Friday, May 15, 2015

Rose Colored Finances and the Fall of FEGS

The venerable New York City nonprofit, Federation Employment and Guidance Service (FEGS), abruptly closed its doors earlier this year and subsequently filed for bankruptcy. The move shocked many and has threatened to seriously disrupt social services throughout the city. Its bankruptcy filings, coupled with its most recent financial statements, provide a painful case study of an organization whose troubles were clouded by persistent growth and excessive optimism about revenues.
  • Though the organization now says its programs faced declining revenues in 2103 and 2014, its (consolidated) financials didn't show these trends thanks to continued growth in its portfolio of programs. In fact, overall program revenues and total revenues increased even in its most recent fiscal year (up 5.1% and 4.1%, respectively).
  • Not only did revenues grow, the organization even showed positive change in net assets (i.e., profits) in 2013. It wasn’t until 2014 that the losses finally appeared -- a staggering $21.4 million loss before considering one-time insurance proceeds and $19.4 million loss after considering the insurance proceeds.
  • In 2014, persistent growth caught up to the organization, with expenses rising drastically, most notably salaries (up 13.5%) and bad debt writeoffs (up 440.1%).
  • The bad debt writeoffs in 2014 ($7.7 million, up from $1.4 million in 2013), coupled with the disclosure of an audit that revealed it had received estimated overpayments of $20.7 million in previous years (through its subsidiary, Home Attendant), suggests in hindsight that the organization’s recorded revenues in previous years were overly optimistic. In other words, the problem that their operating costs exceeded their potential reimbursements may have been festering for a while, but it wasn’t until 2014 that this bubbled up in their financials.
  • In the end, the organization's problems led to mounting cash flow troubles, which ultimately forced its sudden closure. These cash flow troubles too were tied to the organization’s growth mentality. Their net loss in cash in over the two years 2013-2014 was not due to operating losses (they had increases in cash from operations of $4.7 million and $1.0 million in 2013 and 2014, respectively), but rather due to cash used up elsewhere including purchasing new fixed assets ($7.5 million and $4.9 million in 2013 and 2014, respectively). That is, it was persistent growth, not operations alone, that was eating into their cash balances.


Tuesday, May 12, 2015

About the Claim that the Clinton Foundation only Spends 10% on Charity

Legitimate concerns about the Clinton Foundation's reliance on funding from foreign governments and the organization's mixed record of disclosures have, in recent weeks, given way to more outlandish claims about the organization's failures. Most notable among these is the oft-repeated claim that only 10% of its money goes toward charity.

This claim reflects a fundamental misunderstanding about nonprofit accounting. Nonprofits disclose how much of their expenses are on the mission ("programs"), and how much are on fundraising and administration ("supporting services"). From the Clinton Foundation's most recent (consolidated) financial statements, a full 88% of its expenses are classified as program expenses, meaning 88% of spending can be attributed to current efforts to achieve its mission. The dichotomy between this and the claim that only 10% is spent on charity arises because only a small subset of the program expense figure represents grants to other charities – if only such grants are considered "program" expenses, then the figure drops from 88% to 13%. Since the Clinton Foundation is not primarily a grant provider but rather a direct service provider, however, the latter is hardly a figure worth noting.

To get some perspective, consider the Clinton Foundation's closest peer, the Carter Center. In its most recent financials, the Carter Center showed 91% of spending on programs and only 5% on grants.

The natural follow up question is if the organizations aren't spending the majority of the program costs on grants, where are they going? The next two charts reflect the breakdown of "program" expenses for the two organizations.



What does this tell us? By and large, the Clinton Foundation's limited grants are in line with what we should expect of a charity of its sort. The notable differences in Clinton Foundation spending are (i) the smaller share of costs that reflect donated medical supplies and (ii) the higher share of costs spent on personnel. As it turns out, both of these reflect broader trends of the organization.

In short, it is fair game to ask why donated medicines have taken on less importance in the Clinton Foundation’s work and why personnel costs have taken on more importance, but dismissing all program expenses that are not grants to others as waste fails to recognize the nuance of charitable activities.