By Jeff Jones

Several NPT 100 nonprofits appeared to spend more than they brought in during their most recently reported fiscal years.

More than 30 NPT 100 organizations posted operating deficits on paper that ranged from $509,177 to roughly $335.9 million.

At a time when donors, nonprofit watchdog groups, state and federal governments are scrutinizing nonprofit financials, how organizations explain that the financial house isn’t falling down is a difficult feat, especially when expenses appear, on paper, to be outpacing revenue.

Indeed, to the outside observer an operating deficit may appear to be bad luck, but for Covenant House and Catholic Relief Services it was part of the plan.

Covenant House budgeted for a deficit in 2003, and used a reserve fund to pay for scheduled renovations that year, said Mona Williams, vice president of finance for the New York City-based organization.

“We knew that our expenses would be more than our projected income,” Williams said. “There’s nothing wrong with having a deficit if you can cover it. We have a board-designated fund that’s close to $20 million.”

Additionally, net realized losses on investments accounted for $1.7 million of the deficit, according to consolidated financials. The actual deficit was lessened by a current year translation adjustment of roughly $2 million, a result of currency exchange rate changes, Williams said.

For systems such as Covenant House, which report national office figures on the Form 990 but use consolidated financials to report combined national and affiliate totals, explanations to the public can get a bit muddy.

For instance, the deficit for fiscal year 2003 on the national office’s Form 990 is $6.7 million. When affiliates are considered, that drops to $1.6 million, Williams said.

Due to public disclosure laws Covenant House, and almost any charity, must send a Form 990 when requested. Recipients of Covenant House’s Form 990 are told the document represents the parent organization and doesn’t explain all expenses. They’re also referred to consolidated financials, Williams said.

When it comes to potential donors or state reporting requirements, Covenant House avoids the confusion and sends consolidated financials, she said.

Catholic Relief Services (CRS) posted a $21 million operating deficit and $21 million decrease in net assets in fiscal year 2003. Specifically, it experienced declines in unrestricted assets of $3 million and temporarily restricted of $18.4 million, according to its financials.

“Almost 90 percent of (the deficit) is within our temporarily restricted activities,” said Mark D. Palmer, chief financial officer of the Baltimore-based international relief group. “Many of our emergency conditions are program activities in which the funding will come in a particular year or across several years. But our program activities extend over several fiscal years. In that particular fiscal year a little more than $18 million of the deficit is from temporarily restricted funds in operations for relief work in Afghanistan and other areas where we were doing follow up for flooding or earthquakes.”

CRS will spend down reserves if, for example, fundraising or investments outpaced expectations.

Since those resources are intended to be spent on programming and not maintained in investment accounts, Palmer said, the group would expend them over several years as they did in 2003.

“We continued in 2004 to plan to operate at a small deficit for our unrestricted accounts and are managing well to that,” he said.

An operating deficit can prompt calls from concerned donors, but they are just as likely to get fired up over a surplus. “When we publish a financial statement and it has a deficit, a random reader could wonder ‘is that happening because Catholic Relief Services is running into financial trouble’,” he said.

After a year of strong fundraising or investment returns, people have asked “‘Looks like you’re building up a surplus. Why are you doing that?’ Donors expect us to put our funds to use,” Palmer said. “We balance our planning to take both situations into consideration.”

What if the house, or in the case of Williamsburg, Va.-based Colonial Williamsburg Foundation (CWF), the hotel, is being torn down? A large chunk of CWF’s $39.2 million operating deficit in 2002, was attributable to capital improvements, including a $100 million renovation project of the organization’s hotels and visitor center, said spokeswoman Sophie Hart.

Renovation plans included the demolition of the Cascades Hotel.

“Although operations are not the most exciting place to put your money, it’s still an essential part of any organization,” Hart said. “You have to maintain your facilities.”

When donors ask why, it’s a simple reply. “Because we had deferred these kinds of investments for so long, it had reached the point where it was seriously affecting our ability to provide a quality experience for our guests,” Hart said. Donors and visitors appreciated that the group had deferred maintenance as long as they could, Hart said.

CWF is climbing out of debt, shrinking the deficit to $25 million as of Sept. 2004. The goal is to reach zero by 2006, she said.

It hasn’t been painless. The hotels are on the for-profit side of CWF and revenue generated is plowed into the nonprofit side, Hart said. In other words, the nonprofit side lost a major revenue stream. This led to staff cuts, reorganizing programs, and streamlining activities to get the group back to “financial equilibrium,” Hart said.

The visitor center is redone, and the family-oriented Woodlands Hotel and Suites has been well received, Hart said.

Barring a major catastrophe, CWF expects this year to end fairly well, she said. “It’s a little like being on stage, you don’t want to jinx yourself,” Hart said.

Pons Dizon, Jr., deputy controller of Fairfax, Va.-based United Negro College Fund (UNCF), has explained deficits and surpluses. “Sometimes they look at our financial statements … (and say) ‘you only raised $130 million but you spent $152 million,’” Dizon said. “What I tell them is those are restricted net assets that we have to carry over from last year.”

UNCF ran an operating deficit of $21.8 million in 2003. Dizon explained that it’s mostly unspent scholarship money from the previous fiscal year that was disbursed in 2003 due to gift requirements.

Dizon said he hasn’t noticed more people asking questions about the operating deficit. People tend to think deficits are a result of programmatic expenses, he said.

In 2002, UNCF had an excess of $23 million, he said. “When they see an excess, they think ‘what did you do with the money?’ They think that we’re not spending the money,” said Dizon who chuckled at the notion.

Dizon should plan on more of those questions. UNCF expects a surplus in fiscal year 2004, he said.

New York City-based Hadassah Medical Relief Association’s $14.8 million operating deficit is attributable to contributions received in years past but spent in 2003, according to James Rothkopf, chief financial officer.

Another contributing factor is a $725,000 realized and unrealized investment loss, Rothkopf said.

“If investments don’t have healthy returns, you’re going to end up with a net deficit,” he said. “In 2004, with improvement to the market you’ll see that $14.8 million deficit turn to a $40 million increase in net assets.”

With total revenue of $101.62 million, Hadassah just missed the NPT 100.

Due to its massive size, Washington, D.C.-based American Red Cross (ARC) posted one of the largest operating deficits -- $335.9 million and a decline of $72.6 million in net assets during fiscal year 2003.

Bob McDonald, chief financial officer, said a majority of the deficit can be attributed to spending down prior year’s cash balances, including roughly $200 million from the September 11-related Liberty Disaster Relief Fund, and $24 million from an international relief fund.

The domestic relief fund was also a contributing factor. ARC spent nearly $76 million more than it brought in, McDonald said. ARC chapters showed a deficit of $27.8 million that was largely offset by Biomedical Division performance of $25.7 million driven by an increase in the price of a unit of blood and plasma derivative sales, McDonald said.

An incremental pension liability of $54.1 million and $18.5 million in non-operating losses on investment portfolio accounted for the decrease in net assets, McDonald said.

“Generally speaking, the deficit reflects decreased public support after 9-11 and a weakened economy,” McDonald said. ARC faced this, not only at national headquarters, but in all its chapters across the country, he said.

“This was a generic problem that I think all nonprofits face.”

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