Nonprofit Law Prof Blog

Virginia Supreme Court Rejects Donors' Trust Law Based Challenge to Randolph-Macon College's Admission of Men

In Jenna Dodge v. Trustees of Randolph Macon Woman's College, a case decided yesterday, students alumni and donors sued the University alleging that it violated the Uniform Trust Code: 

The plaintiffs allege in their amended complaint that the College was established in 1891 for the primary purpose of educating women, and that all gifts and donations to the College since its inception were given to support that objective. The plaintiffs allege that the College acquired, improved, and maintained real property with funds donated to the College for the purpose of supporting the College as a liberal arts, educational institution for women. The plaintiffs also allege that the College acquired numerous valuable works of art placed in various locations "across [the College's] campus and in [its] Maier Museum" and that the art and "the facilities to house such works[,] were bought and improved and are maintained by funds donated to [the College] for the purpose of supporting . . . a liberal arts, single-sex educational institution." The plaintiffs allege that the College plans to sell assets, including its valuable art collection, to finance physical changes at the campus that will enable the College to educate both men and women. The plaintiffs also allege that the College plans to amend its articles of incorporation to reflect that the College will educate men and women. The plaintiffs further allege that the aforementioned acts are "contrary to [the College's] original and ongoing express charitable purpose as an institution created primarily to educate women in a liberal arts curriculum under the name of Randolph-Macon Woman's College."

From these facts, plaintiffs allege that the College violated its fiduciary duties owed to the plaintiffs who are intended beneficiaries, as well as its obligations under the State's Uniform Trust Law.  The court rejected the plaintiffs' claim.  A significant and contemporary issue is whether trust or corporate law should apply to nonprofit orgnanizations.  To that, the court stated:

We reject the plaintiffs' contention that Code § 2.2-507.1 requires the application of trust law, rather than corporate law, to the College, a nonstock charitable corporation. Acceptance of the plaintiffs' position would transform all charitable Virginia nonstock corporations into charitable trusts, and we find no language in [Virginia] Code §2.2-507.1 that manifests any intent of the General Assembly to make such a drastic change in Virginia's established law.

The case should provide interesting context for the debate regarding whether nonprofits should be governed under trust law or corporate law.

dkj

Hospital Care Is Becoming Less Public and More Private

The New York Times reported on June 5, 2008, about the state of hospital care in the United States in light of the significant reductions in federal and state sources of funding.  The problem is especially acute in poor communities.  Here is an excerpt from an article focusing on Southern California, but similar circumstances exist elsewhere:

Gov. Arnold Schwarzenegger, a Republican, has proposed another 10 percent cut in the state’s Medicaid program to balance the state’s budget while Congress contemplates a host of reductions to the program that, if approved, would mean $240 million less for Los Angeles.

Los Angeles County’s health department, the provider of last resort, is sagging under its own budget woes, and it adopted complex patient-transfer policies that have shifted an increasing number of its indigent patients to private hospitals, which are in barely better financial shape.

“We have an all-out crisis here,” said Carol Meyer, the director of governmental relations for the Los Angeles County Health Services Department. “In terms of lack of access to care, emergency room overcrowding and total underfunding of the health care system.”

In many ways, the woes of South Los Angeles mirror other poor urban health care systems. Medical centers in Philadelphia, Washington, Cleveland and elsewhere have closed or fallen into bankruptcy in recent years, leaving patients scrambling.

Also, Medicaid reductions in recent years have helped contribute to the rising tide of the uninsured — roughly 2.2 million more in 2006 than in the previous year — largely because of a decrease in employer-sponsored insurance and Medicaid reductions.

For the entire article, see "A City Where Hospitals Are As Ill As Patients" in the June 5, 2008, issue of the New York Times.

DAB

More on Zimbabwe's Blockade of Charitable Aid

The New York Times reported on June 6, 2008, that the tightening of controls on charitable aid groups in Zimbabwe is increasing.  We blogged earlier this week about Zimbabwean government's ordered suspension of charitable activities of CARE in the impoverished country.  The government has now apparently "ordered all humanitarian aid groups to suspend their operations in the deeply impoverished nation, a prohibition that relief agencies estimate will deprive two million people of food aid and other basic assistance."  Here is an excerpt from the article:

Aid workers and human rights groups say the suspension of humanitarian operations and the detention of the diplomats are part of the governing party’s strategy to clear the countryside of witnesses to its brutal efforts to decimate the political opposition and drive its supporters out of the wards in which they are eligible to vote.

