Watkins, Meegan, Drury

1

• Watkins, Meegan, Drury Company, L.L.C.
• Certified Public Accountants
• Business and Financial Advisors
• National Academy of Public Administration
• September 17, 2007
• Dan OShea, CPA
• Jim Kanuch, CPA

2
OUR QUALIFICATIONS

• 26 Employees on Not-For-Profit Team
• Over 130 Not-For-Profit Clients
• Active in ASAE, FAR, GWSCPA, AICPA
• Authors of Quarterly Newsletter
• Combined 33 Years Not-for-Profit AND Government
  Contractor Experience
• Deltek Consulting Practice

3
PURPOSE OF ENGAGEMENT

• September Board Meeting
• Analyze the current accounting and financial
  relationships of the Academy and the Foundation
• November Board Meeting
• Make recommendations to improve financial
  condition, reporting and processes

4
TODAYS PRESENTATION

• Methodology
• Key Questions
• Important Terminology
• Academy/Foundation Finances 101
• Overview of Organizational Finances
• Academy Finances
• Foundation Finances
• Financial Relationship between Academy and
  Foundation
• Wrap-up Discussion of Key Questions

5
METHODOLOGY

• Document Review, including
• Management financial reports
• Governance/Corporate documents
• Internal control processes documentation
• 2006 Audit Report 2006 and prior Management
  Letters
• Interviews, including
• Board Members
• Finance, Investment, Audit Committee Chairs
• Treasurer (current and former)
• Senior and mid-level managers
• Finance staff
• Outside auditor

6
KEY QUESTIONS TO BE ADDRESSED TODAY

• Is organizational overhead too high?
• Is the Academys government contracting model
  effective? Why cant the Academy make more
  profit on its government contracting work?
• Is the allocation of costs to the Foundation too
  high?
• How much money is in the Endowment?
• Why is there so much transferring of funds back
  and forth between the Academy and the Foundation?
  
• Is this an indication that the Foundation/Endowme
  nt is subsidizing Academy activities?
• Does the organization lose money when it takes
  private grants from foundations that include
  restrictions on overhead rates?

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IMPORTANT TERMINOLOGY

• Statement of Financial Position
• Balance Sheet
• Statement of Activities
• Income Statement
• Endowment
• Usual definition refers to funds with protected
  corpus
• NAPA has used term to refer to all investment
  funds
• Unrestricted Net Assets
• Retained Earnings/Fund Balances that can be used
  for normal operations
• Board Designated Net Assets
• Fund Balances that may only be used as directed
  by the Board
• Temporarily Restricted Endowment
• Fund Balances that can only be used as specified
  by third party donors (other than Board)
• Margin
• Profits on Contracts or Grants

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OVERVIEW OF ORGANIZATIONAL FINANCES

• Tax Status and Roles of Academy and Foundation
• Overview of 2006 Statement of Position (Balance
  Sheet)
• Overview of 2006 Statement of Activities (Income
  and Expense Statement)

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TAX STATUS AND ROLESAcademy and Foundation

• Academy
• Tax Status 501(c)(3)
• Congressionally Chartered Organization
• Roles
• Operating company for both entities
• Government contractor

• Foundation
• Tax Status 501(c)(3)
• Supporting organization to Academy
• Roles
• Established as a Foundation to receive
  contributions
• Repository for funds available for investment
  (for both organizations)
• Private grantee

10
2006 STATEMENT OF FINANCIAL POSITION(Balance
Sheet)
11
2006 STATEMENT OF ACTIVITIES(Income and Expense
Statement)
12
ACADEMY OVERVIEW

• Revenue and Expenses
• Government Contracting Model
• Implications of government contracting
• Overview of rate structure

13
ACADEMY REVENUE EXPENSES

• Revenue (10 M in 2006)
• Driven by government contracts
• 98.0 of 2006 revenue
• 97.7 of 2005 revenue
• Expenses (9.6 M in 2006)
• Direct Costs Expenses that would not exist but
  for a specific government contract
• Indirect Costs Expenses necessary to run
  Academy, but not attributable to a specific
  contract
• Fringe Benefits (health, retirement, disability
  benefits for staff who are billed directly to a
  contract)
• Overhead (rent allocated to government
  contracts associated with direct costs)
• General and Administrative (finance and
  accounting function corporate management)
• Bid and Proposal
• Unallowable (cannot be billed to government
  interest expense, penalties and fines, alcohol)
• Margin/Profit (406,000 in 2006)

