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.