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Policy on the Independence of SRDCs

INTRODUCTION

7 U.S.C. 2008m (Section 6021 of the 2002 Farm Security and Rural Investment Act) requires a State Rural Development Council to have a “nonpartisan and nondiscriminatory membership” that “shall be responsible for the governance and operations of the State Rural Development Council.” Expanding on this key portion of the legislation, the National Partnership Office informed Councils in August 2002 that they would need to become 501(c)(3) corporations or otherwise demonstrate their independent status.

Councils can meet the 7 U.S.C. 2008m requirement by being free from the control of any individual, organization, institution, department, agency, sector, political party, or interest group. In short, the Council must be free to act as its membership and governing board dictate.

This document outlines standards of independence for State Rural Development Councils and describes ways to meet these standards.


DEFINITIONS

SRDC State Rural Development Council
Governing board The decision-making body of a State Rural Development Council (i.e. the Executive Committee, Executive Council, Board of Directors, etc.)
Council leadership SRDC Chair, Co-Chair, or President
Host institution Often the Council’s financial cooperator, or the organization through which the Executive Director receives employment benefits.

STANDARDS OF INDEPENDENCE FOR STATE RURAL DEVELOPMENT COUNCILS

These standards of independence were developed during the initial review of SRDCs’ applications for Federal Recognition (May-September 2003). Applications were submitted in response to a Federal Register Notice Inviting Applications (February 20, 2003, Vol. 68, No. 34, Pg. 8198). The Notice was designed to ensure all federally-recognized SRDCs would be compliant with 7 U.S.C. 2008m.

To be considered “independent,” all Councils must exhibit all the following characteristics:

  1. The Council and/or the Council’s governing board sets its own direction and major operating policy.
  2. The Council and/or the Council’s governing board has the sole power to hire/appoint, supervise, and if necessary, dismiss the Executive Director through a fair and predetermined process.
  3. No more than 20 percent of SRDC members are appointed by any single institution.
  4. No more than 20 percent of the Council’s governing board is appointed by any single institution.
  5. No person or institution outside the Council elects or appoints the Council’s leadership (Chair, Co-Chair, or President).
  6. The Council has by-laws or operational guidelines that are signed by Council leadership and include a date the governing documents became effective. The by-laws include clear statements about how decisions are made and are consistent with items 1-5 above.
  7. If a Council has a host institution, a written agreement signed by both parties explicitly gives the Council complete control over the governance and operations of the Council.

Status as a 501(c)(3) corporation, independent state agency, or branch council does not relieve Councils from the responsibility of meeting these standards of independence.


FORMS OF INDEPENDENT ORGANIZATION

Three forms of structural organization can help Councils ensure their independence. A Council can operate as a 501(c)(3) non-profit corporation, an independent state agency, or a branch council. Each of these structures allows an SRDC to function free from the control of any outside party.

501(c)(3) Corporation

Forming a 501(c)(3) non-profit corporation allows a Council to receive tax-deductible contributions, and it also limits a Council’s lobbying activity. Applying for 501(c)(3) status is a process that involves two distinct steps. Generally, a Council that is not yet a 501(c)(3) will need to file articles of incorporation with the appropriate agency in its state (usually the office of a Secretary of State). Next, the Council will need to secure federal income tax exemption by filing the appropriate forms with the Internal Revenue Service. Local bar associations may be able to direct Councils to “pro bono” or reduced-cost legal services from lawyers experienced in the non-profit sector. Please be aware that it usually takes 4 to 6 months to complete the incorporation process. See “Technical Notes” (Page 5 of this document) for further information about forming a non-profit organization.

Independent State Agency

A Council structured as an independent state agency is established by the passage of state legislation or an Executive Order, and, in most respects, functions like any other state agency. A Council that is an independent state agency usually receives some funding through the state budget and is often given use of office space and administrative support and resources. The Executive Director of an independent state agency SRDC performs many of the same duties as other state agency heads (for example, preparing an annual budget for submission to the Governor). Unlike other agency heads, though, an independent state agency Executive Director would serve at the discretion of the SRDC’s membership only, and cannot be hired or fired by the Governor, any other elected official, or the head of another agency.

Where the Council is currently established by state statute but is not an independent agency, demonstrating independence may require a legislative change, the revision of an Executive Order, and/or signing a Memorandum of Agreement (MOA) (for instance, between the SRDC and the Governor) that explicitly states the SRDC and its Executive Director are not under the control of any person or institution other than the SRDC’s membership. Securing such a change often requires working with legislators supportive of the SRDC, or with the Governor’s office.

