Charitable review decries center policies
Funds are uninsured
By Jay Rath
Documents released this fall by the fundraising arm of the Overture Center for the Arts portray an alarming downward financial spiral, even as the non-profit officially took over management of the center yesterday, Jan 1.
A lot of ink has been spilled over Overture’s fortunes these last few years, but the reported dollar amounts relate only to its management board, the Madison Cultural Arts District. Little or nothing has been reported about the center’s fundraising organization, Overture Center Foundation Inc. Its responsibilities are now hugely expanded, to cover all aspects of the facility.
Aside from an October audit, the most recent available tax records for the foundation, from 2009, document a net loss of $567,652. In that year the fundraising organization had more than $1.42 million in expenses (including funds expended for Overture programming) but revenue of only $861,694.
Organizations that vet the health of non-profits use tax returns alone. In the case of the Overture Center Foundation, that’s impossible. More than six months into its current fiscal year, the foundation still has not filed a return for 2010.
However, an Oct. 13 audit report by the foundation’s own accounting firm, Johnson Block and Co., suggests that, when it is eventually filed, the foundation’s 2010 tax return will show an additional net loss of $449,917. The foundation’s assets present a similar picture, falling from $1.2 million in fiscal 2008 to $644,810 according to its 2009 tax return.
“The last couple years have been pretty tumultuous,” says Overture president and CEO Tom Carto. It began with good news in June 2010, when Overture and its banks reached a forbearance deal to eliminate $28 million in debt left from the liquidation of the center’s trust fund.
At the time, the entities that make up Overture “were all facing the specter of foreclosure or bankruptcy because of that looming, very large debt,” says Carto. The debt is now settled, but reserves were tapped out to make a down payment on the forbearance agreement. “There’s no question that we’re at the bottom of the trough and have been for about a year, because of the elimination of the debt,” he says.
It’s a complicated financial picture. Many entities make up what the average person thinks of as “Overture.” The Overture Development Corporation built the center. The Madison Cultural Arts District (MCAD), an appointed board, managed it through December. The City of Madison employed most Overture administration and operations staff.
Overture Center Foundation Inc. is a non-profit corporation created in 2001. It was originally named the 201 State Foundation. The official mission of the foundation has been “to cover operating and debt service expenditures of the Arts District.” As part of the deal that paid down debt in 2010, the foundation took over management from MCAD yesterday. (It’s yet to be decided whether MCAD will subsequently be dissolved.) City of Madison employees who work for Overture will now become foundation employees. The foundation has already hired more employees and taken on one-time costs related to the transition. The foundation is also taking over MCAD’s finances.
While the bottom lines of both MCAD and the foundation were tapped to pay off debt, the foundation paid the greater price. Officials expect that remaining MCAD assets will give the foundation a lift.
“It’s been planned to be that way, in anticipation of comingling of all the funds,” says Carto. “It was quite deliberate for the foundation board, in tandem with MCAD, to draw down its principal to make sure that those [debt] commitments were met.”
Overture’s annual report, released in October, already merges MCAD and foundation figures. Viewed that way, there’s some improvement. Overture began its 2009-10 season with net assets of $172,360,713, and ended the season with $188,628,994. MCAD’s increased value will in part offset foundation losses -- at least on paper.
The financial picture is complicated even here. According to a MCAD audit report prepared by Baker Tilly Virchow Krause, the increase in MCAD net assets was “due primarily to the debt forgiveness” and other changes.
Other concerns are revealed by foundation records, and by the Johnson Block audit, including $245,980 in foundation cash that is not insured by the Federal Deposit Insurance Corporation. That is, the foundation has too much money in too few banks; the FDIC insures cash balances only up to $250,000 per financial institution.
Then there are taxes. The foundation’s fiscal year runs from July 1 through June 30. Its tax returns are due Sept. 30 each year. Filing late is a habit for the foundation, muddying timely assessments. For example, the 2008 return was received by the Internal Revenue Service more than three months late, on Jan 6, 2010. The 2009 return was received by the Internal Revenue Service more than seven months late, on May 9, 2011.
“I think there was just a – I don’t want to say a mess, it’s not the right thing to say,” explains Cindy Hughes, a financial consultant who has served as the foundation’s interim chief financial officer since August 2010. “But there has just been such a challenge and they were just so short-staffed, is probably what the biggest issue was.”
While she adds that the late filings are not uncommon in her work with other clients, it has been a challenge. “It took us months to get things back in shape to be able to produce financials.”
Given the confusion, an outsider’s view would be helpful. Charity Navigator is a nationally renowned non-profit organization that assesses the health of other non-profits for the benefit of potential donors. It’s been endorsed by Smart Money magazine and Reader’s Digest, as well as the South Carolina Secretary of State and the Massachusetts Office of the Attorney General. Forbes magazine named its searchable website “best of the web.” PCWorld calls it, “the Consumer Reports of the non-profit world.”
Charity Navigator uses only tax returns in assessing non-profits. The organization has never assessed the health of Overture Center Foundation Inc. It recently took a look at the foundation for this article.
“They do not have many of the proper policies and procedures in place,” says Sandra Miniutti, Charity Navigator vice president of marketing and chief financial officer.
For example, according to the foundation’s 2009 tax return, it did not provide a copy of the return to all board members before filing it. The foundation has no written conflict of interest policy or whistleblower policy. It does not have a written document retention and destruction policy.
“As a result, they'd probably score low on our Accountability and Transparency review,” says Miniutti.
There are still other concerns. The foundation’s 2009 return is still the most recent tax document available. It shows that 36 percent of foundation expenditures went to administration and fundraising, and 64 percent to programming. For a non-profit, the industry rule of thumb is that no more than 35 percent must be spent on administration and fundraising. More than that, and all sorts of red flags go up for potential donors.
“Our calculations confirm yours,” says Miniutti. “And we've found that most of the charities we rate spend at least 75 percent of their budgets on programs/services with only the remaining 25 percent spent on administrative and fundraising costs. So, this charity is less efficient than most of the charities we rate.”
How that assessment might change with the foundation taking on even more administrative responsibilities remains to be seen.
Meanwhile, “Things are very tight, but we have a plan to rectify that over time,” says Carto. “Overture has played it close to the bone because there is no reserve under us at the moment. But the debt is gone. Now the plan, going forward, is to rebuild that reserve. We have budgeted surpluses, and will be budgeting surpluses for the next five years to increase that reserve.”
And Janet Piraino, foundation vice president of advancement, says fundraising is going very well. “We are poised to break $1 million in pledges so far this fiscal year,” says Piraino, a former chief of staff to previous Mayor Dave Cieslewicz.
As for the 2010 tax return, “It’s in process right now,” says Hughes. “I think if anything, what I can assure you is that, going forward, this is all going to be done on a more timely basis.”
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