Asset Charity Threatens to
- published in the August 2009 issue of the
Charity Rating Guide & Watchdog Report
"Unless we do something, the clock is ticking
and within five to seven years we'll probably be out of the hospital
business and not have any hospitals."
The Associated Press (AP),
Comment by Ralph Semb, Board Chairman
of Shriners Hospitals for Children, reported April 2009
This is not what you would expect to hear from the
head of a charity that could operate for 11.6 years at current spending
levels without raising another penny. Shriners Hospitals for
Children (Shriners) is #4 on AIP's Large Asset Reserves Chart
on page 20 of the current Charity Rating Guide & Watchdog
Report, reporting a $9.7 billion fund balance in its most recent
available audit of 2007. Shriners declined to disclose to AIP a
more current accounting of its financial position.
Shriners' Board Chairman Ralph Semb told the AP in
April 2009 that Shriners' endowment size had fallen $3 billion in
less than a year, from $8 billion to $5 billion, and that its annual
budget has increased in the past two years by about $200 million
to $856 million. Shriners' "board designated endowment"
was $6.9 billion in 2007, according to its audit. Semb said that
Shriners' endowment would have to grow to $12 billion by 2014 in
order to keep all of its hospitals open, according to the AP.
While Shriners may be pleading poverty, this has more
to do with how Shriners likes to spend its money than how much money
it actually has at its disposal. Historically, the charity's policy
has been to invest much of the funds it receives from donors and
other sources, using only the interest earned on these investments
to run its programs without touching the original funds. This policy
is more typical of a private foundation than of a public charity.
And unlike a restricted endowment which legally prevents a charity
from using such funds, Shriners' "board designated endowment"
is simply an internal designation that the charity uses to describe
funds that it has set aside for investment. Less than $1 billion
of the charity's $9.7 billion fund balance is permanently restricted
by donors or other third parties, meaning the vast majority of the
charity's funds are available for it to use for its general operations
if it chooses to do so.
According to a note in Shriners' 2007 audit, "In
order to preserve the value of the investment portfolio and to eliminate
the impact of market fluctuations on operations, the Board designates
only a portion of cumulative realized gains for support of current
operations." Essentially, Shriners is claiming that its policy
of reinvesting most of its investment gains and spending only a
portion on operations will help the organization maintain operations
during market changes - ironically, now that the market has changed,
as it did in the past year, it says it has to reduce operations.
While Shriners has experienced significant declines
in its endowment funds, AIP believes that it has exaggerated the
effect of these declines on its ability to continue its operations.
Most charities have only a fraction of their annual budgets in reserve
and would be thrilled to have an endowment worth over five times
their operating budgets, as is the case with Shriners. Only 4% of
charities with budgets of over $5 million have operating reserves
worth more than one year of their expenses, according to a July
2009 Urban Institute study of the 2006 finances of Washington DC
area groups. The study also found that 57% of all the DC area charities
had less than three-months in reserve and 28% had no reserves.
There are not enough charitable resources in this
country for every charity to stockpile funds worth several times
their annual budgets, and operate using only the interest income
generated by these funds. AIP believes that very popular and highly
regarded charities such as Shriners are in an excellent position
to fund their operations through large corporate and foundation
grants, donations from individuals, investment income from a more
modest reserve of no more than three times the charity's annual
budget, and other various revenue streams. In addition, it is important
to note that not all of the funds that Shriners lost in the market
are likely to be gone forever - investors often recoup their losses
as the market recovers from a decline.
According to the AP, on the agenda for Shriners'
annual meeting this July is to decide whether to take a 30% budget
cut or to permanently close six of its twenty-two hospitals in Erie,
PA; Galveston, TX; Greenville, SC; Shreveport, LA; Spokane, WA;
and Springfield, MA. The decisions made at this meeting were not
known at the time this publication went to press. It is certainly
possible that other reasons may exist for closing some of these
facilities, such as to consolidate operations in order to provide
more efficient orthopedic, burn, and other care to children. In
light of Shriners' large stockpile of available funds, AIP does
not believe that it should be cutting its operations.
Update: Shriners members voted to deny the proposal
to close six hospitals and to obtain additional revenue by starting
to accept insurance from patients, according to a July 9th report