Tag Archives: financial security

Payments in Lieu of Taxes: Necessary Evil or Unfair Imposition?

Reposted from The Giving Institute Blog – May 23, 2012

Click HERE to download a PDF of this article. 

Today’s continued economic uncertainty has prompted bold actions by local governments as they struggle to secure necessary income while faced with substantial budget shortfalls, unpredictable tax revenues and critical services in dire need of funding. In this era of municipal belt-tightening, a rapidly growing number of local officials now look at previously untapped sources of revenue: nonprofit institutions.

Since Boston’s Mayor Thomas Menino first broached the issue several years ago, other communities – small, medium, and large – have followed suit and have turned to some of the country’s most significant nonprofits to augment the current tax base.

Image Source: http://american.com

This has become an unprecedented source of revenue as well as debate, especially as questions arise around the endowments and land holdings of some of the country’s largest nonprofits, with universities, museums, hospitals and other community resources being cajoled, negotiated with and sometimes even publicly assailed in the media.

This country’s 1.5 million nonprofit organizations represent and cater to a myriad of important causes and missions, and in return, they have traditionally received immunity from real estate taxes and other taxes through their federally-designated 501(c)(3) statuses. However, the notion that charitable institutions are off-limits to the tax collector has recently been cast off.

As a result, municipalities now see an opportunity to extract some much-needed revenue from nonprofit organizations. This phenomenon has been working its way across the U.S. under creatively phrased monikers such as “voluntary contributions” and “payments in lieu of taxes (PILOT).”

We first noticed the momentum towards acceptance of this new model about 15 months ago when we developed a then-controversial op-ed piece for the Giving Institute’s blog about PILOT.  Since then we have witnessed additional municipalities placing public pressures on their largest local nonprofit institutions. Most organizations are obliging, and only a few weeks ago a precedent-setting court decision undoubtedly propelled these controversial PILOT issues into the public arena.

The Mesivta Eitz Chaim of Bobov Inc. summer camp, located on 61 picturesque acres in Pike County, Pennsylvania, is operated by the Bobov Orthodox Jewish community in Brooklyn, New York. Between June and August, the camp provides classes and lectures on Orthodox Judaism as well as some recreational activities, though the camp is primarily designed as an educational institution.

Although the camp’s dining and recreational facilities are open to the public, camp representatives were unaware of neither Pike County residents using the facilities nor Pike County or Pennsylvania residents attending the camp.  As a nonprofit organization, the camp sought an exemption from real estate taxes, but Pike County and the local school district denied the camp’s request for an exemption based on the nature of the camp and its charitable status.

The Pennsylvania Supreme Court upheld two lower court rulings against the camp’s tax exemption. In order to receive an exemption, the Court held that a claimant must meet the definition of a “purely public charity” as measured in a 1985 Pennsylvania case (Hospital Utilization Project v. Commonwealth).

In Pennsylvania, an “institution of purely public charity” advances a charitable purpose, donates or renders gratuitously a substantial portion of its services, benefits a substantial and indefinite class of persons who are legitimate subjects of charity, relieves the government of some of its burden, and operates entirely free from private profit motive.

At issue in the case was whether the camp relieved the government of some burden, since the dining and recreation facilities were open to the public and the camp’s soccer fields, located outside of the camp’s gates, were used on occasion by the public. The Court affirmed that the occasional use of recreational facilities was insufficient to relieve Pike County’s government of some of its burden and made the camp’s property taxable.

This decision has the potential to be very important, especially in this challenging economic environment when many municipalities are cash-strapped. The implications from the point of view of the nonprofit are that local governments may look to charitable organizations as revenue sources. Furthermore, nonprofits that balk at payments in lieu of taxes may face a likely possibility that the municipality could challenge its nonprofit status, and possibly revoke it.

