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From the President's Office, September 2008

Dear Friend:

Issues around the management of endowments are an area of growing interest in the nonprofit sector.

For some time now, we've been seeing articles on the eye-popping size of some university endowments. Topping the list is Harvard, whose endowment as of June 30, 2007 (the latest figure available at this writing), was more than $34 billion, larger than the budgets of many countries. Other universities, such as Yale and Stanford, are not far behind, and 76 universities have endowments over $1 billion.

Concurrently, we've been reading about the amazing financial management performance of these endowments. According to the Chronicle of Philanthropy, university endowments had a median growth of nearly 22 percent last year, with Yale leading the pack at 28 percent. I wish my TIAA-CREF account had done the same!

With college costs continuing to rise well above inflation and with the college loan system mired in the credit squeeze affecting many parts of our economy, it's not surprising that the size of these endowments is attracting legislative attention as well. Senator Charles Grassley (R-IA) and Representative Peter Welch (D-VT) have scheduled a roundtable discussion next week on rising college costs and the potential impact of mandatory payouts from university endowments. This should be interesting.

We've already seen some of the largest universities voluntarily increase scholarship amounts. Will this action be enough to deter more Congressional scrutiny? I doubt it. The endowments are so large, and the need so great, that I think we'll see more action over the next year reviewing the obligations of university endowments.

It would be a mistake to think this issue affects only universities. Some national large nonprofits also enjoy enormous endowments. The Shriners Hospitals for Children, the Nature Conservancy, and the Museum of Fine Arts, Houston, to name just a few, all have endowments in the billions. How large an endowment is appropriate? How large does an endowment have to be to give an organization the financial support it needs to be a reliable and secure provider of nonprofit services?

And, while we're on the subject of endowments, let me return to one of my favorite topics: leveraging the power of foundation endowments. We all know that currently almost all foundations adhere strictly to the 5 percent payout required by the IRS. Yes, there are exceptions, and we applaud those with the courage and mission determination to move over the 5 percent line.

We applaud even more foundations that invest small portions of their endowments in PRIs (program-related investments) and MRIs (mission-related investments). PRIs and MRIs are not grants; instead, they are loans extended at below market rates to organizations that have solid business plans and are capable and committed to repaying the loans. Although there is much talk in the sector, the numbers of such loans are still quite low.

PRIs and MRIs could also be the key for providing nonprofits with the desperately needed capital necessary to become scalable and sustainable. At GuideStar, we think they are a logical and appropriate way to make foundation endowments more responsive and a great way to leverage the impact of foundations.

What do you think?


Bob Ottenhoff
President and CEO

IRS Updates, September 2008: Revised Instructions for the New Form 990 and More

The IRS has released revised instructions, background documents, and a summary of filing requirements for the new Form 990; guidance on political activities by 501(c)(3) organizations; information for sponsors of donor-advised funds seeking exemption under section 501(c)(3); and an update of the Tax Guide for Charities and Religious Organizations. The service is also requesting comments on the new Exempt Organizations Voluntary Compliance Program.

The New Entry Level: Hiring Talent from Leadership Development Programs

Nonprofit organizations hiring entry-level talent often face a difficult catch-22. Organizations search for candidates looking to enter on the ground floor, but they also want applicants who bring relevant professional experience. This reality creates frustration for first-time job seekers and nonprofit organizations alike.

For organizations seeking entry-level candidates who also possess demonstrated experience, leadership development programs can open up a vast talent pool. Nonprofits that rely on these programs as sources for talent find candidates who have been tested in challenging environments and who have come out of their years of service impassioned and committed to the social sector. Because of the skills and experiences that participants in these programs gain, more organizations are looking to leadership development programs as "the new entry level."

This article will discuss a few of the major leadership development programs serving the social sector as well as share some real-life examples and recommendations for how organizations can leverage this unique talent pool.

IRS Changes Requirements on Reporting Nonprofit Executive Compensation

Note: The following discussion is provided for informational purposes only and is not intended to serve as tax advice. For specific information about reporting nonprofit executive compensation on the new IRS Form 990, consult your attorney or tax adviser.
Just in case you have been so focused on your mission and fundraising in these tough times that you haven't noticed, the IRS Form 990 that most large charities will file has been dramatically revised. Review the changed form, instructions, and rationale for the changes >

This new Form 990 will be used for fiscal years beginning on or after January 1, 2008, typically to be filed in 2009. So the records you keep and processes you follow right now might need to be changed so that it will be easier for you to complete the new form.

