Yesterday Sen. Grassley sent another information request to Wounded Warrior Project. The request went by electronic mail, which means a couple of hours later it appeared in public.
The full letter is visible here.
The letter was discussed in an article at News4Jax.com: Senator questions Wounded Warrior Project spending.
First few comments are looking at donated ads. Letter asserts that backing out about $80M of donated ads drops the program service percentage from 80.6% down to 66.6%.
I tried recalculating the 66% number in half a dozen different ways but can’t figure out how the calculation was made.
Fourth paragraph repeats the criticism of watchdog organizations who exclude SOP 98-2 allocations from program. Paragraph suggests that $41M of joint cost allocations should be removed from program.
Take your pick on how to account for long-term care support
Fifth paragraph opens up a very confusing discussion of funding for the Long-Term Support Trust. Since the letter is a public document I will quote it:
In addition, WWP created a separate 501(c)(3) to serve as a Long-Term Support Trust. In FY 2013, WWP transferred $9,100,000 to the Trust, and in FY 2014 it transferred $28,000,000. This $37,100,000 appears to be counted as a program expense on behalf of veterans. However, the Trust’s FY 2014 Form 990 shows that the only expense was $134,721 to Barclay’s for managing the Trust. It would be helpful if WWP could describe, in detail, what benefit is provided to veterans by the Long-Term Support Trust. Further, WWP has advertised that it spent $65.4 million on long-term support programs, yet it appears almost $40 million of it was simply transferred to the Trust.1 It would be helpful if WWP could address how the $65.4 million was spent and whether its assertion that all of it was spent on veterans is accurate.
Let me describe what I think this discussion is about.
The organization has a long-term goal of setting up $500 million in a trust in order that the proceeds may be used to fund long-term care for the next several decades. This would require accumulating that volume of contributions which are not spent in the meantime and will require fundraising efforts to gather the donations.
The senator’s staff are focused on a page inside the website discussing the Independence Program which says
In the first 18 months alone, WWP has spent $65.4 million on long-term support programs.
The senator’s letter says this amount was expended as program services. The newspaper article picks up this point and places the two years worth of contributions of $37M into the context of 2014 spending. By placing that amount immediately after questioning of the 2014 program spending (which is on a GAAP basis), the article suggests or implies the $37 million transferred was included as a program expense in 2014 on a GAAP basis.
The senator wants to know the amount of direct support provided to veterans in 2014 by these funds.
Apple, Orange, or Turquiose?
If I’m putting the pieces together we are now comparing apples to oranges to turquoise and wondering why they aren’t consistently telling the story of traffic on the freeway this morning. Bear with me and see if you think the apple/orange/turquoise comparison is appropriate.
(I think turquoise and silver jewelry from the Southwest looks very nice. That’s why turquoise is the third part of the discussion. Perhaps I could use burgundy, since it is a color and an alcoholic beverage.)
First, the apple.
After reading the article and the letter the first time, I fully expected to see the $28M in the audited statement of activity. I looked and could not find that amount anywhere. Could not find anyplace it might be included.
There is a comment in the note that there are amounts moved into a separate 501(c)(3) organization. Since that organization is controlled it is consolidated, which means that the transfers are not visible in the basic financial statements. The investments held in the controlled entity are consolidated into the investments in the parent. Thus, the investment is not visible on the statement of financial position either.
The financial statements are talking apples.
Second, the orange. The color or the fruit?
Let’s go to the 990.
Tax return accounting goes in a different direction. The WWP financial information is reported without the new entity because it is essentially a controlled subsidiary. So then we have the question of what do you do with the transfers between organizations when money is moved from a parent to a subsidiary.
The money is disbursed outside the WWP entity, so it needs to be accounted for somewhere.
Hmmm. Perhaps it is a grant.
Aha! Look at page 41 of the 2014 990 PDF package, which is the fourth page of detail on schedule I. There you will see $28M listed as a grant to the Wounded Warrior Project Long-Term Trust.
So that means the $28M transferred into the long-term trust was recorded as a grant in 2014. Having thought about it for a while now, not only is that the appropriate accounting for tax return preparation, I am not able to think of how you could report the amount in any other way.
