile, cash flow situation, grant and contractual obligations, approach to payroll, personnel policies, union obligations, commitments to the community, and plan of service.
This array of approaches and obligations create a unique identity that will be uniquely impacted by the current crisis.
Which brings me to my second point, which is based on my favorite baseball phrase:
Run it out.
Run. It. Out.
What does that mean? For those of you who don’t play baseball, it means…
No matter how soft a pop fly you just hit--no matter how easily the pitcher just snatched the ball out the air and is sending it hurtling to first—once the ball is in motion, drop your bat, and run the bases. Even if you think you can’t possibly make it home. Even if you are pretty sure you’ll be tagged out before you take 5 steps. Even if you suspect the catcher is laughing at you. If your library’s budget or ability to operate is being negatively impacted by COVID-19, your board owes it to the library and its community to explore every avenue. That includes PPP, and other emergency lending.
“Running it out,” of course, should not happen in a vacuum. It should happen as part of a well-considered, diverse plan for dealing with the current crisis (to that end, see my “Ten Things” column about boards and emergency response). But PPP and other aid should not be off the table until…they’re off the table.
To do this, be ready to assess the library’s fiscal position. Are you facing a pinch now, or more worried about next year? You also need to work closely with your bank, and be ready for both of you to closely assess your special identity (charter, bylaws, policies, payroll, obligations, cash flow) vis-à-vis the SBA’s rules for application.
For some of you, your library will get tagged out before you round first base. Your bank may decide you don’t qualify, or your board may even assess that that PPP or other emergency relief aren’t for you. But others of you just might make it home.
And if even only 5 libraries in the State of New York qualify for PPP and are able to help their communities recover from the impacts of a pandemic, because they did everything they could to get the aid they need to function, then the effort will be worth it.
Does your library qualify for PPP? If you need it to stay in the game: run it out.
Is it legal for a Friends of the Library group to hold their funds and not to use those funds to support the library's mission? OR refuse to pay for library program and services when ask by library staff?
Can they lose their 501c3 status, if it is proven that the funds are not being used to benefit the library?
Before we address what may be the clear signs of a dysfunctional relationship between a library and its "Friends," let's explore the basis for the Library-Friends arrangement.
A public library, hemmed in by many laws, regulations and pressures governing fiscal operations, often enters into a cooperative agreement with a "Friends" group--an independent, usually "501(c)(3)" corporation who can raise and spend money unburdened by such obligations.
Here's an example of how this works:
A town's library wants to create a special collection on "Local African-American Heritage"…a project that will be done in collaboration with a noted Black historian, the Black Studies department of a nearby college, and the archivist of a historically Black church in the town. The initial $10,000.00 donation to kick off the collection was left to the Friends by a donor in their will.
The Library and Friends create a joint committee to make the special collection happen. As envisioned by the joint committee, the project will involve renovation of a room in the library previously used for community meetings, as well as the acquisition of a wide range of books, museum-quality and ADA-compliant signage for the walls, and an oral history project housed on special interactive technology. The library's staff will receive special training on the resources and the room.
The new section's "Grand Opening" will feature a keynote speaker who some town residents find controversial. After the ribbon is cut (the Friends already own giant scissors) the Friends will host an off-site catered reception featuring a local rapper, which donors, trustees, project collaborators, staff and the media can attend for free.
Through careful planning by the joint committee, the details, budget, procurement procedures, and contracts for the room and opening events have been determined, and the bills are being paid entirely by the Friends. However, the contracts involved are not so simple.
The construction contracts were bid and had to follow all applicable procurement laws and regulations. The invoices for the new books are only in the name of the library. The off-site venue and catering contracts are only in the name of the Friends, but the contract expressly "holds harmless" the library. And although her speech will be in the new room, the contract for the speaker is only in the name of the Friends…a tactic used to avoid community accusations that taxpayer money was spent to generate controversy.