Here’s an overview of where PILOT programs are especially active:

Boston, Massachusetts

Boston has become the clear leader in implementing PILOT programs, collecting almost $17 million annually from a variety of cultural, educational and medical institutions, with annual payments ranging from a few hundred dollars from a VFW Post to millions from hospitals and universities. In 2010, 36 nonprofits provided “voluntary tax” payments to the city.

New guidelines promulgated by Mayor Menino’s PILOT Task Force increased the number of nonprofits asked to contribute and pushed nonprofit payments up by 24%. Boston University and other large landholders have “volunteered” payments for municipal services approximating 25% of what they would pay if they were a for-profit entity.

Chicago, Illinois

Chicago has slashed critical city services amounting to $417 million. Colleges, universities and hospitals are being approached, although organizations of all sizes are affected.

One prominent example is the 20-member nonprofit Austin Green Team. Since 1989, the Austin Green Team has maintained over one dozen gardens and two greenhouses in the Austin neighborhood on Chicago’s west side, providing beauty and a sense of serenity to more than 100,000 residents. Under the Mayor’s 2012 budget, the Austin Green Team’s water service fee waiver is proposed for revocation, threatening the viability and survival of the gardens. The proposed budget plan includes eliminating fee waivers for virtually every nonprofit organization in Chicago.

Worcester, Massachusetts

In 2011, Worcester Polytechnic Institute entered into a 25-year agreement with the city to annually fund $50,000 to maintain and improve a neighboring park. WPI had already been making annual PILOT contributions of $180,000, including a 2.5% increase built in annually over the next 25 years. WPI president Dennis Berkey described the payments as strengthening the quality of the relationship between the college and the city. WPI also received assurances from the city that for the next 25 years, no additional taxes would be levied on the institution. However, a more important aspect of the relationship was the positive publicity lauded on the school for its support of the city.

Syracuse, New York

In 2011, Syracuse University began making $500,000 annual payments on a 5-year, $2.5 million pledge to the city of Syracuse. Responding to the pleas from the financially strapped city, University officials agreed to be the first nonprofit in Syracuse to make a voluntary payment after the City Council began exploring taxing some aspects of the University’s newly expanded properties. According to City Council, even as the University further shifts the burden of municipal services away from taxpayers, “It’s time for the University to kick in a little more to support these services.”

Providence, Rhode Island

Due to unprecedented financial problems, the Mayor of Providence initiated a program designed to pursue tax exempt institutions for a “failure to sacrifice.” The natural target was the city’s largest landowner, Brown University, who since 1764, was “freed and exempted from all taxes.”

Recent negotiations have yielded voluntary payments from Brown in the amount of $31.5 million over 11 years. Brown owns 200 buildings in Providence valued at over $1 billion in total, and if taxed, would pay the city $38 million annually. As Providence Mayor Angel Taveras summed it up, “every organization, including tax-exempt institutions, must share part of the burden of saving our city.”

Even with a slowly advancing economic outlook, the landscape has changed and nonprofits are unlikely to continue to benefit from their open-ended special tax exemption. With this in mind, land-owning nonprofit organizations should consider the following:

  1. Be prepared. Charitable organizations should not assume that their nonprofit status creates blanket immunity from all taxation. Houses of worship, community centers of all types, camps and other agencies owning larger parcels of land may be targeted for voluntary payments.
  1. Budget now for PILOT. Nonprofits should plan on including PILOT payments that might represent “reasonable” contributions to the municipality and tailor their budgets and programming accordingly.
  1. Get out in front of the issue and use it to your advantage. Appearing as a “good citizen” is important to nonprofits, especially those that are large landowners. Tailoring the PILOT to garner positive PR can strengthen an organization’s community image as well as possibly enable special consideration from the municipality later on. Nonprofits of all sizes should expect governments to ask them to step forward and contribute voluntary payments or pay usage fees to cover municipal services, including fire and police protection and other services.
Advertisements

Non-Cash Giving Can Be an Important Donor Option

Reposted from eJewish Philanthropy – May 3, 2012

While the most common way to satisfy charitable commitments is with cash and appreciated securities, an often uncommon means available to donors is to utilize “stuff:” items of value that are often very attractive to collectors and which can become practical ways to satisfy philanthropic obligations.

