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Corporate Research E-Letter No. 5, October 2000

Investigating the Non-Profit Sector

by Philip Mattera

A home healthcare agency sponsored by a church refuses to recognize the collective bargaining rights of its employees. A non-profit hospital provides only a tiny amount of free care for the poor. A Blue Cross Blue Shield plan seeks to convert itself into a for-profit insurance company. A university obtains its athletic uniforms from a sweatshop supplier. A major industrial polluter funnels money to a non-profit think tank that publishes reports raising doubts about the environmental harm caused by the company.

These are but a few of the ways in which non-profit entities are becoming targets for campaigns launched by labor unions, environmental groups, community organizers or other parts of the progressive movement. Sometimes the focus on a non-profit is a sidelight of a campaign mainly directed against a corporation, but non-profits increasingly are primary targets in their own right.

This is, in part, a reflection of the substantial size of what some call the Independent Sector. A think tank by that name (www.independentsector.org) estimates the funds flowing into non-governmental charitable, educational, religious, health and social welfare organizations at more than $600 billion annually, with total paid employment of more than 10 million. According to the NonProfit Times, the trade journal of the field, seven non-profits now have annual revenues in excess of $1 billion.

Another reason why non-profits become campaign targets is that they tend to act more and more like corporations these days. Many of them are obsessed with cutting costs--often at the expense of their staff--while attempting to grow at a rapid rate. Many universities, hospitals and social welfare agencies fight unionization as intensely as the most reactionary private-sector employer. They worry about their market share and have no hesitation about giving their chief executives generous salaries, which these days are well into six figures at the largest institutions.

With non-profits, as with any institutional target, a key element of an effective social-justice campaign is information-gathering. But when it comes to non-profits, many people are uncertain about how much data is available. They know that governments have to abide by freedom of information laws, and publicly traded corporations have to disclose their financial results, but what about hospitals, universities and the like?

Getting Your Hands on the 990

There are some significant disclosure requirements for non-profits. As a tradeoff for being exempt from taxation, they have to make their financial statements and certain other information available to the public. This disclosure takes place annually in what is known as the Form 990, a rare Internal Revenue Service filing that is not confidential.

In addition to basic financial data (income statement and balance sheet), the Form 990 reveals other key information about the operations of a non-profit, such as the following:

• itemization of expenditures (including amounts spent on lobbying)
• names of officers and trustees
• compensation of officers and trustees
• compensation of five highest paid employees
• compensation of five highest paid independent contractors
• information on taxable subsidiaries

At one time, gaining access to a Form 990 was a formidable challenge. You could request it from the IRS and wait weeks or months to receive your copy. Otherwise, you could ask the institution itself to let you see its Form 990, but non-profits would usually make this as inconvenient as possible. You'd have to read the document on their premises, and they often would not let you make a photocopy. Sometimes key information would be mysteriously missing from the examination copy.

In 1999 the IRS issued rules requiring non-profits to provide copies of 990s upon request. Yet over the past year there has been a development that makes the documents even more accessible: they are being put on the internet. It is now possible to view thousands of 990s online, thanks to two websites. The first (nccs.urban.org) is the one put up by the National Center for Charitable Statistics, a project of the Urban Institute. The other is GuideStar (www.guidestar.org), a site designed to help contributors to charities get a sense of how their money is being used.

Analyzing the Blues

Activists on health insurance issues often find themselves going up against Blue Cross Blue Shield Associations, which are a special category of non-profit. The Blues emerged in the 1930s, and for decades these non-profits had much of the health insurance business to themselves. Over the past decade the Blues, now facing intense competition from HMOs and other commercial insurers, have been remaking themselves. WellPoint Health Networks, parent company of Blue Cross of California, is now a for-profit company trading on the New York Stock Exchange. Blues in eight states have been merged under the auspices of a non-profit mutual holding company (i.e., one owned by policyholders) called Anthem Insurance. The Blues in Washington, Oregon, Idaho and Utah--already joined in the Regence Group--are planning to affiliate with their counterparts in Texas and Illinois under the umbrella of Health Care Service Corp.

For those Blues, such as WellPoint, that have gone completely for-profit and are publicly traded, you can get financial and other information in their Securities and Exchange Commission filings. Getting the goods on those that remain non-profit (or mutual) is a bit trickier. Unlike other non-profits, Blues do not file Form 990s. The reason is that in 1986 Congress lifted their tax-exempt status, acknowledging that the Blues were functioning like for-profit businesses. Since they pay federal taxes, the Blues don't have to disclose their finances through Form 990.

There is, however, another way to peer behind the blue curtain. Blues are subject to the disclosure requirements imposed by state governments on all insurance companies. Consequently, Blues file what are called Annual Statements with insurance regulators in each state in which they do business. Annual Statements, the content of which is standardized across states by adherence to the rules of the National Association of Insurance Commissioners, are a gold mine of information. In addition to detailed financial reports, these documents--which run about 75 pages each--require insurance companies to disclose, for example, the complete contents of their investment portfolios.

Unfortunately, Annual Statements are almost never available online. You can purchase expensive CD-ROM compilations of Annual Statements from companies such as A.M. Best or Sheshunoff Information Services, but usually the most practical approach is to contact your state insurance department and arrange to get an old-fashioned photocopy.

The Municipal Bond Connection 

Like their for-profit counterparts, large non-profit institutions often need to borrow money to fund major projects such as the construction of a new building. It is not well known that non-profits frequently obtain this financing through participation in the commercial bond market. In doing so, they often float their bonds under the auspices of state or local government entities in order to enjoy lower interest rates. Consequently, universities and hospitals, in particular, are a recognized subset of what is known as the municipal bond market.

What goes along with offering securities to the public are fairly substantial disclosure requirements. A non-profit issuing bonds must publish a prospectus, which in the case of municipal offerings is known as an Official Statement. These documents are designed to help investors assess the risk of an offering by requiring the institution to disclose a great deal of information about its finances, operations, management, etc.

Unless you have your own municipal bond broker, it is not that easy to obtain an Official Statement. The Municipal Securities Rulemaking Board, a regulatory body that oversees the municipal market, operates a public reading room in the Washington, DC area but does not put the documents online. There are a number of private document services that sell photocopies of the Official Statements and at least one, Thomson Financial Service's Muni Statements Online (www.munistatements.com) that makes full texts available to subscribers via the web.

Learning the Basics

If you are looking for only basic, non-financial information, it is worth remembering that non-profits are corporations and thus must be chartered by a state government. You can thus learn a certain amount about an institution from the Secretary of State's office for the relevant state. These corporate filings, which vary greatly in depth from state to state but often include the names of trustees and top managers, can be searched online through subscription services such as Lexis-Nexis. Some states are beginning to put these records on the internet.

You can also check an institution's non-profit status on the website of the Internal Revenue Service (www.irs.ustreas.gov/plain/bus_info/eo/eosearch.html) and you can find out a bit more by checking out its listing in a print reference work called THE NATIONAL DIRECTORY OF NONPROFIT ORGANIZATIONS (published by the Taft Group).

In short, information about the finances and operations of non-profits is not as widely available as with publicly traded corporations, but neither are these institutions completely shrouded from public scrutiny.

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