ZANU-PF, the governing party, is clearly determined to go ahead with the runoff in the hope of preserving a veneer of legitimacy for a government that is increasingly viewed internationally as a pariah, and the party is trying to win it at any cost, Zimbabwean political analysts say.

At an emergency meeting on Thursday in Harare, the capital, United Nations agencies and aid groups agreed to protest the suspension and issue a statement about its humanitarian implications, according to the minutes of the meeting. The nongovernmental organizations there worried about the safety of their field staff once the prohibition order reaches local administrators across the country.

For the entire article, see "Zimbabwe Tells All Aid Groups to Halt Efforts" in the June 6, 2008, issue of the New York Times.

DAB

Congressman's Relatives Charged in 31 Count Indictment to Defraud Charities

  Three relatives of embattled U.S. Representative William Jefferson (D. La.) (shown above) were indicted yesterday in a 31 count indictment, according to the New Orleans Times Picayune.  According to a U.S. Attorney press release issued June 4, 2008:

BETTY JEFFERSON, age 70, an elected tax assessor in New Orleans, along with BETTY JEFFERSON'S brother, MOSE JEFFERSON, age 66, and her daughter, ANGELA COLEMAN, age 53, all residents of New Orleans, Louisiana, were charged via a 31 count-indictment by a Federal Grand Jury today with conspiracy to commit mail fraud; and federal program fraud; aggravated identity theft; substantive program fraud; and mail fraud, and conspiracy to commit money laundering, announced U. S. Attorney Jim Letten. Additionally, BETTY JEFFERSON was charged with four counts of tax evasion and MOSE JEFFERSON was charged with three counts of making false statements to federal investigators.

The indictment alleges that these defendants controlled numerous specified for-profit and non-profit companies, thereby obtaining control over federal and state grant funds for these non-profit companies by applying for charitable and educational grants designed to assist needy, at-risk and disadvantaged youth and other individuals in need of assistance. According to the indictment, the defendants would and did write checks out of the non-profit bank accounts payable to individuals who did not work for the grant programs, thereafter depositing those checks into their (the defendants) own personal checking accounts, or otherwise using the funds to pay for their personal expenses.

It is also alleged that the defendants funneled federal and state grant funds to themselves by writing checks on the non-profits' bank accounts, thereby transferring monies into their companies in false attempts to create the illusion that the payments were for legitimate business purposes.

Additionally, the indictment charges that MOSE JEFFERSON used grant funds to pay for work performed at his direction on properties owned by him, and which had no relation to the non-profit grantees.

Download the full indictment here. If the allegations are true, this has to be one of the worst nonprofit scandals in a long time, effecting some of the most vulnerable, beset upon people in America.  Many of the nonprofits were set up to encourage academic acheivement  for a disturbingly underserved population (many of whom lived on highway overpasses for weeks during Hurricane Katrina).  According to the Times-Picayune article:

The 47-page indictment, long even by federal standards, alleges a superficially complex but fundamentally simple scheme in which the three defendants founded nonprofits, solicited grant money for them, and then wrote checks to purported employees who never received the money. The proceeds of the checks made out to such "straw payees" -- who "did not work for the nonprofits, never received the checks or money, and were not aware that a payment had been issued to them," according to the indictment -- generally wound up in bank accounts controlled by one of the Jeffersons or Coleman, the indictment says.

Pathetic, and that ain't even the half of it.  Just makes me want to spit!

dkj

More Angst Re College Endowments: Waldeck on Limiting Deductions for Gifts to Very Wealthy Universities

Speaking of huge untapped endowments, over on TaxProf Paul Caron reports that Sarah Waldeck (Seton Hall) has posted The Coming Showdown Over University Endowments: Enlisting the Donors, 77 Fordham L. Rev. ___ (2009), on SSRN.  Here is the abstract:

This essay focuses on the discordance between universities with endowments in excess of one billion dollars and what is occurring in the rest of higher education, particularly with respect to skyrocketing tuition and a growing institutional wealth gap. The essay analyzes absolute endowment values, the amount of endowment per student, and expense-endowment ratios at 60 private universities. It concludes that a small number of schools have an excess endowment, and then provides a convenient proxy for determining when an endowment is so large that it should receive less-preferential tax treatment. The essay then considers the effects that large endowments have at their home institutions and throughout higher education, the arguments in defense of large endowments, and some frequently-proposed modifications to the tax code. The essay recommends that policymakers modify the charitable deduction for gifts to universities with mega-endowments, as part of a multi-faceted effort to spur endowment spending and control tuition.