Donors at all levels, but most notably high net worth contributors, periodically utilize non-cash giving. Art museums have received benefactions of pieces of art for decades and other types of nonprofits have welcomed real estate, especially when property was highly valued and represented an easy way for a donor to avoid costly capital gains taxes while satisfying a pledge.

A recent synagogue client received a valuable sculpture, valued at $300,000, when a member inherited the piece from a deceased relative. The donor did not want the piece and made the gift with two important stipulations: the congregation had to hold the piece for at least three years and that it is displayed prominently (requirements made for tax considerations subject to the related-use and tax exempt purpose rules of the 501(c)3 ).

Another congregation was nearly the recipient of a time-share at a Poconos resort, carrying with it a value of about $10,000. Fortunately formal Gift Acceptance policies prohibited the institution from accepting a gift of this type and the donor ultimately made cash payment for a campaign pledge instead.

Laura Linder, executive director of the Jewish Foundation of Memphis, is talking passionately these days about two gifts the Foundation has received within recent months from older Jewish philanthropists originally unaware of the power of gifting valuable collections.

The Foundation received the first gift in late 2011 when a member of the Jewish community, Susan Adler Thorp, began breaking up the estate of her late parents, Herta and Dr. Justin Hans Adler, and considered ways to deal with a Tiffany glass collection her mother had amassed. Determining that no living relatives wanted the collection, she contacted the Foundation and made arrangements through Mrs. Linder to transfer a significant portion of the collection that took more than 50 years to create.

After cataloging the objects and working in concert with one of the nation’s top auction houses, the Foundation received very significant proceeds earmarked for and added to the Herta and Justin H. Adler Philanthropic Fund, the family’s donor advised fund (DAF). Proceeds from the auction of that collection will be used in part to help fund the purchase of life-saving prescription medications for senior citizens, the Temple Israel Museum, and other charitable organizations designed to help make life better for others.

While the Adlers were avid collectors of art, they also were dedicated philanthropists, often saying that “charity is the gift you give for having a good life,” noted Mrs. Thorp. “My parents shared an eye for beauty and a love for art,” she said. “My mother’s passion was collecting Tiffany glass. Nearly everything in the collection was found as my mother searched for Tiffany glass.” All of the items in the collection were sold in a special Heritage Signature Auction of Lalique and Art Glass in New York City on November 19th. The much- anticipated live auction generated far more than the book value of the collection.

A second non-cash gift came to the Memphis Foundation earlier this year as a result of an anonymous Jewish couple preparing to downsize. The donor had passionately developed an enormous coin collection, including U.S. coins, shekels, and other pieces of varying value. The Foundation has contracted with an auction house to catalogue the coins and it is expected to go to auction in several venues later in 2012. Proceeds could exceed $500,000 and will also be used to create a DAF for an as-yet-to-be-determined set of purposes.

“During the ten years I have been at the Foundation, we have received several real estate gifts,” Laura Linder told us. “But until recently I had never even considered the power of encouraging donors to make non-cash gifts of this type or of this magnitude. This is an eye-opener for all of us at the Foundation.”

Tax implications for donors using collected items are a motivator, for sure, especially if offspring have little or no appreciation for or interest in “the stuff,” a commonly used term voiced by Bob Koo, a Palm Beach-based art and philanthropy consultant to the high net worth philanthropically-focused. “While our work is focused especially on successful individuals and families, there are certainly implications for donors of all levels,” he says.

Koo conducts educational seminars across the U.S. and has written extensively about the approaches that nonprofits might consider to attract part or all of collected possessions. Very often, he says, “things” that people have collected probably have no significant value … other than to the collector. “But in other instances, fine art of all types, books and manuscripts, coins and medals, clocks and watches, entertainment and space memorabilia, furniture, jewelry, vintage motor cars or wines and whiskeys can have large price tags. And when estate planning requires significant taxes, nonprofits can benefit significantly when they openly encourage donors to make gifts of this type … prior to their passing.”

