Loans to Nonprofit Officials Undermine Trust in Charities

To the Editor:

The Chronicle of Philanthropy’s exposé on the extent and size of interest-free loans to nonprofit executives is yet another devastating example of how the nonprofit sector is behaving in ways that are inconsistent with the public trust (“Borrowing the Future: Nonprofit Groups Have Lent Millions of Dollars in Charitable Assets to Their Key Officials,” February 5).

This new scandal, together with the ongoing stories about excessive compensation for foundation trustees and allegations of self-dealing at nonprofit organizations and foundations, should lead all of us to recognize that we are facing the most significant crisis in public confidence that our sector has ever known.

There are at least three things that we will need to do — and do quickly.

First, we have to admit that the reported behavior, even if not prohibited by law, justifiably undermines the nonprofit sector’s credibility with the public and elected officials. Without such trust, the nonprofit sector will find it difficult to recruit volunteers and raise funds to fulfill our larger purpose to improve society. Too much is at stake to allow the code of silence that comes with collegiality to prevent us from taking decisive actions in words and substance. We must demonstrate that we understand and share public concerns that our sector be more accountable in fulfilling the public trust.

Second, we must confront the difficult question of how these questionable practices became so widely adopted by so many otherwise well-respected nonprofit organizations and foundations. Without understanding the root of the problem, we run the risk of repeating it. My own belief is that the exuberance of the 1990s, coupled with the push for nonprofit organizations to adopt for-profit business practices, resulted in institutions whose values and operations are fundamentally different from what the public expects from nonprofit organi-zations and inconsistent with what we say we stand for.

Part of our challenge is to acknowledge that while nonprofit organizations must be efficient, show measurable outcomes, and have competitive compensation, they are not and should not operate like for-profit businesses. We are held to a different and higher level of public accountability because of our use of tax-deductible charitable resources.

Finally, we must be aggressive in developing high ethical standards and enforcement practices that are meaningful and credible.

As appealing as it might seem to promote the idea that each nonprofit organization or foundation should develop its own ethical practices and standards, it is this approach that is responsible for the very problems that we now confront. Organizations with different cultures and capacities will inevitably devise different standards. Such a system can only lead to greater public confusion and distrust as the nonprofit sector’s reputation is further harmed.

Uniform standards with a credible enforcement mechanism would create a bright-line standard for acceptable and expected behavior, help restore the public’s confidence, limit the need for legislation by elected officials, and allow our sector to once again look at ourselves squarely in the mirror with our heads held high. Our choice is whether we lead in this change effort or are content to let others shape our sector’s destiny without us. It’s now or never.

Emmett D. Carson
President
Minneapolis Foundation
Minneapolis

To the Editor:

The skillful investigative reporters at The Chronicle of Philanthropy deserve thanks for their recent exposé of self-serving charity officers and directors who negotiate large loans, often totaling millions and interest-free, from the organizations they serve.

Although the number of such infractions cited is a small percentage of the nation’s 264,000 charitable groups that file 990 federal tax forms, the Chronicle’s findings can only be extremely disturbing to anyone working in or with the nonprofit sector today. Even when not illegal, such practices are clearly serious ethical breaches.

Americans are a very giving people who contribute generously to support many worthy causes. Questionable activities of this nature raise serious doubts about the proper use of those funds and can stem the flow of future contributions.

Charitable and philanthropic organizations must operate with the highest ethical standards — higher even than those of public corporations — and be above suspicion at all times. Stronger governance, fuller transparency, and greater accountability throughout the nonprofit sector are requisite to ensuring continued public trust and support.

The exposure The Chronicle has given this issue can play an important role in bringing about a prompt, voluntary halt to any further such inappropriate financial transactions.

Anthony Knerr
Managing Director
Anthony Knerr & Associates
New York

To the Editor:

The Chronicle of Philanthropy’s cover story fails to make the essential distinction between charities and not-for-profit operating companies like Catholic Healthcare West.

In doing so, the article blurs the nature of Catholic Healthcare West’s operations and the reasons for the loan made to CEO Lloyd H. Dean, which figures so prominently in your piece. The primary purpose of not-for-profit operating companies is not the disbursement of funds, but the responsible and stable stewardship necessary for the organization to fulfill its public mission. Lloyd Dean was brought to Catholic Healthcare West to renew and strengthen our stewardship, and over the past three years that is exactly what he has done.

