Wednesday, September 21, 2016

What makes up the "Clinton Foundation"?

One thing I have noticed in discussions of the Clinton family's charities is a lot of disagreement about what is meant when people say the "Clinton Foundation".  As it turns out, there isn't such a single organization.  Typically, the group of charities that bear the Clinton name can be split into two pieces: (1) the Clinton Family Foundation, a private foundation that disburses the family's own charitable giving; and (2) what is typically labeled as the "Clinton Foundation", which consists of the Bill, Hillary, & Chelsea Clinton Foundation, a public charity, as well as its controlled affiliates.  Here is a depiction of the organizations and their relationships.
As it turns out, much of the confusion about the Clinton charities can be attributed to people incorrectly treating one (or more) of these individual pieces as the Clinton Foundation.  The fact that some pieces file separately with the IRS (form 990) doesn't help with such confusion.  For this reason, it's important to look at the (audited) GAAP financial statements, which consolidate the related entities together.

Tuesday, August 16, 2016

A look at the 2015 Wounded Warrior Project Financial Statements

Since this blog previously discussed what can (and what cannot) be gleaned from the Wounded Warrior Project (WWP) financial statements from 2015, I figured I would revisit the question now that they have been publicly released.  The five things to look for were:

If you want to see how the crisis affected donations or changed WWP's spending approach, you’ll need to wait another year for it to show up in the financials.
As mentioned before, these financials cover the period prior to the fallout from media scrutiny, so there are not any operational changes here to note.  One feature worth noting, however, is that the disclosure on subsequent events does mention a reorganization planned for September 2016 to address concerns that have been raised.

If you want a complete picture, you will need to look at the consolidated GAAP (audited) financial statements.
As discussed before, the main reason GAAP financials are more informative for WWP than the IRS Form 990 is that they consolidate the activities of WWP and its controlled entity, the Wounded Warrior Project Long Term Support Trust (WWPLTST).  For 2015, this matters because WWP transferred $54,000,000 to WWPLTST, an amount that didn't register as an expense in the GAAP financials since they consolidate the two entities.  Surprisingly, the organization has decided to make a shift toward highlighting the results from the WWP Form 990, which lists this $54,000,000 as an expenditure devoted to programs.  This is perplexing, since it is hard to argue that shifting money from one of your organizations to another is spending money on veterans programs (that money shouldn't be viewed as spent until it is disbursed from WWPLTST).  I am not sure why the organization made this shift in focus, but I continue to stress that the Form 990 is misleading in this case and interested readers should stick to the GAAP financials.

Check the audited financials to see who conducted the audit and if they offer any mention of the developments in 2016.
Nothing earth shattering to report here.  Grant Thornton once again served as the auditor and provided an unqualified opinion on the financial statements.  As discussed above, the developments are described briefly as a subsequent event but there is no mention of a material consequence of them.  That said, Jim Ulvog noted the interesting tidbit that the audit report was issued by the Atlanta office in 2014 but switched to the New York office in 2015.

Examine the consolidated net asset balance to see how much of a financial cushion the organization built before the controversy.
As of September 30, 2014, the organization had accumulated over $283 million in unrestricted net assets (up from $173 million just one year prior). This number increased another $86 million in 2015 to $369 million.

Check to see if the organization chose to be more conservative in its accounting choices. 
The short story on this is it appears the organization largely continued its accounting choices from previous years, relying heavily on joint cost allocation and treating donated public service announcements as entirely program-related.  This remained a material aspect of their financials, with donated media, advertising, postage & mailing, and direct response efforts making up 50% of all of the organization's expenses; of that amount, 73% was recorded as program-related.

