Wednesday, January 28, 2009
Last fall, we reported that the National Heritage Foundation, a Virginia based charity that aggressively marketed split dollar life insurance policies, had been backslapped with a $9 million jury verdict for allegedly misleading donors regarding the tax benefits of the charitable schemes (among other allegations.) The post noted that as charities get on the slippery slope that leads to commercialization, they should expect that "donors" will act less like benevolent patrons and more like malevolent (or at least self-interested) consumers. Now comes word that the National Heritage Foundation has filed for bankruptcy protection under Chapter 11. The organization says that the filing is necessary because of dwindling donations, losses in its investment portfolio and the costs of reorganizing its donor advised funds to prevent donors from engaging in self-dealing:
Donations to the organization had dropped by more than half from 2006 to 2007, and probably dropped by another 25 percent last year, Ms. Ridgeley estimated. Losses in the group’s investment portfolio due to the poor economy are stacking up, too, she says, and the group took at least a $1-million hit reorganizing many of its donor-advised funds to comply with new federal rules in the Pension Protection Act of 2006. National Heritage Foundation’s financial statements for 2007, the latest available, show the organization had $232-million in assets and less than $24-million in liabilities. But Ms. Ridgeley says that liquidity became an issue. The group is now trying to renegotiate the terms of a $6.5-million loan it took from a Virginia bank, and to extend its $1-million line of credit with the bank to $2-million. The organization is also, she says, trying to push up the payback schedule for a $14-million loan it made as an investment in a private company.
Donor advised funds, by the way, are sort of the modestly rich person's version of the private foundation and typically suffer from the same sort of abuse potentials found in private foundations, while avoiding the onerous regulatory oversight provisions applicable to private foundations. Donors get a tax deduction to funds donated essentially to their own control, and "advise" the fund to spend the money in certain ways (including the hiring of what the Private Foundation rules refer to as "disqualified persons," meaning the donor's son or daughter or wife or husband). What sponsor of a donor advised fund is going to ignore its benefactor's "advice"? Please! Anyway, While the donor enjoys an immediate tax deduction and (before the Pension Protection Act) the objects of her affection get an immediate new paycheck (in many cases -- I know I am painting with a broad brush today), the donated funds may just sit there for a good while, benefitting nobody except the donor and the objects of the donor's affections.
This rules exploited in the NHF case demonstrates the type of systemic changes needed but that stimulus packages naturally disdain. Stimulus, as I understand it, (see the earlier post on the Senate Appropriations' Nonprofit Stimulus bill) is like giving aspirin to a cancer patient who continues to smoke three or four packs of cigarettes a day!