The redistributive idea of drying up donations to universities with "excess endowments" (by reducing or removing the tax subsidy for the very wealthy, apparently) is provocative, to say the least.  I suspect Waldeck's piece will be one of the more frequently downloaded papers (at least amongst nonprofit and higher ed scholars) over the next few months.

dkj

Business Week Debates College Endowment Payout Requirement

Business Week Magazine's Debate Room has published a short but interesting debate regarding the extent to which colleges and universities should be subject to a mandatory endowment payout, at the pain of losing their tax exempt status.  Here is a snippett from the pro side:

Wealthy universities, such as Harvard with its $35 billion endowment, are part hedge funds, part universities. Tax policy should reflect this. Rich colleges should have to prove they’re not hedge funds in disguise by spending most of their investment profits on research and education. Or perhaps, as some Massachusetts legislators desire, all colleges with $1 billion-plus endowments should pay taxes. If not—and colleges can continue to accumulate vast endowments without negative tax consequences—expect some hedge fund to get tax exemption by starting a university and redesignating its investors as faculty and students.

Here is a snippett from the con side:

The nation’s 785 educational endowments have assets that exceed $411 billion, and the biggest, like Harvard’s $34.6 billion, get the headlines. But the vast majority are quite small—more than 400 have assets totaling less than $100 million. Any spend-down rule could have a disproportionate impact on the smallest endowments, which typically have the lowest investment returns.

Unlike foundations, which are designed to raise and spend all their funds for charitable purposes, endowments are meant to serve the financial needs of their institutions in perpetuity. They do that by investing their funds wisely, spending a small portion of their assets each year, and squirreling away the rest for the future. Requiring them to spend more than necessary diminishes the endowment’s size and ability to meet future needs of the institution.

dkj

Zimbabwe Blocks Charitable Aid

In addition to the issues in Myanmar, blogged here, it appears that charities in Zimbabwe are being hampered in their charitable efforts.  Here is an excerpt from an article in the new York Times describing government orders to NGO's in Zimbabwe to suspend operations:

In recent days, CARE, one of the largest nonprofit groups working in the country, has been ordered by the Zimbabwean government to suspend all its operations, which help 500,000 of the country’s most vulnerable people. This month alone, CARE would have fed more than 110,000 people in schools, orphanages, old-age homes and in various programs, it said.

But the aid restrictions go far beyond any one group. Muktar Farah, deputy head of the United Nations Office for the Coordination of Humanitarian Affairs in Zimbabwe, said Tuesday that millions of people had lost assistance because of what he called “the shrinking of humanitarian space.”

“NGOs have been told to scale down or stop operations throughout the country,” he said, referring to nongovernmental organizations.

Zimbabwe’s president, Robert Mugabe, speaking on Tuesday at a United Nations food conference in Rome, accused nongovernmental organizations of interfering in politics and contended that the West had conspired “to cripple Zimbabwe’s economy” and bring about “illegal regime change.”

For the entire article, see "In a Crackdown, Zimbabwe Curbs Aid Groups" in the June 4, 2008, New York Times.