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ACADEMY CONTRACTING

• Implications of having government contracts
• Revenue is recorded as expenses are incurred
• Generally, profits (margins) are limited to fee
  that is charged against expenses incurred
  (negotiated fee usually 5)
• Overhead and GA rates must remain low enough to
  be competitive and obtain contracts
• Overhead and General and Administrative (GA)
  rates are relatively high
• 2007 provisional rates
• Overhead 37.4
• GA 40.9
• Biggest contributing factors are rent and
  non-billable labor
• Government contracting rates are calculated
  without Foundation-related expenses

15
FOUNDATION OVERVIEW

• Revenue and Expenses
• Foundation Endowment
• Distinction between Investment Fund and
  Endowment Funds
• Summary of Foundation Endowment Funds

16
FOUNDATION REVENUE EXPENSES

• Revenue (775,000 in 2006)
• Investment earnings (70 of revenue in 2006)
• Dues, contributions, fees for conference
• No private grants in 2006
• Expenses (1.7 M in 2006)
• Allocated share (in Board-approved budget) of all
  expenses charged to a particular activity
• Examples
• Big Ideas 100
• Finance/Accounting 20
• Fellows Support (Fall Meetings, Nominations
  processes, Standing Panels) 100
• Margin/Profit (-936,000 in 2006)
• Largely reflects decision to invest in Big Ideas
  without equivalent income stream, and a shortfall
  in anticipated revenue associated with the
  investment in Development

17
FOUNDATION ENDOWMENT

• Use of the term Endowment
• True endowment donor specifies that corpus
  (original gift) cannot be spent
• No Foundation funds are true endowments to the
  best of our knowledge
• Original intent of Foundation Endowment
• Established to utilize investment income from
  Endowment to fund activities of Fellows
• Documentation of original gifts, purpose and
  restrictions cannot be found
• Foundation investment funds can be spent for
  activities defined in Statement of Management
  Investment Policy (Investment Committee, January
  9, 1997)
• Limited to 5 of the trailing average of the
  market value of the Endowment Fund, on the basis
  of the 12 quarters preceding the beginning of the
  fiscal year for which the spending limit is
  determined (approximately 400,000)
• Foundation investment balance has not declined
  significantly between 2004 and 2007 (see graph on
  slide 21)
• Spending for Board initiatives has been mitigated
  by investment earnings

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INVESTMENT FUNDS

• All organizational investments are held by the
  Foundation and are carried at Fair Market Value
• Investment Funds consist of
• Foundation assets (Board-Designated Temporarily
  Restricted)
• Academy assets
• I.O.U. for expenses paid by Academy on behalf
  of Foundation
• Accumulated margin on Academy work
• At September 2006, 10.1 M in Investments
• 8.1 M Foundation assets Board-Designated
  (unrestricted)
• 312,000 Foundation assets Temporarily
  Restricted
• 1.7 M Academy assets

19
INVESTMENT FUND BALANCES

• End of FY 2006

Foundation Board-Designated Funds
(unrestricted) 8.1 M Fellows Endowment Fund
1.2 M James E. Webb Fund 4.2 M Elmer B.
Staats Fund 2.7 M Foundation Temporarily
Restricted Funds 312,000 National Public
Service Award Fund 160,000 Roback Scholarship
Fund 112,000 Webb Trust 40,000 Academy
Assets 1.7 M TOTAL INVESTMENT
FUNDS 10.1 M
20
INTERCOMPANY ACTIVITY

• Three types of intercompany activity
• Accounting for Foundations share of expenses
• All expenses of both Academy and Foundation are
  initially paid by Academy
• Foundation share of expenses is tracked through
  Intercompany Account
• These funds (Academy assets) are held in the
  Foundation investment accounts until cash is
  needed
• Moving Academy margin into investment accounts
• To the extent that the Academy generates
  margin/profit
• The Academy can transfer excess cash. in whole or
  part. to Academy assets held by the Foundation so
  that these funds can be invested or
• The Academy can reduce the I.O.U. from the
  Foundation
• Transferring cash to Academy to pay expenses
• When cash is needed by Academy to pay bills
  (rent, payroll), Academy assets held by
  Foundation are sold and transferred to Academy
  checking accounts
• Generally due to collections on receivables not
  keeping up with cash flow needs
• Moving funds is authorized by President and
  Treasurer

