Wednesday, August 21, 2013

A Few Observations on the Financials of The Clinton Foundation

Since the recent New York Times expose of The Clinton Foundation, many accusations and rumors have swirled about the organization and its finances.  Avoiding some of the larger issues about governance and the stability/clarity of the mission, I will offer a few observations solely about their financial picture.

  • One claim in the New York Times piece that many have noted revolves around annual deficits at the foundation.  Yes, the organization ran deficits in 2007 and 2008, totaling around $40 million.  And, their 2012 annual report shows another deficit ($8 million). However, the story didn't mention the surpluses in 2006 and 2009-2011, totaling $82 million.  Over that entire time-frame, then, there is little sign of financial distress.
  • Even if the overall financial stability seems sound, one implication of the deficits claim is that the organization's finances are too volatile.  On this count, one must give Bill Clinton some credit.  In his open letter response to the New York Times piece, Bill Clinton properly explained that this can be attributed to accrual accounting.  To elaborate, accounting rules stipulate that for multi-year pledges, the organization must recognize revenue in the year the pledge becomes unconditional, not when the funds are actually received.  So, an organization may smooth its expenses to match when funds are received and be left with finances that look more volatile than they really are.  In short, this concern is not terribly compelling either.
  • Another concern that has gotten some traction involves the travel budget of the foundation.  As the New York Post reported, the foundation has spent more than $50 million on travel expenses since 2003. Actually, when taking the figures for the consolidated financials (which includes Clinton Global Initiative and Clinton Health Access Initiative), the costs are much more, with travel and meetings accounting for over $65 million in costs from 2007-2011. Ok, this sounds like a lot, right?  Before deciding this proves the foundation's ineffectiveness, however, a little context is in order.  During the 2007-2011 period, travel/meetings represented 5.6% of the foundation's expenses.  For comparison, consider the expenses of The Carter Center – during the same time-frame, The Carter Center spent $63 million, or 7.0% of its expenses, on travel/meetings.  In other words, the travel expenses of the Clinton Foundation are not an anomaly. Some people (like the folks at Give Directly) may argue that travel costs for international aid efforts are too high, but this is not a concern specific to the Clinton Foundation.
  • Finally, I would be remiss not to mention an odd tidbit in Bill Clinton's Open letter. Regarding the $8 million deficit shown in the organization's 2012 annual report, Clinton notes that those figures are unaudited, and that "[w]hen the audited financials are released, they will show a surplus."  I am not sure why he feels that this is comforting.  Why would the audit uncover such a substantial discrepancy?  As it turns out, this is not unusual for the foundation.  Going back to 2007, the (unaudited) annual report figures deviate from the audited financials consistently, with the change in net assets typically being off more than $1 million.  What can explain this?  The usual suspects are that the (i) unaudited numbers are not GAAP basis but instead follow form 990 or other rules; (ii) the unaudited numbers are not consolidated but only reflect a portion of the organization's financial picture; or (iii) the unaudited numbers are a rough consolidation that does not eliminate related party transactions.  A quick perusal of the financials, however, reveals that none of these can alone explain the discrepancies.  I am curious as to what their explanation for such consistent and large deviations is.  For now, its safe to say that one cannot rely on the figures in their annual report presuming them to be accurate, but must instead wait for the audited financials.