The new form consists of an 11-page core form completed by all filers, with supporting schedules that will be completed only when an organization's answers trigger the need for more detail. The core form's Part VI (Governance, Management, and Disclosure) requires answers about policies not required by the Internal Revenue Code, but all filers still need to respond to the questions. The IRS thinks that if nonprofits have certain kinds of policies (think whistleblower protections, conflict of interest policies, etc.), they are more likely to end up in compliance with regulations.

New Reporting on the "Process" of Determining Compensation

Form 990 information on executive compensation has long been a focus of IRS compliance efforts, and the revisions reflect the continuing IRS interest. The IRS not only wants to know what salaries are paid but also the process you use to determine compensation levels.

The new question 15 in Part VI asks if the process for determining compensation includes:

  • a review and approval by independent persons,
  • comparability data, and
  • contemporaneous substantiation of the deliberation and decision.
There is a yes/no checkbox for two groups—first, the process for the CEO, executive director, or top management official, and second, the process for other officers or key employees. And if you check "Yes," you must then describe the process in more detail in Schedule O, the schedule that is used for narrative explanations.

With this question, the IRS is again emphasizing what it wants you to do. As in the past, the IRS is looking for the following components in the process of setting compensation:

  • Review/approval by the executive board
  • No involvement of persons with conflicts of interest
  • Collection and use of compensation data for similarly qualified persons in comparable positions at similarly situated organizations
  • Contemporaneous documentation and recordkeeping
But now if you do have a process, you must describe it in Schedule O, identifying the positions covered and the year conducted. Obviously, checking the "No" box and saying that you do not have a process is just not the right answer. And describing a process that does not include the steps outlined above is also problematic. Both answers will clearly be red flags for IRS compliance staff.

Changes in Reporting Compensation: New Thresholds, New Definitions

All Form 990 filers (now including all tax-exempt organizations, not just charities) must complete  Part VII (Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors) of the core form. The listing must include name, hours worked, and compensation (from IRS Form W-2 or Form 1099-MISC, so the totals are now for the calendar year, which may be different from the organization's fiscal year) for:

  • All current officers, directors, and trustees (no minimum threshold!)

  • All current key employees (only if earning more than $150,000)—with a new definition of  key employee as a person who (1) has power over the organization as a whole similar to an officer, trustee, director or (2) manages or controls discrete segment or activity representing 10 percent or more of the organization, and (3) was part of the top 20 highest paid persons who satisfied both the $150,000 and the responsibility tests

  • Five current highest compensated employees other than officers, directors, trustees, or listed key employees (only if earning more than $100,000)
Part VII on the core form also requires name and compensation in the same table for:

  • Former officers, key employees, and highest compensated employees (only if earning more than $100,000)
  • Former directors and trustees (only if earning more than $10,000 as former director or trustee)
The revisions in reporting reflect IRS concern about relationships with related and unrelated organizations that may affect the independence of compensation decisions and the accuracy of the salaries themselves (now required to match what organizations reported to the IRS for the individuals).

The instructions contain much detail on what to report and were finalized in August. They include a new glossary of terms and a table that shows precisely how and where to report the many types of "other compensation" that have been problems in the past.

Getting to Schedule J (Supplemental Compensation Information)

If there are individuals listed in Part VII that meet certain criteria, more detail on compensation must be provided on Schedule J. The criteria include:

  • If former officers, directors, trustees, key employees, highest compensated employees are listed
  • If any individual listed had more than $150,000 in reportable and other compensation
  • If any individual listed received or accrued compensation from any unrelated organization for services rendered to the organization
Schedule J begins with "Yes-No" questions about certain practices (first-class travel, discretionary spending accounts, housing allowances, health club dues, chauffeur services, etc.), and if the answer is "Yes," supplemental information must be provided. The form also asks if there is a written policy on such expenses and whether or not it was followed. A "No" requires an explanation. If there was severance pay or compensation contingent on net earnings/revenues or equity-based compensation, again a detailed explanation is required.

What You Need to Do Now on Compensation Issues

Review the new Form 990 and instructions. If you are concerned about requirements for reporting compensation, focus on Part VI, Part VII, and Schedule J.