21
VALUE OF INVESTMENT FUNDS
22
FINANCIAL RELATIONSHIPS
Total Expenses 11.5M 2007 11.4M 2006 10.1M
2005
Academy 10.2M 2007 9.7M 2006 8.8M 2005
Foundation 1.3M 2007 1.7M 2006 1.3M 2005

• Expenses attributed to the Academy form the
  basis of the GA and Overhead Rates
• charged to the government.
• Accounting rules require that all costs be
  accurately attributed to entity/work being
  performed.
• - Costs attributed to the Foundation must be
  related to Foundation activities
• Similarly, costs attributed to the Academy must
  be related to Academy activities.
• However, Academy margin may be transferred to
  the Foundation and used to pay
• for Foundation activities or to reduce the
  amount owed by the Foundation to the Academy.

23
GOVERNMENT CONTRACTS VS. PRIVATE GRANTS

• Current practice is to account for government
  contracts through the Academy and private grants
  through the Foundation
• If private grants were accounted for through the
  Academy, they would be subject to Overhead and
  GA rates charged under government contracts
• Private grants received by the Foundation are not
  subject to government contracting rates
• Concerns raised in interviews
• Independence and integrity of Academy will be
  tarnished by accepting Private Grants
• Organization loses money on Private Grants

24
GOVERNMENT CONTRACTS

• Academy has an effective government contracting
  model
• Monitoring of contract margins (profit) is
  effective
• Three types of government contracts
• Cost Plus Fixed Fee (CPFF)
• Most attractive actual cost reimbursed margin
  at least risk
• Fixed Price (FP) or Direct Reimbursement (DR)
• Least attractive fixed price greater risk to
  margin
• Time and Materials (TM)

25
PRIVATE GRANTS

• Private Grants can include funding from
• Private Foundations (examples Robert Wood
  Johnson MacArthur)
• Corporate Foundations (examples Fannie Mae
  Foundation Coke Foundation)
• Private Grants can be profitable
• If Foundation is grantee, they are not subject to
  government contracting rules
• Private grants often limit indirect rates to
  10-15
• Must budget as much as possible as direct costs
• Effective grant management requires close
  attention to assignment of costs

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WERE KEY QUESTIONS ADDRESSED?

• Is organizational overhead too high?
• Overhead rates are reasonable and at high end of
  non-profit industry range
• Is the Academys government contracting model
  effective? Why cant the Academy make more
  profit on its government contracting work?
• Government contracting model is highly effective
• Profit is limited by terms of government
  contracts

27
WERE KEY QUESTIONS ADDRESSED?

• Is the allocation of costs to the Foundation too
  high?
• Allocation of costs to Foundation is reasonable
  and consistent
• How much money is in the Endowment?
• Foundation does not have true endowment
• At end of FY2006, total NAPA investments were
  10.1 million
• Foundation investment assets totaled 8.4 million
• Academy assets invested by the Foundation totaled
  1.7 million

28
WERE KEY QUESTIONS ADDRESSED?

• Why is there so much transferring of funds back
  and forth between the Academy and the Foundation?
  Is this an indication that the
  Foundation/Endowment is subsidizing Academy
  activities?
• Neither entity is subsidizing the other in the
  allocation of expense
• However, the Academy transfers significant margin
  to Foundation investment funds (by offsetting the
  Foundations I.O.U to the Academy or by
  transferring cash and increasing Foundation
  assets)
• Academy is the operating arm of both
  organizations and pays all bills
• Foundation is the investment arm for both
  organizations
• Transfers reflect operational needs for cash and
  transfer of excess cash for investment

29
WERE KEY QUESTIONS ADDRESSED?

• Does the organization lose money when it takes
  private grants from foundations that include
  restrictions on overhead rates?
• No the organization will not lose money
• The Foundation can treat reimbursable costs
  (i.e., rent) under privates grants differently
  than the Academy can treat such costs under
  government contracts, thereby accommodating the
  requirements of private grants to charge lower
  indirect cost rates
• Private grants received by the Foundation can
  have a positive impact on the organizations
  bottom line, as long as they are effectively
  managed

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QUESTIONS?