Tuesday, August 2, 2016

If He Did It: The Question of Charitable Donations by Donald Trump

One interesting subplot of the presidential campaign that has brought the nonprofit world into play is the question of Donald Trump’s personal charitable giving.  After repeated claims of Mr. Trump’s philanthropic largesse by his supporters, many have questioned the extent of such giving.  Gifts of conservation easements, free golf rounds, and the like by Trump-controlled companies have been well-documented, but personal giving by the candidate himself was, until recently, largely uncharted territory.  This is where the extensive work of David Fahrenthold of the Washington Post comes in.  While the Washington Post examination itself has yielded several fascinating stories, it has found little evidence of substantial personal giving by Mr. Trump.  However, in my mind, there is one large gap in the investigation that will be hard to bridge.  To elaborate, here are what I see as the three most plausible sources of personal giving by Mr. Trump:

1. Donations to the Donald J. Trump Foundation.  This would seem like the obvious recipient of Mr. Trump’s personal giving.  After all, he established this charity as a private foundation, and that is what private foundations are for.  Yet, it turns out that little of the giving to the Donald J. Trump foundation comes from Mr. Trump himself; instead, the organization acts more like a public charity.

2. Donations to individual operating charities.  This is the most popular choice for the average donor, so it seems like the natural next place to look.  And, this is precisely what Mr. Fahrenthold has done – seeking out nonprofits that have had some affiliation Mr. Trump, have been recipients of funds from the Donald J. Trump Foundation, or have otherwise been mentioned in conjunction with the candidate.  Though plagued by many nonprofits’ opting for “no comment”, this avenue of investigation has yielded little evidence of donations.

3. Donations to Donor Advised Funds (DAFs).  Though donations to individual operating charities seems like a reasonable path for investigation, it is actually not a particularly wise way to go for a high-wealth individual.  Instead, I would argue that the second-most plausible giving outlet is through donor advised funds.
Why are DAFs an avenue to consider? For one, there are strong tax incentives to give appreciated investments rather than cash to charity, and donor advised funds (at least those with commercial sponsors) are typically better equipped to take and convert such donations to cash.  Second, using donor advised funds helps separate the tax benefit of giving from the decisions of which operating charity will get funds and when.  Finally, donor advised funds permit giving to individual operating charities while preserving privacy of the donor.
What would this entail? The donor gives money (or, more likely, investments) to the DAF and then later directs the DAF about which operating charity should receive the cash.
Would Mr. Trump use DAFs?  Normally, I would say no, that having a private foundation is strong evidence that the individual intends to use the private foundation for his/her giving and not a DAF.  In this case, however, if there is substantial giving, we already know the private foundation is not the source.  More circumstantial evidence to this end is that Mr. Trump’s private foundation itself has granted funds to DAFs, so there are some natural recipients.

The problem presented by DAFs is that if they are a possible source of Mr. Trump’s personal giving, it is unlikely that these organizations will comment on the presence or extent of Mr. Trump's use of them without him asking them to. How can we know then?  The only sure way is if the candidate releases tax returns, or at least the portion that details his charitable contributions.  Until that happens, we are left with an incomplete picture.  In the mean time, we can all enjoy David Fahrenthold's valiant attempts to piece together the puzzle.

Tuesday, June 21, 2016

What to Look for in the Next Wounded Warrior Project Financial Statements

Nearly five months has passed since the CBS News and New York Times investigations of the Wounded Warrior Project (WWP) generated a crisis of confidence surrounding the organization's spending practices. During that time, we have seen long-serving executives removed and new executives hired, an external review initiated by the organization, questioning by Senator Chuck Grassley, and a vow to bring in new board members, but no new financial information.  However, since the previous financials were released in the spring of 2015, new financials are sure to be in the offing.  Here are a few tips for reviewing the financials when they are released.

If you want to see how the crisis affected donations or changed WWP's spending approach, you’ll need to wait another year for it to show up in the financials.
Believe it or not, the current financials only cover October 1, 2013 – September 30, 2014, so the new financials, when released, will cover October 1, 2014 – September 30, 2015.  Thus, the time period covered by the new financials ends nearly four months before the crisis so won't reflect the fallout.

If you want a complete picture, you will need to look at the consolidated GAAP (audited) financial statements.
In 2013, WWP established the Wounded Warrior Project Long Term Support Trust (WWPLTST), to house funds that will support veterans' long-term needs. Since then, WWP has been increasingly transferring funds to WWPLTST to invest.  The two organizations, though closely intertwined, file separate form 990 financial statements, meaning those transfers from WWP to WWPLTST will appear as grants made by WWP even if they remain invested at WWPLTST.  Such transfers between related parties are eliminated in GAAP financial statements, which will instead consolidate the two entities and thereby provide a more complete picture of their combined activities.

