Another Challenge to Not-For-Profit Status
Upper Saddle River, N.J. - July 2004
A recent article published in The Wall Street Journal on June 29, 2004, has, once again, brought corporate governance of not-for-profits to the forefront. Provena Covenant Medical Center of Urbana, Illinois, has had its local property tax exemption rescinded, making it liable for a multi-million dollar local tax bill. What began as an obscure agency’s investigation into the not-for-profit hospital, has ended up having the potential to cost Provena millions of dollars in property tax payments.
As stated in the article, Provena’s troubles began last year when the Champaign County Board of Review made an argument to Illinois state tax officials that Provena wasn’t purely a charity and didn’t deserve its property tax exemptions on the grounds that profit-making entities operated within its walls. In February, the Department of Revenue upheld the Board of Review’s contention that Provena should pay property taxes. Provena is appealing; currently, it remains exempt from federal taxes.
This recent news story has reminded us of the close scrutiny every not-for-profit organization potentially faces. “Virtually every entity in the United States that is enjoying not-for-profit status has something to be concerned about.” Not-for-profits are being called upon to review their system of checks and balances in order to ensure compliance with not-for-profit status regulations. Compensation is a highly visible component of a not-for-profit’s structure. It has become one of the key focus points of many governmental entities with the accessibility of compensation information in the IRS Return of Organization Exempt Income Tax Form 990. Reviewing compensation levels of executives in not-for-profits can be challenging. Initial review of the duties and responsibilities of the incumbent, as well as the number of hours devoted to a position, is generally the first step in analyzing compensation for reasonableness against the market. The Internal Revenue Code - Intermediate Sanctions Act 4958 allows comparison of not-for-profit executives’ compensation against not-for-profit peer organizations, as well as for-profit peer organizations, in an effort to establish the value of the position, recognizing that executives of not-for-profit organizations can be recruited from for-profit organizations.
In analyzing the compensation of NFP management, it is important to examine the historical performance of the not-for-profit. Since many key, standard business performance measures are not appropriate for not-for-profits, it becomes challenging to find appropriate performance measures. One suggested performance marker would be the amount of resources the organization spends on management, general expenses, and fundraising in relation to its stated activities. In the case of grantmakers, the historical level of activity, as well as the dollar amount of grants as a percent of assets, could serve as an appropriate performance marker. Outcomes and program effectiveness are also sound business measurements of not-for-profits.
Having a realistic performance measurement system in place, which ties in the organization’s mission statement, serves as a tool for setting compensation levels, as well as laying the groundwork for long-term strategic development.