Review (or establish) a process for setting compensation that meets IRS standards:

  • Review and approval by the board
  • No person with conflict of interest involved in compensation decisions
  • Comparable data (salaries for like jobs in like enterprises under like circumstances) collected and used to make decisions
  • Documentation of decisions when they are made
With a little preparation now, you can have the information that will ease the filing of the new Form 990. But even more important, you can find the salary levels that allow you to attract, motivate, and retain the people you need to fulfill your organization's mission. And when compensation questions arise, whether from the IRS, state charity officials, the media, or members of the public, the appropriate documentation about your decisions will be already there.

Linda M. Lampkin, ERI Economic Research Institute
© 2008, ERI Economic Research Institute

Linda M. Lampkin is research director of ERI Economic Research Institute (, a company that provides Form 990 data for use by nonprofits, and former director of the National Center for Charitable Statistics at the Urban Institute.

Don't Forget About the Simplest Planned Gift

Note: The following discussion is provided for informational purposes only and is not intended to serve as financial or tax advice. For specific information about charitable donations of stocks and securities, consult your accountant, financial adviser, or tax adviser.
A few years ago, the CEO of a large medical center foundation was meeting with a grateful patient who wanted to help fund a significant medical research project at the center. During the meeting, the donor told the CEO that she was planning to sell some stock and write a check. "If the stock is appreciated, there's a better way," the CEO said. The CEO then explained that by donating appreciated stock instead of selling it, the donor would avoid capital gains tax. "Is that legal?" the donor asked. "Absolutely!" the CEO replied. "In fact, you can take the cash you were going to donate and purchase new securities with a brand new cost basis!"

Over the next week, the donor worked with her investment advisor and foundation to identify and transfer 33 different stocks from her portfolio with a total value of $2.7 million. In addition to receiving a $2.7 million income tax charitable deduction, the donor avoided an additional $250,000 in potential capital gains taxes. Everyone won. In fact, the donor has since made a larger contribution.

What is most interesting about this story is that as professional fundraisers, we often presume our major donors understand the basic tax rules of charitable giving and run prospective gifts by their professional advisers in advance. That, however, is not always the case.

Why It's Important to Ask for Securities

Although this gift involved several million dollars, the average gift of stock or mutual fund is a more modest $3,000. This means more donors are getting the message that giving appreciated securities makes "cents" at tax time. In fact, many are learning they can give more. Consider the following example:

John would like to make a $10,000 gift. Assuming he is in the 35 percent ordinary income tax bracket, the after-tax cost of his cash gift would be $6,500 ($10,000 - $3,500). As an alternative, if John gives $10,000 worth of stock in which he has a $2,000 cost basis, the net cost of his gift (including the capital gains he will avoid) will be only $4,900—a further savings of $1,600.

Now, here's a question John probably hasn't heard. "Would you like to know how much more stock you can give for the same after-tax cost as giving cash?" The answer is significant. If John donates $13,256 of appreciated stock, the net cost of his gift (including the capital gains tax he will avoid) will be the same $6,500 as giving cash. That's nearly 33 percent more!

Aside from the added tax benefits and being able to give more, there is another important dynamic at work when donors consider noncash gifts such as securities. Most donors consider cash gifts as being made from their discretionary income. Conversely, donors who are asked to give securities are making gifts of principal or capital. Put another way, instead of giving the fruit of the tree, they are giving the tree. Furthermore, they can use the fruit they would have given to buy a new and better tree.

Since a planned gift is defined as any gift, current or outright, that considers the tax economics of the transfer, donors who make gifts of securities may be making their first planned gifts. In so doing, they are now thinking about their philanthropy and the charities they support in the context of their financial and estate planning.

Donors who become comfortable with making strategic gifts of securities are ideal candidates to learn about more sophisticated and larger contributions via split-interest gift planning vehicles such as charitable gift annuities, charitable remainder trusts, and charitable lead trusts.

In summary, where gifts of securities can help donors give more and give more efficiently, they also offer an important stepping-stone in helping them explore and fulfill their philanthropic potential.

More Information

Marc Hoffman, September 2008
© 2008, Planned Giving Design Center

Marc Hoffman is a co-founder and editor-in-chief of the Planned Giving Design Center and a principal in AssetStream, LLC. He has been a platform speaker at National Committee on Planned Giving (NCPG) and Association of Fundraising Professionals (AFP) national conferences; is a founding board member and past president of the Orange County and Inland Empire Planned Giving Roundtables; and is a founding and current faculty member of the American Institute for Philanthropic Studies' Certified Specialist in Planned Giving program at California State University Long Beach.