How does a library and its Friends reach this high-functioning ideal of collaboration? It takes a well-crafted (and periodically re-evaluated) Collaboration Agreement, sound policies, and routine, informed communication by both sides. This isn't to say there won't be a spat or two. But with a commitment to those things, a library-Friends relationship can be appropriately challenging, while reaching a productive ideal.
The questions posed by the member show what can happen when things are less than "productively ideal." They sound like symptoms of a problem I call "Friends Drift."
"Friends Drift" is where a previously strong relationship (or perhaps one that was never so strong), leads a library and its Friends to drift so far apart, they cease to collaborate effectively. As a result, the types of great programming and support the relationship was forged to create cease to materialize.
What does "Friends Drift" look like? It can have any number of causes and symptoms, but here are some solid hallmarks:
In the example provided by the member, the "Friends Drift" is so serious, the library is even wondering if the Friends are in compliance with State and Federal laws.
This is particularly worrisome because as not-for-profit, charitable organizations, the fiscal and operational integrity of both a library and its Friends should NEVER be something one has to speculate about. In New York, a public library must file an annual report with the Comptroller, while its Friends group must file both a "CHAR500" with the New York Attorney General and a form 990 with the IRS.
Those mandatory filings should provide everything needed for mutual assurance fiscal responsibility and transparency. If there is uncertainly even if those things are done, something has gone astray.
Which brings us to the member's specific questions, which I need to modify a bit, in order to provide accurate answers.
The first question is about whether a Friends group can withhold money from the library when the library asks for it.
The answer to that is: YES, that might be okay. In fact, it is often perfectly appropriate (and sometimes, highly advisable) for a Friends group not to pay for certain things for its affiliated library. For instance, while this is a critical factor to be decided only by the library and agreed to by the Friends, I would encourage any library to think twice (and twice again) before using a Friends group to routinely supplement an annual operating budget. In that same vein, a Friends group shouldn't pay (at least, not before deep and critical policy and fiscal analysis) a regular cost-of-living adjustment for staff salaries.
Why? Because this type of predictable, routine expense is something that should be built into the base operating budget, and supported by the sponsoring tax base(s). While community budget battles aren't always pretty, they are an essential connection to your area of service. Having Friends underwrite routine expenses to meet the library's basic Plan of Service is a potentially bad habit. In my opinion, it is something an experienced Friends group will meet with resistance.
So, what are Friends for? To put it in baking terms, they are for two things: whipping up delicious and beautiful frosting, and going from cupcake to cake.
The "frosting," is all the "extras" that are really flavorful essentials: speakers, new collections, special programming, or perhaps a really cool new set of carts or 3-D printer. They should be highly visible and make things better…just like lovely pink frosting on top of a chocolate cupcake (and just like the frosting, they could actually be a huge factor in the appeal of the cupcake, and have more calories - I mean, cost more money).
And the journey from "cupcake to cake"? That's a capital campaign. Need a new building? Hoping to expand? Want to build a green roof with solar? One-time physical upgrades are great candidates for "Friends" generosity and work, where the money can supplement a state grant or bond issue, or even take on the whole nut.
That's what Friends are for.
Which bring us to the next (slightly modified) question: what if "Friends" funds aren't being released at all? Can that risk their status at a not-for-profit?
Although there are some things Friends might not pay for, I can say with just as much assurance that any organization built solely around the well-being of a library, that does not use its resources for its not-for-profit purpose, is going to have some serious concerns. And yes, those concerns could impact its charitable and 501(c)(3) status.
To diagnose those concerns, an attorney for the library (or the Friends) would need to review the group's charter, bylaws, recent CHAR500's and 990's, and (if possible) board minutes and correspondence with the sponsored library. If there is a Cooperation Agreement, that should be reviewed. The method of requesting funds, and the basis for the refusal should be assessed. And of course, any exigent circumstances (were the Friends the victim of a theft? Did they not meet their fund-raising goals? Did they not yet conduct their audit?) would have to be considered.
Depending on what was found, legal action based on a violation of the Agreement could be threatened/brought by the sponsored Library, or a complaint to the New York Attorney General Charities Bureau or the IRS could be lodged. If things get to that point, it's likely the relationship is highly adversarial, and each party would have brought in a lawyer.