DAB

Pennsylvania Charitable Nonprofit Caucus

The Chronicle on Philanthropy reports that a group of Pennsylvania legislators have formed a caucus to focus on nonprofit issues.  The Pennsylvania Alliance of Nonprofit Organizations (PANO) and the United Way of Pennsylvania worked with the General Assembly to create the caucus.  The legislative caucus, composed of both Republicans and Democrats, will begin its work on June 17.  A group of 30 charities and private foundations will serve as an advisory board to the caucus.  Topics that could be discussed include charitable tax exemptions, sales taxes on services, lobbying, volunteerism, and government money for human services and the arts.  The charities sought the creation of the caucus as a way to help legislators by providing helpful feedback that could improve bills considered by the legislature.

sng

Comparative Funding - Europe and US Support for the Arts

An article in the New York Times describes different approaches to funding the arts in Europe and in the U.S.  In Europe public (government) support is expected, and arts organizations can rely on government funding.  Asking corporations and rich people for donations is still somewhat unseemly in Europe, and donors who do contribute in Europe do so without tax deductions.  The article then describes the success of a performing arts nonprofit in Germany, the Festspielhaus Baden-Baden, one that operates without government subsidies.

sng

FASB Guidance on Endowment Funds Governed by UPMIFA

During its meeting this morning, the Financial Accounting Standards Board considered the substantive issues raised in comment letters received in response to FSP FAS 117-a.  The FASB received comments from 45 respondents, some from public accounting, some from university accounting, some legal (regulators, a lawyer, and an academic), and a few others.

The board handout noted "dissatisfaction with the existing guidance and the net asset classification scheme, which the FSP largely reaffirmed."  The handout then identified two fundamental issues to be addressed at the meeting:

• Since UPMIFA takes a fund as a whole approach, should the net asset mirror that approach, treating the fund in one net asset class?  If not, and if a piece should be singled out for characterization as permanently restricted net assets, should permanently restricted net assets be allowed to decreasein so-called "underwater" situations?
• If a piece of the endowment is characterized as permanently restricted, is the guidance in EITF Topic D-49 still appropriate?

The Board handout prepared for the meeting is available on the FASB website, and an audiocast of the Board's meeting is posted on the website. 

The handout notes that although UPMIFA no longer requires a charity to track dollars contributed (no more historic dollar value - HDV), regulators commented that they want to know the amount of the original gift as a data point for enforcing the gift.  Thus, the staff recommended that some portion of the fund be classified as permanently restricted net assets, probably the original gift amount (the amount called HDV under UMIFA).  The Board will determine the amount, based on its interpretation of applicable law.  The guidance will downplay any suggestion that the organization needs to maintain the purchasing power. The Board voted in agreement.

If a portion of an endowment fund is classified as permanently restricted, then the next question is the appropriate accounting treatment if the fund goes underwater.  In the view of the staff, a drop in the permanently restricted amount does not represent a release of restriction.  Under UPMIFA, a charity could spend from an underwater fund, but the staff views that spending as internal borrowing.  The charity would still have an "accountability/fiduciary duty" with respect to the permanently restricted amount.  The staff then recommended that underwater funds should be reflected as a reduction of unrestricted or temporarily restricted net assets.  The Board agreed.

The handout turns next to the question of how to treat amounts other than the amount classified in permanently restricted net assets.  The staff concludes, based on the comments received, that UPMIFA extends a donor-restriction to the portion of the fund not classified in permanently restricted net assets.  The staff views the restriction as a time restriction and recommended that the amount should be classified in temporarily restricted net assets.  The Board agreed.

For many organizations with existing endowments, this change will require a one-time reclassification of assets currently classified in unrestricted to classification in temporarily restricted.

Disclosures.  The staff recommended retaining disclosures of (a) the governing board's interpretation of the law that underlies the organization's net asset classification of donor-restricted endowment funds, (b) a description of the organization's policy for the appropriation of endowment assets for expenditure, and (c) a description of the organization's endowment investment policies, including risk and return objectives, how those objectives relate to the spending policy, and the strategies employed for achieving those objectives.  The Board agreed with the recommendation.

Comment letters included two requests for additional guidance, and the staff recommended that the Board reject both requests  One request was that the disclosure requirement for investment expenses in paragraph 24 of Statement 117 be dropped. The other was a request for guidance on tangential issues concerning community foundations.  The Board agreed to reject the requests.

The staff recommended that the effective date of the guidance be deferred to fiscal years ending after December 15, 2008.  The Board agreed.

The staff recommended that the Board commit to doing a post-implemenation review in 1-2 years.  The review could consider how UPMIFA is interpreted and enforced, how the FSP is applied, and whether the creation of a new net asset class might be appropriate.  The Board did not want to commit to a post-implementation review and instead directed the staff to monitor implementation.

sng