Both Koo and Linder have told us about other circumstances where donors have talked about people who have considered charitable gifts to either satisfy current priorities or pave the way for other charitable opportunities. Both share a common recommendation to nonprofits: market the concepts actively and showcase the values of gifting collectables.

One other important consideration for nonprofits accepting non-cash gifts: carefully review your Gift Acceptance policies and update the written, formal documents so that you minimize jeopardy and are prepared with responses when potential donors inquire about gifting collectibles. Nonprofits should review such policies annually but giving beyond “conventional” methods requires careful strategies and policies.

Transparency and Financial Oversight

Reposted from eJewish Philanthropy – January 24, 2012

“We think that the foundation should have glass pockets.”
Russell Leffingwell, Chair, Carnegie Corporation, 1952

Effective oversight of financial systems in nonprofit organizations is key to their proper and effective functioning. This philosophy, however fundamental, has not always been universal practice nor have donors always expressed more determined expectations about the transparency of organizations they support.

In today’s marketplace, nonprofits that watch over finances and share financial, programmatic and other information with their constituents build stakeholder confidence and are thus far better suited to fulfill their missions, deliver effective services and adequately address donor concerns. Nonprofit finances not only include fiduciary elements but also address reporting of capital, personnel and programmatic expenditures.

But no organization is immune from the high standards of financial transparency. Within the last few months, two rabbis were accused of mishandling precious donor dollars for organizations they headed, and the headlines in various media and across the internet were, well, ugly.

Therefore, in today’s fast-paced and accessible environment, the landscape is changing and standards are rising. In fact, while we eschew “gotcha” scenarios, we do encourage every one of our client organizations to establish a financial oversight committee – apart from the agency’s treasurer and CFO – for major campaign efforts and ongoing operations, especially to assure donors at all levels of proper procedures and practices!

At the heart of increased transparency and accountability is the widespread belief that, in return for public support, nonprofits have a special responsibility to the public: a responsibility to earn and maintain trust instilled by donors to properly utilize funding to fulfill their stated mission. Today, no nonprofit leader, professional or volunteer, could be considered exempt from scrutiny; and we suggest that nonprofits today must be diligent in setting policies and adhering to best practices to assure donors that they are in force and the guide organizational decision making at all times.

Media reports abound with the financial shenanigans undertaken by some nonprofit staffs and boards. And we know that the Jewish community is not immune from various recent horror stories that validate the importance of nonprofits establishing formal policies to promote transparency. In this context we are often stunned to hear that some people claim that they do not want to receive information even when agencies produce extensive annual reports or other detailed materials.

Here is a review of only a few recent examples of alleged bad practices:

Excessive spending on luxury travel, jewels and clothing appear to be the habits of a New York-based educational and charitable organization in the Orthodox community.

A Birmingham, Alabama, nonprofit that provides computers to needy kids was treated as a “personal piggy bank” by the founding board member who traveled, gambled and lavishly spent charity money for years. During this time, this nonprofit did not even file the requisite IRS nonprofit forms.

Embezzlement of nearly $1 million by an outside accountant was treated as an internal matter by the CEO and other high level staff of a nationally known community organizing operation. Neither the Board nor law enforcement was initially notified as the CEO sought to cover up the misuse of funds. The outside accountant also happened to be the CEO’s brother so the drama continued unabated.

A Chicago-area nonprofit providing affordable housing dedicated nearly $700,000 to the director’s salary, three times as much what other nonprofit housing leaders in the region made.

Clearly, no sector, whether Jewish or not, is immune from scandal. So what should nonprofits do?