Branch Council

Another type of independent entity that meets SRDC independence requirements is a branch council. A branch council functions in much the same way as an independent state agency, receiving funding and/or office space and administrative support. However, instead of being a separate state agency, the SRDC is a “branch” of a “host institution” (e.g., a state agency, university, or existing non-profit organization). The branch council operates under an MOA explicitly outlining terms of the Council’s independence. (In cases where a Council currently works with a host institution, it may be necessary to renegotiate the MOA under which the Council operates.)


CHOOSING A FORM OF ORGANIZATION

Some states’ civil service codes prohibit state employees from being appointed and dismissed by outside groups, such as an SRDC. Because the Executive Director of an independent SRDC must be appointed and dismissed only by the Council or its executive committee (or similar decision-making body), not all options presented above will be available to all SRDCs. In addition, particular circumstances might lead a Council to choose one form of organization over another:

  • When state government is viewed with suspicion by potential partners and rural communities, Councils organized as 501(c)(3) corporations may benefit from their “outsider” status. Funding may seem uncertain for non-profit SRDCs, but that very uncertainty can have a positive impact, encouraging Councils to think and act more entrepreneurially. 501(c)(3) Councils are also sometimes able to apply for grants not available to Councils that are affiliated with state government.
  • For independent state agency SRDCs, the receipt of state funds, office space and administrative support, and a more explicit connection to state government or a university, may result in a more stable fiscal environment and less time dedicated to fundraising or applying for grants. Because independent state agency Councils are not competing for the same pool of grants or contract funds that potential collaborators are seeking, successful partnerships may be fostered more easily by independent state agency SRDCs than by their non-profit counterparts.
  • The positive aspects of branch council organization are similar to those for independent state agencies. Being housed in a state agency, university, non-profit or other organization sometimes results in more funding certainty than that experienced by 501(c)(3) Councils. Further, Councils housed within government entities may compete less often for grant funds, facilitating better working relationships with non-profit partners.


SPECIAL PROVISIONS FOR SRDC-HOST INSTITUTION RELATIONSHIPS

In order to meet reviewers’ standards of independence, any Council not organized as a 501(c)(3) corporation should put in place a signed Memorandum of Agreement (MOA) between the SRDC and its host institution. This standard also applies to independent state agency Councils, where there is no “host institution” other than the state. In such a case, the Council should prepare an MOA between itself and an appropriate representative of state government, such as the Governor. Only in cases where the above provisions are stated in state legislation or an Executive Order, is it unnecessary for a Council and its host institution to sign an MOA.

The MOA should spell out key aspects of the unique relationship between each Council and its host institution. In addition, the agreement should include the following five provisions, which are consistent with the “Standards of Independence for State Rural Development Councils” (Page 2 of this document):

  1. The Council and/or the Council’s governing board shall set the Council’s overall direction, policy, and agenda.
  2. The Council and/or the Council’s governing board shall have the sole power to recruit, hire/appoint, supervise, and, if necessary, dismiss the Executive Director and other Council staff through a fair and pre-determined process.
  3. No more than 20 percent of the Council’s members shall be appointed by any single institution.
  4. No more than 20 percent of the Council’s governing board shall be appointed by any single institution.
  5. No person or institution outside the Council shall elect or appoint any of the Council’s leadership (Chair, Co-Chair, or President).

These provisions are consistent with 7 U.S.C. 2008m (Section 6021 of the 2002 Farm Security and Rural Investment Act), which states that a Council’s membership “shall be responsible for the governance and operations” of the Council. The provisions are intended to ensure a host institution does not unduly influence Council affairs. Councils are still encouraged to welcome their host institutions as Council partners and invite representatives of the host institution to participate in Council decision making and other activities.


TECHNICAL NOTES

Some Councils have expressed interest in structuring themselves as non-profit entities, but not as 501(c)(3) organizations. Several factors prevent other types of 501(c) status from being beneficial for SRDC organization. Specifically:

  • 501(c)(4) organizations are organized for social welfare activities. The duty of SRDCs to work at the intersection of programs and policies might disqualify SRDCs from being 501(c)(4) organizations. In addition, donations to these organizations often are not tax-deductible, which could limit the awarding of private grants and/or private foundation contributions to a 501(c)(4) SRDC.
  • Councils organized as 501(c)(6) organizations must be business leagues (such as chambers of commerce, real estate boards, and boards of trade). SRDCs need freedom to engage in various community development efforts, not just economic development projects. Therefore, SRDCs should carefully examine how a 501(c)(6) designation might restrict their activities. Also, not all contributions to 501(c)(6) organizations are tax-deductible, which could impinge on a Council’s ability to raise funds from outside sources.

For more information on non-profit organizations, please see IRS Publication 557
“Tax Exempt Status for Your Organization."