Check the audited financials to see who conducted the audit and if they offer any mention of the developments in 2016.
Though shocking revelations in audit opinions are rare, it is possible the auditor’s report or financial statements will offer some language discussing the controversy at the organization in the form of a footnote on subsequent events and their potential impact on the organization.  Further, WWP in particular has the interesting feature of having three different auditors over the past three years (LBA Group in 2011-2012; BDO in 2012-2013; and Grant Thornton in 2013-2014).  To have yet another auditor change for 2014-2015 would be notable.

Examine the consolidated net asset balance to see how much of a financial cushion the organization built before the controversy.
As of September 30, 2014, the organization had accumulated over $283 million in unrestricted net assets (up from $173 million just one year prior). How high did this number get by September 30, 2015?

Check to see if the organization chose to be more conservative in its accounting choices. 
Though activities after the crisis are not covered in the financial statements, many of the accounting choices that underlie the statements could have been made after the crisis (after all, the financial statements are not being released until well after year-end).  In particular:
  • The organization’s largest expense item in 2013-2014 was donated media ad value, representing over 23% of all expenses. The entire amount of this line item was recorded as a program expense. Did this practice of treating the ads as only a programming-related expense continue?
  • Beyond donated media ad value, the organization recorded another $51.6 million (17% of all expenses) for postage, mailing, and other advertising-related expense items in 2013-2014. Among these costs, over 62% were treated as related to programming. Did the organization continue to treat such a large percentage of advertising and mailing costs as programming?
In short, though the new financial statements for Wounded Warrior Project will not tell us everything, particularly about the organization's future direction, they can nonetheless be informative if viewed with care.

Wednesday, June 15, 2016

Sizing up the NRA

As gun control debates once again resurface across the country, I want to provide some perspective on one small sliver of the discussion.  Though I have little to offer to the main areas of contention, I do think it is worth revisiting the pervasive view that the National Rifle Association (NRA) is an unstoppable financial behemoth.  (This view has even made its way to The Onion.)  Though it certainly may exercise influence on the discussion, the NRA's strength cannot be attributed solely to its financial backing.

To illustrate, consider the following national nonprofit membership organizations for comparison: AARP; American Chemical Society (ACS); National Association of Realtors (NAR); and the United States Golf Association (USGA).  These are clearly a diverse set of organizations – what they share is nonprofit status, a nationwide membership base, and a heavy reliance on membership dues and/or other programming fees for revenue (actually, AARP and NRA are the two which are also 501(c)(4) organizations so probably represent the most apples-to-apples comparison).

First, consider a comparison of annual revenues from the organizations' most recent financial filings.  This gives a sense of scale of annual operations.

Clearly, the NRA is far from small, with revenues over $300 million; yet, it also does not stand out as outsized relative to others.  In this vein, consider also the net assets of the organizations.  This gives a sense of retained wealth that the organization can use moving forward.

Thus, unlike some of the others, the NRA's finances are notably driven by year-to-year revenues rather than a built-up financial cushion or endowment.

Are we to interpret these facts as meaning the NRA's influence is overstated? Perhaps not, but it does indicate that the organization is not as large or flush with cash as critics and supporters alike seem to think it is.

Thursday, June 9, 2016

Observations from the Financials of the Donald J. Trump Foundation

Since I have covered developments in the finances of the Clinton Foundation here over the past few years, it only seems fair to take a look at the Donald J. Trump Foundation. A review of the financial filings of the Trump Foundation from the past five years led me to the following basic observations:

1. The Donald J. Trump Foundation is a private foundation but doesn't really behave like one.
The hallmark characteristics of a private foundation are that it (a) is primarily funded by the wealth of its founder or its founder's family; and (b) invests the endowed wealth (principal) and distributes only a percentage of assets each year (often approximating investment returns or the 5% minimum distribution requirement) so as to preserve the principal well into the future. The Trump Foundation doesn't exhibit either of these characteristics. 

In terms of funding sources, over the past five years the primary contributions received by the foundation came not from its founder but by others, with Comedy Central, NBC, a carpet wholesaler, and a sports marketing group leading the way.

