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Sep 15, 2011

Tax Deductions and Nonprofit Assets: What Really Matters?

Recently I finished my September column for Columbus Business First. After its completion, I am even more struck by the fact that tax deductibility of charitable donations keeps re-emerging as an issue. It was the subject of Congressional hearings a few years back and more recently, the deficit-reduction introduced the concept of caps. Examples cited by opponents of deductibles always refer to the elite institutions, their fundraising prowess, and the wealth they already possess. The notion is that very wealthy donors would not give super-sized gifts without the deduction.

Before anyone gets partisan, let’s get some perspective. In the last ten years, there have been only about 65 gifts of more than $100 million. That is not much in terms of total philanthropy. Even in higher education, that well-oiled fundraising machine, individual donors accounted for only about half of all funds raised; corporations put in 16% and foundations put in 29%. And the largest amount of giving went to the research universities. They raised, on average, $85 million last year while the four-year colleges brought in an average of only $9 million. Two-year colleges were left in the dust: only $1 million on average.

So when we are talking huge donations to nonprofits, let’s remember it is higher education research universities that are the most successful of the fundraising machines and individuals constitute only half of their achievement in fundraising.

Regardless, the real question should be whether or not the institutions truly need the money. Skeptics of the charitable deduction suggest that it is a game for the big institutions played with the big individuals. Well, the data above qualifies the individuals as only partial players. Let’s look at the big institutions themselves. I will pick Harvard since that seems to be the poster boy for aggressive fundraising. I will also pick Princeton since it has more endowment per student than any institution (sans MD Anderson Cancer Center at the University of Texas). And I’ll choose the Metropolitan Museum of Art (the Met)  since it is the most well-known art museum in the country.

The Better Business Bureau Wise Giving Alliance put out some very good Standards for Charity Accountability which I wrote about awhile back (Trust Between Donors and Nonprofits: Part 2). The standards cover governance, management, and finance. One standard attempts to address the issue of raising money the nonprofit doesn’t need. As a quick measure, they divide unrestricted net assets by total operating expenses to evaluate if a nonprofit’s money is being put to work. If the value is greater than 3 (36 months’ worth of expenses), they conclude that the nonprofit already has enough money to support its program without needing to fundraise. They correctly focus on available funds as the appropriate measure of a nonprofit’s need for fundraising, but because donors are able to limit a nonprofit’s ability to utilize their gifts, it is possible for a nonprofit to have tremendous wealth that it cannot tap in times of financial stress. The Alliance therefore looks at the money the nonprofit can tap in order to maintain a reliable set of services. Because accounting rules include buildings and “fixed assets” with unrestricted cash, if the ratio for an institution approaches 36 months, the Alliance recalculates the ratio after subtracting fixed assets and related debt.

I went to GuideStar to look at the Form 990 filings for each institution. If it didn’t have a 990 on file, I went to their web sites to get their financial statements. If you want to do your own research, extra information is provided at the end of the post.

This measure shows that in FY2010 the Met has 36 months of unrestricted assets and Princeton has 48 months. Even after adjusting for property, they have over two years’ worth of unrestricted assets. One could conclude that they do not need to fundraise so aggressively and should “share the wealth” with more deserving institutions. Interestingly, while Harvard has 23 months of unrestricted net assets, it has only 14 months after adjusting for property (financial statements, not 990). Thus, while Harvard is wealthy, it cannot easily access much of its assets, leaving its need for fundraising higher than the less wealthy Princeton or the Met. Rather ironic. Shows the high profile shouldn’t necessarily be the one to be shot at.

The local reality is that the nonprofits that most affect our daily lives are usually nowhere near the limits suggested by the Alliance. While Harvard and Princeton can support years’ worth of expenses from their existing unrestricted assets, our largest university here in central Ohio, The Ohio State University, can support only 3 months of expenses (financial statements, not 990).  Our other large universities, Franklin and Capital, have net assets sufficient to fund 13 months and 10 months of operating expenses, respectively. The smallest, Ohio Wesleyan and Columbus College of Art and Design, have 6 and 9 months, respectively. Any criticism that higher education attracts money beyond its needs does not apply in central Ohio.

Nor does any notion that the local visual arts attract more than they need. The Metropolitan Museum of Art raised $130 million last year. This amount was raised at a time when the Met could support over two years of expenses with the non-fixed assets it already had. In contrast, the Columbus Museum of Art raised about $10 million according to its latest filing (2009) but its non-fixed unrestricted assets could support less than six months of expenses. The former may not need to fundraise, but the latter surely needs all the money it can get.

According to the Book of Lists, the Columbus Zoo and Mid-Ohio Foodbank are the largest non-educational nonprofits in central Ohio and Easter Seals, and Boy Scouts Simon Kenton Council the smallest. While the Alliance says that 36 months’ worth of expenditures in unrestricted net assets is too much, the Mid-Ohio Foodbank has less than two months. The Zoo has 30 months (2009 data), but it has chosen to invest heavily in facilities. When adjusted for these relatively unavailable funds, the Zoo has unrestricted net assets sufficient to support only 3 months of operating expenditures. The Boy Scouts (2009 data) and Easter Seals can sustain only 7 months and 3 months, respectively, of their operations from their existing unrestricted assets.

Not only do these data confirm that there is no excessive fundraising in central Ohio, they point out that our nonprofits are trying too hard — they are putting so much of their resources into services that they have not accumulated an appropriate safety cushion to stabilize their services in times of crisis. The Alliance says 36 months is too rich, but less than 10 months is approaching anemia. And don’t get me going about endowments, adding to endowment would do nothing to improve this ratio; and this ratio is the most important service-stabilizing goal a nonprofit can have.

Thus, while national discussion focuses on the benefits of fundraising incentives on a few very fortunate institutions, the local reality is much different. Nonprofits in central Ohio have put so much of their resources into their services that they actually have set aside too little money. Past recessions have impacted revenues for a minimum of twelve months and one would want our nonprofits to have at least that much set aside in unrestricted assets excluding buildings and equipment if they are to stabilize their services. Yet that goal eludes them all.

The current tax system hardly shifts resources to the local institutions that least need it. Our local nonprofits have too little savings to protect their services from disruption. We still need to bolster their finances and encourage local donors to continue to step up.

To calculate The Better Business Bureau Wise Giving Alliance nonprofit asset ratio, collect data from lines 10c, 20, and 27 in Part X and line 25 in part IX from Form 990. Not precisely what the Alliance suggests, but close enough to make a point. If you want the instructions go to the BBB website for a general description of the Standard 10 and detailed instructions.