February 5, 2004 | Read Time: 5 minutes
Ronnie Webb has a message for nonprofit groups thinking about making loans to one of their officials:
Don’t.
Mr. Webb speaks from experience.
In June 2000 the board of Kids Incorporated, the Crossville, Tenn., charity of which he is executive director, voted to lend him $140,000, which he planned to use to buy a restaurant property but eventually spent to start a restaurant on property that he already owned. He thought he was doing a favor for the charity, which provides developmental programs for preschool children with disabilities. The organization has annual expenditures of about $300,000 to $400,000 and gets 60 percent to 75 percent of its revenue through government contracts.
Mr. Webb signed a note, promising to repay the money with 5 percent interest over 15 years, a better return than the 4 percent the organization was getting by keeping the money in local banks. In the event that interest rates rose in subsequent years, Mr. Webb agreed to pay back his loan at a level that would always be 1 percentage point above the going rate for bank investments.
For security, he put up 52 acres of undeveloped land that he had previously purchased. If for some reason he could not repay the loan, the charity would take ownership of this acreage.
“As an organization, we are very conservative and cautious with our money,” said Sharon Potter, president of Kids Incorporated. “We looked at the loan to Ronnie as an investment, which just happened to be a loan, that would give us a better return on our money.”
The loan arrangement also figured to be profitable for Mr. Webb, who expected to make money from his restaurant enterprise.
“Then the whole thing blew up in my face,” said Mr. Webb, who has worked at the organization for most of the past 27 years.
Concerns Raised
When they realized the loan had been made, after taking a second look at the charity’s financial statements, leaders of the local United Fund of Cumberland County, a charity similar to the United Way that collects gifts through on-the-job campaigns, decided last year to stop supporting Kids Incorporated in 2004. The United Fund provided Kids Incorporated with more than $12,000 in 2003.
“Our board didn’t think Ronnie had done anything wrong: He wasn’t taking advantage of the organization, he’s done a great job, and what Kids Incorporated does in our community is amazing,” said Holly Neal, the United Fund’s director. “But our board felt that if the charity had that much money to loan to someone, then it seemed that they didn’t need our money.”
The United Fund also thought that Kids Incorporated had too much undesignated money in reserves, according to Ms. Neal — more than $800,000 in savings and temporary cash investments at the end of its 2002 fiscal year.
Ms. Neal said that after a series of national controversies — including questionable fund-raising practices at some charities in the wake of the September 11 terrorist attacks and scandals at Enron and other corporations — “it’s a different world” in terms of the accountability expected of nonprofit and other organizations by the public. “Ronnie just didn’t understand that the loan didn’t look good,” she said.
The county government followed suit last year, cutting off more than $16,000 in funds Kids Incorporated would have received in 2003 and 2004. The Cumberland County Commission decided to eliminate the funds because it was concerned about the loan to Mr. Webb.
“The commission hated to do it,” said Sharon York, a commission member who opposed the move because she worried about the effect on children in the charity’s programs. “But a lot of people in the community just didn’t want their tax money going to an organization that was financially able to make loans.”
The loss of the United Fund and local government money left Kids Incorporated with about $30,000 less to spend than it had anticipated.
‘Out in the Open’
“We were stunned by the controversy,” said Mr. Webb. “We felt we’d done nothing wrong, and the loan was always out in the open. I was totally convinced that, when questions were raised about the loan, it would be a simple matter of my explaining what was going on and everybody would be, like, ‘OK, we see, that’s fine.’”
Ms. Potter, president of Kids Incorporated, said she was shocked. “This is a small town and everybody got to looking at us like we were Enron,” she said. “I thought, good gracious, it was an investment tool that got caught up in public perception.”
In response to the controversy, Mr. Webb and his charity’s board agreed that he would repay his loan in full last fall. He said he wound up providing the charity with $4,000 more than it would have reaped had the organization never lent him the money.
Kids Incorporated’s board of directors voted to put $500,000 of its reserves into a designated fund that eventually will be used to buy land and construct a building to house the charity, which currently leases its space.
Yet Mr. Webb said that, because his organization is unhappy with the United Fund’s handling of the matter, he does not think Kids Incorporated is likely to again seek money from the group — even though he is a member of the United Fund’s board. Mr. Webb said he hopes that the county government will decide again to provide funds to his charity.
For now, Kids Incorporated must try to make up for the hole in its budget, and for the first time it may send out direct-mail solicitations this spring. “We’re hoping folks in the community will realize that we have lost dollars, and that, in order for us to maintain a strong program, they need to give more personal donations,” said Mr. Webb. “When you lose these kinds of dollars, it’s difficult to make up, if not impossible.”
Ms. Potter said that fund-raising results from a Kids Incorporated gala to be held this spring will provide the first indication of how much the loan controversy has affected the attitude of supporters of the charity. “We’ll find out soon,” she said.
Mr. Webb’s experience over the past year has at times been “extremely traumatizing,” he said. “My interest was totally to try to benefit the agency, and never hurt it, but it totally backfired.” Added Mr. Webb: “It’s like a Twilight Zone nightmare. Based on my experience, I would not ever advise any directors of nonprofits to ever do anything like we did.”
