Decoding Government Instrumentalities in Maryland: Essential Partners in Environmental and Conservation Initiatives

 

In the world of public infrastructure, conservation, and restoration, governmental instrumentalities are like the mythical centaur. They are part government and part corporate entity, combining the strengths--and some challenges--of both. Just as the centaur straddles the line between human and horse, these entities blend the independence of a private business with the authority of a government body. 

Some instrumentalities in Maryland are created directly by State law, like the Chesapeake Bay Trust, the Maryland Environmental Service and the Maryland Agricultural and Resource-Based Industry Development Corporation (MARBIDCO). Others, such as local water and sewer authorities and county resilience authorities, are authorized by State law but brought to life by local legislation. The unique hybrid nature of instrumentalities brings its own set of legal complexities, requiring careful navigation. Whether you’re part of one of these organizations or looking to partner with one, understanding these nuances is crucial.

What is a Governmental Instrumentality?

A governmental instrumentality is an entity created by legislation to serve specific public purposes, similar to a government agency but with greater operational flexibility and a degree of autonomy. Unlike government agencies, which are fully integrated into the governmental structure and subject to direct governmental control, instrumentalities have a degree of operational independence. They often function as nonprofits, allowing them to leverage private sector efficiencies while still advancing public sector goals. This dual nature sets them apart from purely private entities, which do not have the same public accountability or access to governmental resources.

Creation, Structure, and Compliance

Governmental instrumentalities are typically established through specific state or local laws that outline their scope, powers, and governance structures. This bespoke legislative approach ensures that instrumentalities can effectively address the specific public needs they were designed to meet while adhering to broader legal and regulatory requirements. The legislation creating these entities often presents interpretational challenges regarding how various rules for the operation of government entities should apply.

For those instrumentalities that achieve nonprofit status, balancing compliance with both nonprofit regulations and governmental requirements becomes a significant challenge. This often means adhering to public records and open meetings laws, ensuring transparency in operations. Expect a high level of openness and accountability, as these entities are often required to hold open meetings and maintain public records.

Financial Management and Tax Exemption

Managing public funds comes with strict rules. Grant-making organizations need to be aware that their funding recipients must comply with specific guidelines governing the use of these funds. Regular audits and detailed financial reporting are part of the territory, often under both nonprofit and governmental accounting standards. This ensures that funds are used appropriately and that there is a clear trail of accountability.

For instrumentalities that choose to operate as nonprofits, the process of obtaining tax-exempt status involves careful consideration. While some seek 501(c)(3) status under the Internal Revenue Code (IRC) to benefit from eligibility for grants and donations, others may claim tax-exempt status under Section 115 of the IRC. Section 115 applies to entities that derive their income from the exercise of essential governmental functions and whose income benefits a state or political subdivision. Unlike 501(c)(3) entities, those claiming tax-exempt status under Section 115 do not need to seek formal IRS determination, but they must ensure their income is used in a manner consistent with their public purposes and be prepared to substantiate their tax-exempt status if questioned. Although Section 115 entities may not have the same access to private grants as 501(c)(3) organizations, they often secure funding through government grants or partnerships with other public entities.

Operational Complexities: Employment, Procurement, and Governance

While laws establishing government instrumentalities vary, employees of these entities are often considered public employees, subject to civil service rules and public sector employment laws. This affects everything from hiring practices to benefits and pensions. For project partners, this means that any collaborative work involving staff needs to account for these public sector rules, which might differ significantly from private sector norms.

Likewise, governmental instrumentalities typically must follow stringent public procurement laws, including competitive bidding processes. This can impact project timelines and partnerships. If you’re a grant-making organization or a project partner, understanding these requirements can help streamline collaboration and avoid potential delays.

Governance in these nonprofits can be complex. Board members are often appointed by government officials, bringing additional layers of accountability and potential political influences. Conflicts of interest must be managed meticulously, with robust policies in place to navigate potential overlaps between governmental duties and nonprofit activities.

Adapting to Change and Aligning with ESG Standards

Staying current with legislative and regulatory changes is vital. These organizations must adapt to shifts in laws that affect both the nonprofit and public sectors. For grant-making organizations and project partners, this means being aware that your partners may need to adjust their compliance strategies to align with evolving regulations.

There’s a growing expectation for these entities to excel in environmental stewardship and social responsibility. Enhanced reporting on Environmental and Social Governance (ESG) metrics is often required to satisfy both governmental and nonprofit stakeholders. For those working in conservation and restoration, this alignment with ESG standards can bolster the credibility and impact of your projects.

Conclusion

Navigating the legal landscape for nonprofits that are governmental instrumentalities in Maryland requires a nuanced understanding of both nonprofit and governmental regulations. Being aware of these unique challenges can lead to more effective and compliant collaborations. Watershed Legal Counsel’s principal attorney has experience advising governmental instrumentalities and organizations working with them, providing the expertise needed to navigate this complex terrain successfully.

--Jennifer Wazenski

Watershed Legal Counsel advises private clients and government instrumentalities in environmental and natural resources matters, conducts legal audits, and serves as outside general counsel for mission-driven enterprises in the environmental space. Founder Jennifer Wazenski is a Maryland attorney who has practiced environmental and natural resources law since 1991. She served as Principal Counsel to the Maryland Department of Natural Resources from 2013 through 2021, and, prior to that, Deputy Counsel to the Maryland Department of the Environment.

Disclaimer: Attorney advertising. The information provided at this site is for general purposes only. It is not, nor is it intended to be, legal advice.

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