  1. Damage to the public perception of the organization and the loss of the public trust is often irreversible, rendering an organization incapable of functioning. Nonprofits rely on the trust and good will generated through fulfilling compelling missions that advance the public good to cultivate and sustain support from donors and clients. Contributors are less likely to support an organization with a history of poor financial oversight or worse.
  2. Today’s donors demand greater transparency; they want a financially accountable and open organization. The legacy of the rubble of Enron and financial deals crafted in “quiet rooms,” at the outset of the latest economic recession is a societal push for accountability and transparency. We hold our schools accountable and we expect our government to be open in how it operates and more accountable for its actions. Now, donors view their charitable contributions less as a gift and more like a strategic investment. Therefore, they demand more honest information about how their investment is utilized. It will not take much for sophisticated donors to be turned off by an information vacuum or the perception that the business side of the organization is being handled improperly. The more you share, the more your stakeholders will understand, and the more likely they are to support you.
  3. Rules governing charitable organizations, namely from the IRS, require honesty and compliance. IRS Form 990 requires annual reporting on a nonprofit’s mission, governance, programs and finances as well as the organizational compliance with relevant state laws. In addition to the Federal reporting, most individual states require annual reporting of finances and governance. Oversight by local government also ensures tighter controls over nonprofit organizations. After a local charity providing low-income housing and facing mounting financial problems received hundreds of thousands of dollars in grant funding, the city of Glendale, California, approved the requirement for two years of financial statements and audit reports for any nonprofit organization competing for social service funding from the city.
  4. Transparency is the basic foundation for collaboration. Openness fosters collaboration with staff, donors and volunteers and the efficient use of resources to fulfill the organization’s mission and increase giving.

Transparency is not easy. In the hectic world of nonprofit management, transparency and financial oversight are often relegated to non-urgent status as staffs and boards may view these as “chores” as not advancing the mission. But as the notable examples consistently show, time well spent on creating and implementing financial oversight systems and a culture of openness are significantly beneficial in the long run. To maintain relevance and stability (or growth), nonprofits should act now and consistently to be more open, compliant and diligent. Below are some recommended steps for openness:

  • Nonprofit boards should institute formal policies and procedures to ensure the prudent and responsible management of all financial documents (e.g. budgets, audits, expense reports, compensation, petty cash and invoices). Board members and relevant staff should review, approve and track budget and organizational financials on a monthly basis.
  • Accurate and complete financial records should be maintained at all times. Nonprofit organizations should undergo annual audits or reviews by an independent and qualified financial expert.
  • Clear policies for reimbursement of documented business and travel expenses should be created.
  • Board members should question patterns of spending that seem at odds with stated organizational policies and objectives.
  • Boards should create or enhance their audit or finance committees and recruit directors or committee members with relevant professional experience.
  • Charitable organizations should use the Internet and other electronic media (e.g. blogs, Twitter, Facebook, website, Flickr, YouTube, Linked In, e-newsletter) to disclose information such as an annual reports, names of board members, as well as mission and vision statements.

Clearly, the nonprofit sector has come under increased scrutiny by the government and private contributors. Establishing consistent and transparent financial oversight systems will go a long way in maintaining the public trust and cultivating financial support.

Taking a Fresh Look at Endowment: Financial Security, Ethical Dilemmas, & Investment Strategies

Every vibrant nonprofit today requires a strong endowment as part of its financial program and the best and most well-run agencies accepted this mandate many years ago. Lessons from the Great Recession remind us, too, that endowments are a critical venue for institutional funding.  Yet fresh perspectives about endowments are important today and are reshaping the financial picture for many nonprofits.

Webster’s defines an endowment as “the part of an institution’s income derived from donations.” With this basic statement in hand, I am hearing that some nonprofit organizations still confuse “endowment” with “planned giving” or a “free-spending account” . . . or even other incorrect or misleading terms. This prompts me to wonder aloud if nonprofit leaders truly understand the critical importance of having adequate endowments, what they are doing to build this important income stream for the long term, and what they see as their responsibilities to protect the corpus of the endowments.