As for its distributions, the typical private foundation model of spending near 5% of net assets in any given year is also upended with the Trump Foundation, which distributes much of what it receives rather than keeping a quasi-endowment. For illustration, consider how the spending of the Trump Foundation compares to the private foundations of a few other well-known individuals/families: the Bloomberg Family Foundation, the Charles Koch Foundation, the Perot Foundation, and the Walton Family Foundation.  The next chart details expenses as a percent of net assets for each in the most recent year.

2. The Donald J. Trump Foundation is a relatively small operation.
Though its founder is known for extravagance, the Trump Foundation doesn't have a huge footprint. Its most recent tax year is fairly representative of previous years, and shows just how small the operation is relative to other private foundations. Take the size of net assets under management, as shown in the following chart.

Lest one conclude that the only take-away here is that three foundations are much smaller than the other two, let's zoom in on the three smallest.

With just over $1 million in net assets, the Trump Foundation is just a blip compared to the others. One reason for this may just be that the organization doesn't maintain a quasi-endowment like the others.  However, a similar comparison also plays out when it comes to annual expenses, which were $596,700 for the Trump Foundation in the most recent tax filing.

3. The Donald J. Trump Foundation's grants are not politically focused. Actually, they're not really focused at all.
Over the past five years, the foundation has given grants to a wide variety of organizations, from more conservative ones like Citizens United and the American Conservative Union Foundation to those that would be considered left-of-center like GLSEN (a group advocating for LGBT youth in schools) and Protect Our Winters (a climate change advocacy group). Most grants, however, were to organizations without a connection to political causes. Recipient organizations run the gamut from locally-focused (e.g., Long Island Sled Hockey) to nationally-recognized (e.g., Leukemia and Lymphoma Society), with causes ranging from international aid (e.g., Maestro Cares), to veterans (e.g., Green Beret Foundation) to health care (e.g., The Nicklaus Children's Health Care Foundation) to education (e.g., Columbia Grammar & Preparatory School). Many recipient organizations are themselves foundations of other celebrities (e.g., Magic Johnson Foundation; Tiger Woods Foundation; Mariano Rivera Foundation; Joe Torre Safe at Home Foundation), and there were even grants to the Eric Trump Foundation and donor advised funds at Fidelity Charitable and Schwab Charitable. Some organizations received grants in multiple years, whereas others were "one-off" grants. In short, the grant provision strategy of the foundation seems quite scattered.

Wednesday, May 18, 2016

The Fundamental Issue in the Wounded Warrior Project Inquiry

The recent letter released by Senator Chuck Grassley in his examination of the Wounded Warrior Project delves into, and seeks additional clarity on, the organization’s accounting practices, in particular those that give rise to its reported 80.6% program expense ratio.  As an accountant, I am tempted to delve into the details (Jim Ulvog does so deftly here).  However, I will instead focus on what I believe is the fundamental question being asked of the organization.

As noted here before and underscored in the letter from Sen. Grassley, much of the program costs that underlie the 80.6% figure are donated advertising as well as joint costs stemming from mailings, advertisements, and promotional items.  To this end, a pattern has clearly emerged when the organization’s spending decisions are questioned.  When critics accuse the organization of spending too little on meeting veterans’ needs, defenders quickly rush to note that over 80% of expenses are on programs for wounded veterans and their families.  Then, when questioned about a large portion of those costs consisting of advertising, mailing, and promotions, defenders often respond by noting the importance of such activities to grow an organization so it can scale to the size of the problems it confronts.

This brings us to the fundamental issue: growth is not a program.  If these activities are being treated as program costs, the defenders of these activities should be prepared to point out what was accomplished by them beyond raising funds or expanding the brand.  How did wounded veterans benefit from the advertisements and promotional items?  Was it money well spent or would veterans have benefited more from spending on different programs?  An alternative tack would be to state that fundraising is critical and that these are not current programs but rather efforts to raise money for future programs; this, however, would suggest the costs should be treated as fundraising, not program, expenses.  In short, the organization’s defenders can’t have their cake and eat it too – a clear and consistent answer seems necessary to move things forward.

In the coming weeks and months, we should expect some clarity on this fundamental issue, be it from additional communications by the organization itself, findings by the inquiry by Sen. Grassley, or both.