In the three years before the arrival of Mr. Dean, Catholic Healthcare West lost more than $900-million from the operations of its hospitals. Our decision to recruit Mr. Dean’s skills and talents, and to offer him compensation in line with that of the heads of similar hospital operating companies, allowed Catholic Healthcare West to regain its financial footing and continue its mission of providing outstanding health care to the communities it serves. Under his leadership, in the most recent fiscal year we posted a surplus of $54-million, which we have used to enhance our services.

As the largest not-for-profit hospital system based in California, with 41 facilities and 36,000 employees in Arizona, California, and Nevada, Catholic Healthcare West deemed Mr. Dean’s compensation necessary for the long-term health of the organization.

The housing loan that is part of his compensation package was approved by the board with the advice of a national executive-compensation firm, and is in compliance with all applicable California statutes. He is required to serve the company for at least five years before the balance of the loan made to him as a part of his compensation is forgiven. And, we are pleased that Mr. Dean has extended his commitment to Cath-olic Healthcare West for an additional three years.

Lloyd Dean is well compensated because he provides the leadership needed for Catholic Healthcare West to contribute to the welfare of the public by providing outstanding health care to millions of residents in the communities served by its hospitals.

Sister Diane Grassilli
Chairperson of the Board of Directors
Catholic Healthcare West
San Francisco

To the Editor:

The Chronicle of Philanthropy article did a serious disservice to Catholic Healthcare West and its chief executive officer, Lloyd Dean, by citing his salary and other compensation apart from the challenges he was hired to address and his significant accomplishments.

Three years ago, Catholic Healthcare West was searching for a new CEO in the context of an organizational and financial crisis that threatened the multihospital system’s survival as a not-for-profit, Catholic-sponsored health- care ministry:

• Catholic Healthcare West was hemorrhaging hundreds of millions of dollars annually.
• The system was highly decentralized and needed top-to-bottom reorganization to reduce overhead and streamline operations.
• Catholic Healthcare West’s primary market, California, had just enacted a nurse-to-patient-ratio law that would drive up its labor costs by requiring it to hire hundreds of new nurses in a labor market that was, and is, chronically short of nurses.
• California was also requiring hospitals built before a certain date to be structurally retrofitted or completely rebuilt to meet strict earthquake standards.

This “unfunded” mandate would require Catholic Healthcare West to finance hundreds of millions of dollars of new construction. Unfortunately, the system’s bond rating was so low that even if it could find lenders, the interest rates would have been exorbitantly expensive.

It is not surprising that many analysts were predicting Catholic Healthcare West’s imminent demise. Others had concluded that the system would have to be sold to a for-profit hospital company.

Against the odds, Catholic Healthcare West’s board was able to find a proven executive who was willing to leave secure employment elsewhere and assume the considerable risks of leading a financial turnaround — all the while sustaining and strengthening the system’s 140-year commitment to the economically disadvantaged.

The executive is Lloyd Dean. When measured against the risks and his considerable accomplishments, Lloyd Dean’s compensation is more than reasonable. Catholic Healthcare West considers itself fortunate to have the benefit of Mr. Dean’s outstanding leadership and service.

William J. Cox
President
Alliance of Catholic Health Care
Sacramento

To the Editor:

Your “Borrowing the Future” articles raise very troubling questions about the use of charitable assets within the nonprofit sector.

Your article makes one misleading statement that warrants clarification.

The article says in relevant part, “Florida has an even stronger statute [than New York], banning loans to officers and directors by any nonprofit group. Yet…The Chronicle [found] that 36 Florida charities reported on tax returns filed from 1998 to 2001 that they had made such loans. …”

In actuality, if you look at Line 50 of Form 990 where charities report making loans, it asks for “Receivables from officers, directors, trustees, and key employees.” There is nothing in the Florida statutes that bans loans to key employees.

Consequently, it is possible that the 36 Florida charities that The Chronicle identified made loans to key employees, not officers or directors — in which case their action was completely permissible under Florida law (although, admittedly, still worthy of scrutiny).

I would hate for The Chronicle to leave the impression that a loan reported by a Florida charity on its 990 is, by definition, a violation of Florida law. A more nuanced investigation is needed to make that claim.

Jonathan Lever
Executive Director
Nonprofit Center of Northeast Florida
Jacksonville, Fla.

Editor’s note: Florida’s law banning loans to officers and directors of nonprofit organizations technically is stronger than New York’s law. Both forbid loans to “directors or officers,” but New York exempts state-chartered educational institutions while Florida allows no exemptions. Otherwise, both laws are nearly identical.