Nonprofit volunteers and professional leaders need to keep evaluating the endowment programs that they create and depend upon. Recognize that donors have made endowment gifts with the expectation that funds will be managed well (conservatively), and funneled to oftentimes specific channels for restricted purposes and will be available for years to come. Every endowment gift represents an investment in the future of a nonprofit

As a consultant to nonprofits of all types and sizes for many decades, I receive questions constantly about what represents adequate endowments and what these dollars can be used for. Best practices today dictate that a nonprofit’s endowments should exceed no less than five times its operating budget. One of the troubling factors today is that too many nonprofits are not considering this ratio, are looking only at their day-to-day needs, and are not necessarily being creative in the approaches they are taking in establishing and encouraging endowment gifts.

Because of financial pressures, some nonprofit leaders have even dipped into their organization’s endowment when times seem economically dire and have not replenished the corpus, thereby perpetuating “the slippery slope” of economic difficulties. This is not only bad practice but it also often violates instructions set forth by generous donors.

There are many reasons to keep healthy balances in the endowment investment portfolio. One of the primary reasons is because of a likely scenario that I discussed for “Taking the Long View” in the September edition of Advancing Philanthropy. The author, Paul Lagasse, asked me if there was a lesson to be learned about the Great Recession as it pertains to endowment funds. My view steadfastly remains that we need to be prepared for the next downturn in the economy. The best way to do that responsibly is safeguarding our endowments. Interpret this as protecting the corpus of the endowment while concurrently attracting more donor support for restricted and unrestricted purposes.

In the winter 2010 issue of The Stanford Innovation Review, authors
Burton A. Weisbrod and Evelyn D. Asch make another compelling case that endowments are more than simply a rainy day account. In many cases, it is a benchmark for bragging and a measurability of viability. It is a way for consumers (aka donors) to understand the impact of an organization. Savvy donors use it as a guide to determine an organization’s level of sophistication as well as their wealth management expertise. From an organizational perspective, it is a way to showcase a respectable endowment as “qualified” and capable for cultivating additional support.

Besides the ethical dilemmas associated with dipping into the assets of an endowment, acknowledge, too, the overarching federal law that prohibits such practices from occurring. The Uniform Prudent Management of Institutional Funds Act of 2010 (UPMIFA) provides guidance on investment decisions and endowment expenditures for nonprofit organizations.  Almost every US state except Florida, Mississippi and Pennsylvania also adopted these recommendations about good investment behaviors. The idea of this act is to responsibly dictate guidelines for nonprofits on what levels of withdrawls from endowments are permitted. In other words, endowment funds decreasing in value probably are not eligible for withdrawls. Any deviation from these guidelines would be deemed irresponsible and possibly unlawful.

Therefore, as increasing numbers of nonprofits do adopt best practices about establishing and fostering endowment programs, I recommend that organizations consider four essential points to secure both the trust of donors and treat their funds with respect:

A.   Continually review investment policies. In doing this, I recommend that every nonprofit Board regularly assess investment allocations, evaluate the work of management and investment services, and clarify and redefine endowment objectives. Professionals who are specialists in nonprofit investment strategies should be called upon.

B.   Endowment programs should be building for 20 or more years . . . not just for today! Contributions to endowments should not be looked at as band-aids on the finances of any nonprofit. Therefore, donors may make either (or both) testamentary gifts as well as current gifts to fund restricted or unrestricted purposes.

C.   Provide an annual report to stakeholders. This important document can highlight accomplishments and relatable statistics to give donors a sense of how their gifts are being appropriated and managed. Perhaps their money is supporting a specific program or professional position: donors expect to see if their dollars are justified by the end result.  In the case of unrestricted gifts, donors would like to know that their contributions are paving the way for a financially sustainable future for the organization they love.

D.   Seek ongoing endowment initiatives. Make sure there is a vision for what endowment gifts can support. Donors like to see tangible results being accomplished. They may also like to have some control of where their money is going. Invite donors at all levels to truly become investors in the future of the nonprofit by being committed to endowment strength just as much as addressing every day financial needs.