YOU ARE JUST A MEMORY: ACCOUNTING TIPS AND TRICKS AT PRINCETON

Today’s Wall Street Journal adds lots of juicy details about the battle between the Robertson family heirs and Princeton University.  Members of the family sued Princeton in 2002 over control of the endowment left to the Woodrow Wilson School of Public Policy.  In 1961, the heirs to the A & P fortune gave $35 million to Princeton to train graduate students for service in international affairs, with a specific focus on eventual federal government service by graduates.  That amount has now grown to a staggering ....

Our very own Jack Siegel's book,  A Desktop Guide for Non-Profit Directors, Officers and Advisors: Avoiding Trouble While Doing Good is scheduled to hit the streets before the end of March.  The page proofs are now complete and production is about to commence.  Here is what noted lawyer, authority, and author Bruce R. Hopkins had to say about an advance copy of Siegel's book. Jack Siegel – lawyer, accountant, management consultant, and computer whiz – takes the putative director or officer of a nonprofit organization on a useful and often entertaining voyage throughout the realm of the tax-exempt organizations universe, pointing out its quirks, foibles, and legal liabilities along the way.  His handbook will make mandatory – and arresting – reading for those who are already serving as trustees, directors, officers, and key employees of exempt organizations, particularly charitable ones. Mr. Siegel’s goal, in which he succeeds, is to help directors and officers of nonprofit organizations “make better decisions.”  He recognizes that his book is arriving in the midst of government officials’ and other policymakers’ intense examination of corporate principles and practices of exempt organizations.  He correctly notes, nonetheless, that “good governance cannot be mandated; there must be buy-in from those charged with governing.”  Siegel wisely notes the need for emphasis on what he terms the “secondary aspects” of running an organization: control, red tape avoidance, risk management, and administration.  The book is full of large policy analyses and paragraphs on the details, such as board size, board committees, board meeting formats, the contents of minutes, and the duties of officers. Salted with some excellent real-life examples, what also sets this book apart from most in its genre is the tone: the writing style, the brusqueness, the blunt.  He complains that too many directors “check their good judgment at the boardroom door.”  He advises individuals who “desire agreement and demand adulation” to stay off boards; he insists on “commitment” and “institutional tension” with the executive director.  He warns prospective directors that some organizations want, in addition to time and judgment, “either your money or your ability to raise money.”  To my delight, he extols the virtues of “some level of expenditures” for qualified lawyers and accountants.           Please join me in adding this most helpful handbook to your nonprofit library. Pre-order your copy of the Guide today by clicking here

$650 million, or 6% of Princeton’s endowment.

The initial lawsuit focused on management of the money, although the Journal points out that the family had long questioned whether the money was used appropriately.  The case is scheduled to be tried this year, meaning that we should see a resolution of the dispute this year or next, assuming no appeals.  One thing is for sure, the lawyers have made out like bandits, with both sides racking up somewhere in the neighborhood of $22 million in legal fees to date.  We have no doubt many charities would have loved to get those bread crumbs.

The Journal’s article refers to a number of documents that paint Princeton in an unfavorable light.  One 1993 memo, from former Federal Reserve Chairman Paul Volcker and then Princeton professor, notes that Princeton was straying from the Robertson’s original intentions.  Princeton’s response seems to be that the Vietnam War reduced the level of interest in federal public service and that while necessity may have caused a technical deviation from the original expectations, Princeton is using the funds in the overall spirit of the gift.

Once again, we are left with the age-old question:  When should the cold, dead hands of the donor be pried from his money?  Law students hated it, but the old rule against perpetuties made a lot of sense, at least if you didn't have to deal with the details. Of course, charitable trusts were exempt from the law against perpetuities, but the doctrine of cy pres provided a necessary safey valve.  That doctrine permits a court to approve necessary modifications should unanticipated circumstances make the original purposes of the gift impossible to achieve.  But even given the doctrine of cy pres, we believe the policy judgment encapsulated in the rule against perpetuities--that the dead should not control the living--is worth remembering when making charitable gifts.

The fault in the Princeton dispute lies with both the donors and those who were running Princeton in 1961.  They clearly did not anticipate that times and needs change.  The original gift instrument simply did not build enough flexibility into it.  In fact, the suit would be much better cast as a cy pres action on the part of Princeton--at least that should be the gist of a counterclaim.  Charities often are reluctant to seek the help of the courts when carrying out a gift's terms become impossible due to unanticpated circumstances.  Instead, many charites elect to rely on self-help, including novel or strained interpretations of restictions  To a certain extent, you can't blame a charity's reluctance to seek court assistance.  Would you want to admit in court that you are having trouble fulfiling the purposes of a gift that now represents 6% of your endowment, particularly with the heirs hovering about?  But as the Robertson case aptly ilustrates, Princeton's self-help efforts backfired.

According to the Wall Street Journal, one source of self-help for Princeton was accounting games.  For example, when a new building was built with the Robertson money, the endowment was charged for the cost of construction.  The fund was then charged again as the building was depreciated (an accounting event rather than an actual outlay of funds).  As a consequence, the Robertson money was being charged twice for the same expenditures.  The article also discusses a number of gifts by others for specific purposes, where the donor's fund was then charged for general and administrative charges on the theory that general funds were being used for those purposes.  When someone makes a gift for a specific purpose, is it appropriate for an institution to use that gift to reimburse itself for expenditures the institution made before the gift was made?  Probably not; the donor is giving with the expectation of new expenditures.

But rather than being critical, the proper course of action is to ask why these games are being played.  The answer goes back to our original point.  In many cases, donors simply are not building enough flexibility into their gifts.  This is not necessarily the fault of the donors.  In all likelihood, many institutions acquiesce to the donor’s language, figuring that the important thing is to first get the money in the bank, and then to worry about finessing the language after the donor is no longer of this world.

The Wall Street Journal’s article cataloging of the alleged abuses and unflattering memos may cause donors and their counsel to write even more restrictive instruments controlling their gifts.  No doubt gift instruments will now address how depreciation and past expenditures are handled.  But you can bet that the insitutional recipients of these gifts will find new and novel theories for circumventing the terms of these gifts as time makes the restrictions obsolete.  The answer:  Donors should recognize that no matter how generous they are with the wealth they accumulated while they were alive, they are still dead and cannot control a world in which they are just a memory.

Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

 

THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our Guide/Tutorial for non-profit directors and officers entitled “Avoiding Trouble While Doing Good: A Guide for the Non-Profit Director and Officer.” Copyright 2006, Auto Didactix LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer" and this web blog.  For additional information call 773-325-2124