Learning from Other’s Mistakes

Big Brothers Big Sisters of America was all over the news of late, having had its federal funding temporarily frozen.  According to the Inspector General’s Office of the Department of Justice, the national organization has done a poor job of complying with federal standards for accounting for more than $23 million of federal grant dollars received.  While the Fed’s expectations are not, by any means, light and easy, they are generally clear and straightforward, particularly for an organization with a track record of receiving federal dollars.  According to the audit, BBBSA did not: 1) do a good job of tracking its own use of those dollars; 2) may have charged some inappropriate expenses against the federal grant; and 3) did not hold its affiliates with which they shared these dollars to the federal standards of accounting for, and documenting, the expenditures.

At the same time that these wrongdoings are being cited by the Inspector General, no one is contending that the things promised in exchange for the money weren’t done.  Logic begs the validity of such a statement when there are doubts about the documentation of how the money was spent and statements that things were charged against the grant that should not have been.  If non-permissible expenses were charged against the grant that means there were dollars not spent on the intended program that were supposed to go to that program.  I’m not sure how both can be true:  there are questions about the accuracy and correctness of the documentation but no question that all that was to be done under the grant was, in fact, done.

I would like to believe that any organization that has received at least one grant understands that receipt of grant dollars, regardless of from whom they were received, comes with stipulations on how the funder:  a) wants the money to be used and b) how it wants use of that money documented and accounted.  For some funders, this is quite easy; for others, like the federal government, it can be extremely complex.  But you learn after the receipt of that first grant to do what the funders request, regardless of what you think of what is requested.  You want the dollars; you jump through the hoops—before, during and after.  But if you are reading this and didn’t know that before, now you do.

Yet, it is not only BSSSA’s behavior that is disturbing.   An organization with its history and stature should have known and done better and demanded better of its affiliates.   But what is also disturbing is the reaction of others.  One headline on this story actually said that BSSSA was “dinged.”

This is not a ding; this was a serious dent that requires major body shop time!  This same author then seemed to provide BSSSA with a pardon for its wrongdoing,  explaining that it had experienced major senior staff turnover in the last half of 2012, including a new CEO, COO and finance head.  What?  Do you mean to say that BSSSA cannot afford to hire skilled and experienced nonprofit leaders who have worked with funders, including the federal government?  Do you mean to suggest that the missteps in the accounting of this grant happened only under the new administration? Or that it was the fault of the previous employees, and thus, excusable.  Or that the new should not be held accountable for the missteps of their predecessors?  When are those in the nonprofit sector going to stop making excuses for others in the sector?  The rest of the world is certainly not giving us such accommodation; in fact, it generally takes us all down with the errors made by one.

So, here is a story of one that has the potential to take many of us down, depending upon how the lawsuit ends.  Princeton University may again be leading the way in another key area of nonprofit history.  Previously, the University was the first major, if not the first of any size, instance where a donor (or in Princeton’s case, family members of the donor, Marie Robertson) sued a nonprofit for failure to use a restricted gift for those restricted purposes.  Princeton argued that it was using it for the intent of the restriction even if it didn’t look exactly like the family thought the donor thought it would.  The case was settled, after more than six years of legal back and forth, as so many legal battles are, just weeks it was to go to trial.  Since that time in 2008, we have more suits like this, with famous and not so famous donors suing because they were unhappy with how the charity was using a restricted gift.  The lesson was clear, regardless of whether it was learned or not:  both sides need to be clear and explicit as to the firm and/or fungible area of the gift.

With the increased interest in PILOTS (Payment in Lieu of Taxes) by underwater jurisdictions looking for additional revenue, what characterizes a tax-exempt organization has, increasingly, been debated and challenged.  Last week New Jersey Tax Court Judge Vito Bianco ruled that the case brought by some Princeton residents challenging the University’s tax exempt status should not be thrown out.  HUGE case and one every property-owning nonprofit should be watching.   No truer words have been spoken.

The newly melded entity Princeton (formerly the two separate jurisdictions of Princeton Township and Princeton Borough) has a tax-base problem:  much of its taxable property is owned by, yup, the University, which, as a tax-exempt organization does not pay taxes.  It is not difficult, then, to understand why some residents of Princeton, and the government entity of Princeton itself, want to make sure that the University really is a tax-exempt organization.

There are two specific points that the attorney for the residents noted that might be applicable to other nonprofits beyond universities. First is the fact that many of the University owned properties house commercial enterprises, with restaurants and ticketing outlets being specifically mentioned.  If this case, which Judge Bianco rightfully labeled as holding great significance, should end up favoring the residents, every nonprofit that has a commercial establishment (i.e., thrift store, gift shop, repair shop, etc.) operating in property it owns had best immediately consult an attorney.

Second, the residents point out that Princeton University pays some of its faculty royalties earned as a result of patents awarded to the work of those University faculty.  Contrary to what so many believe, the reference to nonprofit in the sector’s name does not refer to the fact that nonprofits cannot make a profit; rather, it means that the profits made cannot be distributed to shareholders.  According to Bruce Afran, the lawyer representing the Princeton residents, New Jersey law says that a nonprofit that gives out even a portion of its profits is not entitled to any exemptions.  Did I say this case is huge?  And to be clear, not just for universities, but many, many other nonprofits.

There are actually three lessons that we can learn from these two stories.  First, and yet again, know what a funder expects in terms of accounting, outcomes, reporting, etc.  Adhere to it at all costs.  Second, understand what makes a tax-exempt organization tax-exempt and make sure your organization complies.  And third, pay attention to the world around you; listen, learn from others, don’t repeat their mistakes, and be proactive.

Look for our upcoming class this fall on Managing the Contribution – from the Finance & Development Perspectives to be sure you understand responsible grant/gift management.