Anyone have ideas on how it could possibly be reported any differently?
The 990 is talking oranges.
Third, the turquoise.
Now let’s go back to the website which says
in the first 18 months alone, WWP has spent $65.4 million on long-term support programs
The senator wants to know how much of that was spent in cash to provide direct support to veterans. He is defining “spent” to mean what was used, excluding ads or GIKs, to provide direct support to vets in the current year. He wants to understand how the $65M can represent the amount of direct assistance. That is the obvious perspective he is taking.
The senator’s letter is talking turquoise.
So, which is it?
So what does that comment (outside the audited financial statements and outside the 990), in a section describing programs, specifically on a page describing the Independence program actually mean?
GAAP – If you look at it from the perspective of GAAP accounting and assume “spent” means the amount is an expense on the consolidated statement of activity, then that is an incorrect statement.
The GAAP expenses for the Independence program is $19.9M in FY 14 and $2.3M in FY 13. That is a total of $22.2M over two years. Obviously that isn’t $65M and can’t include the $28M transfer.
990 – If you look at it from the perspective of 990 reporting (using the rules that are required for tax reporting) I believe that is a correct statement.
Combining the transfers which need to be reported as an expense for purposes of the 990 with the $19.9M and $2.3M expenses on the audited financials roughly gets to the reported $65.5M. So for purposes of the 990 that is a correct statement.
Oh, by the way, in case you’re wondering if this was somehow hidden from view, check out page 28 of the 2014 990, which contains the following note:
Other reconciling items
$28,000,000 – grants and other assistance provided to the Wounded Warrior Long-Term Support Trust eliminated upon consolidation of audited financial statements. The trust consists of funds set aside for the long-term care of the most severely disabled warriors. The trust is recorded in investment on the audited financial statements as the trust was consolidated with Wounded Warriors Project, Inc.
That comment is included in the place it belongs to explain part XI and XII of schedule D (see page 26 of the 990 package) which is the required place to reconcile from the audited financial statements to the amount reported on tax returns for revenue and for expenses. The $28M is clearly listed as a reconciling item.
Direct support – So the third perspective, which the senator’s letter is inferring, is that the $65M amount represents what has been spent in cash to directly benefit wounded warriors over an 18 month timeframe. Previous comments in the letter make it clear the senator does not consider donated ads or costs allocated under SOP 98-2 to be direct support to vets. If the senator assumes that is what the number represents, then the number would be incorrect.
The winner is …… Oranges!
So, the $65M is not GAAP and it does not represent the direct support in cash to vets for independent living.
If you want the amount to tie out to something somewhere, go to the 990.
Take your pick in general of which metric you wish to use for a conversation: GAAP, direct-support-to-veterans, or 990. However, for this number, I think the winner is 990 reporting.
I will rephrase what I think the number represents. It is the amount that has been spent in cash on independence project plus the amount that has been set aside, or disbursed, or transferred, to provide a permanent fund which will provide long-term care over the next many decades.
I have used over 1,300 words to describe what that one comment on one page on one program likely means. Said comment which is now the focus of a senatorial investigation.
At this point I hope you can make your own assessment.
At this point I also hope you also understand that nonprofit numbers are astoundingly complex.
More questions to WWP
The senator’s letter raises seven additional questions with an expected response to be provided by June 1, which is two weeks from now.
Question 1 deals with accounting for ads. Question 2 deals with joint cost allocation.
Those are both superb questions with serious implications.
Wow, I mentioned those questions yesterday as issues that I think need more discussion.
Questions 3 and 4 deal with the Long-Term Support Trust discussed above.
Question 5 and 6 dive deep into the weeds discussing headcounts of how many people participated in each of a variety of programs.
Question 7 asks for a copy of the independent review research performed at the request of the board. Previous public discussion indicates there was no written report.
Perhaps we can guess why there was no written report. May turn out to have been a very wise decision for the organization and very frustrating to the Senator.
Watch for lots more coverage on this issue. The issue isn’t going away.
(P.S. Minor editing changes made in the few minutes after publishing post and sending a tweet.)