Now, I like lawyers. Being one, I see their value, and I never hesitate to recommend when I think a party needs to consult one. After all, it's how I make my living.
That said, if a library and their Friends are experiencing "Friends Drift" of the type discussed above, and its looking like things will get ugly, I recommend after initially working with their lawyers, the two groups consider using a mediator, not two adversarial lawyers, to help sort things out.
Now, when I say "mediator," I don't mean just any nice, neutral person who is willing to listen to both parties and help out. I mean a trained professional who knows the law and the obligations faced by both sides (likely a lawyer with not-for-profit experience), who can help them assess their mutual goals, and get their relationship on the right track.
In some cases, the mediation could be a respectful, productive "airing of the grievances" used to diagnose the problems and craft a new (or a first) Cooperation Agreement. In simpler cases, it could mean merely solidifying the functions of the groups' committees or developing some healthy new policies and procedures.
How does a mediation get set up?
A mediation is always conducted per a written "Mediation Agreement" that sets out the obligations of the mediator and the parties (a big one being confidentiality of the proceedings, another being the neutrality of the mediator and the willingness of the parties to proceed "in a spirit of mutual problem-solving"). The Mediation Agreement should also establish clear goals for the process (such as "…in furtherance of the mission of both parties, a session to discover and confirm shared procedures for the planned payment of certain library expenses") and defined results ("…the final product shall be a new/revised Cooperation Agreement to meet the needs of the parties for the next five years.").
A county's local bar association usually maintains a list of trained mediators. That said, for an exercise like this, not only mediation experience knowledge of libraries and not-for-profits is essential. The price tag for such a session could be anywhere from $1000-$50000 (with costs shared equally by the parties), but when compared with the costs for one party to hire a lawyer to go on the offensive, and the other to play defense - with nothing created but bad feelings and complaints in the end - as an investment, it may be worthwhile.
This is especially true since--unless something truly nefarious is suspected - "Friends Drift" is generally the result of good people caught up in the complicated web of not-for-profit operations, and not knowing quite what they can and should do. But good intentions don't automatically translate into knowing how to run a compliant not-for-profit. And when people try to wing it, trouble can start.
This is why the library-Friends relationship can be fraught with fiscal drama, and "Drift," even when all good people are involved.
The member's questions show how this drama - and Drift - can take up a lot of staff and volunteer energy, and cause a lot of stress. Working to maintain good relations, and perhaps using a mediator when relations are strained, can be the best way to harness that energy for the library and its Friends…and thus, for the entire community.
Thank you for a difficult question on an under-discussed topic.
 Meaning: donations to the group are tax-deductible, while operations are limited to its not-for-profit purpose.
 The library's pesky lawyer insisted on this, since the library is involved in the event.
 I know many taxpayers don't really care about the "Friends/Library distinction," but it never hurts to try to keep them distinct.
 It doesn’t have to be called a "Collaboration Agreement," but every library and friends combo should have a written contract that addresses how they operate together.
 The sad fact is, board committees can meet regularly and get nothing done (in other words, be "unproductive"). Signs of an unproductive board/committee meeting are: 1) big ideas are discussed but nothing is acted upon, 2) there are few if any anticipated resolutions for action items, and 3) a lack of clear objectives set at one meeting for action by the next meeting.
 I imagine there are tiny exceptions to this but in such a case, there would be other requirements for fiscal transparency.
 I am a lawyer, not a library budget specialist. This is a good topic to visit with your library system…they are there for you on all things tax levy and budget!
 Yes, I have that song stuck in my head now.
 By "nefarious" I mean suspected embezzlement, conflicts of interest, fiduciary neglect, or other issues that aren't just disconnects, but possible wrongdoing by a Friends board. If those are suspected, a Library should work with their lawyer on next steps.
 Libraries, you're not alone. This is a problem in religious organizations, social clubs, and other volunteer-driven organizations…although the people in library disputes might be better at trivia games and have larger vocabularies.