Columbia Association - The Friends Of The Columbia Association

THE 2009 FINANCIAL ADVISORY COMMITTEE REPORT ON

THE FRIENDS OF THE COLUMBIA ASSOCIATION

COMMITTEE MEMBERS Chair: James Howard, Long Reach Vice-Chair: Dan Woodruff, Dorsey's Search Roger Hultgren, Harper's Choice Alan Romack, Owen Brown

COLUMBIA, MARYLAND FEBRUARY 12, 2009

The 2008 Financial Advisory Committee February 12, 2009 Miles Coffman Chair, Planning and Strategy Committee Columbia Association, Inc. 10221 Wincopin Circle Columbia, Maryland 21044 Dear Mr. Coffman, Please accept the attached report from the 2008 Budget Committee on “The Friends of the Columbia Association.” As always, members of the Financial Advisory Committee are available for future consultation regarding this report or other matters the Board of Directors or the Planning and Strategy Committee require. The other committee members and I sincerely appreciate the opportunity to have served the Columbia Association and residents as members of the Financial Advisory Committee and on their behalf, I remain, Respectfully,

James P. Howard, II Chair, Financial Advisory Committee

The Friends of the Columbia Association

Charge The Columbia Association Board of Directors (Board) asked the Financial Analysis Committee (FAC) to analyze the best use of the Friends of Columbia 501(c)(3) nonprofit corporation as it relates to CA's fiscal condition.

Recommendation The Financial Advisory Committee recommends terminating the Friends of the CA and proceeding no further with developing a plan to collect and use tax exempt donations. The Committee bases this recommendation on the complexity of the political and economic environment and expects the return on investment to be lower than initially anticipated.

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The Friends of the Columbia Association

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Background The Columbia Association (CA) is considered a social welfare organization under section 501(c) (4) of the Internal Revenue Code (IRC), like many other homeowners associations. This is different and distinct from organizations typically described as charitable, which are addressed by section 501(c)(3) of the IRC, which also includes religious, educational, scientific, and literary organizations. As a social welfare organization, the CA is not eligible to receive donations which are deductible from income for the donor's tax purposes. Further, it may not be eligible to receive grants or other discretionary funds from governmental programs or private foundations which are restricted to charitable purposes, by program or donor. Because of these restrictions, the CA considered establishing an adjunct entity which would be considered exempt under section 501(c)(3) of the IRC, allowing donations to be deducted from donor's income for tax purposes. In 2005, the Board of Directors of the CA voted to establish the "Friends of the Columbia Association, Inc." (Friends of the CA) and directed the staff to pursue the opportunity. The Maryland State Department of Assessments and Taxation (SDAT) accepted articles of incorporation for the organization on November 10, 2005. If other corporate formalities were pursued, they are not on the public record. However, to be considered for exemption, the Internal Revenue Service (IRS) requires organizations to file Form 1023, "Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code." If the IRS finds the organization's purpose meets the requirements of section 501(c)(3), it authorizes a determination letter (for new organizations, there is a five year probationary period) and adds the organization to Publication 78, "Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986." As of January 22, 2009, the Friends of the CA does not appear in Publication 78. According to SDAT, the organization is considered active and has filed personal property tax returns for the years 2006, 2007, and 2008.

Eligible Activities Determining which activities of the Columbia Association may be considered tax exempt under section 501(c)(3) of the Internal Revenue Code is a complex question. Some programs run by the CA are plainly eligible for 501(c)(3) recognition. However, other programs may not be and others may be under restricted circumstances. The Financial Advisory Committee finds two core program areas funded by the CA through the assessment and user fees which it believes could be partially or completely funded through charitable donations. These areas represent a broad swath of the CA's activities and are not thematically related. First, the largest block of CA program activities which may be partially funded through charitable funds are the open space programs. Open space management will cost CA about $15,500,000 in fiscal year 2010, representing about 27 percent of CA's budget for this coming year—a substantial portion of CA's total budget. The IRS has ruled that tax-exempt funds can be used to maintain public park land and noted that "the courts have consistently upheld trust dedicated to community beautification and the preservation of natural beauty." 1 This definition 1. Internal Revenue Service, Revenue Ruling 78-85, 1978-1 C.B. 150.

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might include the Friends of the Columbia Association. Additionally, the Columbia Art Center, owned and managed by the CA in Long Reach, would likely be eligible for charitable funding. The Art Center provides both art education, on a user fee basis, and gallery services to artists in Columbia. Both activities are historically considered eligible for 501(c)(3) recognition. 2 The Art Center will cost the CA $858,000 in fiscal year 2010 and representing about 1.5 percent of the budget. While significantly smaller than other programs maintained by the CA, these costs could be partially or completely funded through external donations. Further, there is a significant distribution network for funding art exhibits and related projects that the Art Center may then become eligible for. Additional activities in the community services area may qualify as charitable depending on implementation or other circumstances. Those activities with educational components would qualify, as would CA-issued grants to other 501(c)(3) recognized organizations. Further, activities in sports and fitness may be charitable, as they have been regarded as such in the past. However, the CA already faces criticism over its competitive advantage versus commercial fitness service providers. Pursuing charitable status for the CA's sport and fitness facilities may intensify those criticisms and cause unforeseeable blowback in the competitive market.

Moving Forward If the Columbia Association were to reopen the discussion of the Friends of the Columbia Association, for pursuing charitable donations, a significant amount of work will be required. In addition to formalities, such as finalizing recognition of tax-exempt status under section 501(c) (3) of the Internal Revenue Code, there are two major concerns the Financial Advisory Committee has with respect to starting up the organization. The first concern is the management. In 2005, the articles of incorporation filed with the Maryland State Department of Assessments and Taxation state that the initial directors of the organization were listed as the ten directors of the CA at the time. This suggests a long term plan for the CA's board of directors to serve conterminously with the board of directors of the Friends of the CA. This may be an untenable solution in the long term. The Board of Directors already manages an extremely large organization and placing additional responsibilities may cause undue stress and be perceived as a burden. This may potentially introduce destabilizing factors that can harm the long term health of the Friends of the CA and chill potential donors. Because of these concerns, the CA ought to reform the management of the organization, appointing a group of outside directors, including at most the CA's president and chairman of the board of directors. Additionally, a representative of the ten villages may be selected to provide additional insight and feedback on the needs of the community. The outside directors should be selected for their skill and knowledge in supporting non-profit organizations. This model emulates the common structure of a public university and an affiliated foundation which 2. Dennis Zimmerman, “Nonprofit Organizations, Social Benefits, and Tax Policy,” National Tax Journal 44, no. 3, (September 1991): 341-349.

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maintain separate and only minimally overlapping governance structures. This would increase the profile of the organization among potential donors and increase its ability to solicit funds and grants. The second concern the committee has is support structures. While the Friends of the CA may proceed for some time with no employees or formal support, it will need access to bookkeeping and record keeping functions. As a result, the administrative functions of the CA would need to be prepared for and accept responsibility for supporting the organization including basic functions, with a willingness to accept oversight from an outside body (the Friends of the CA board of directors), in accordance with the duties performed. Again, this model emulates the common structure of a public university and affiliated foundation, which mutually support each other in pursuit of their missions.

Revenue Sources There are three primary revenue sources available to the Friends of the Columbia Association. The first revenue source is private donations. Private donations may come in either restricted or unrestricted form, with the freedom to set conditions on disbursement and use established by the donor (though the Friends of the CA would be able to reject donations if it did not agree upon the conditions). These donations take the usual form of charitable donation and may include bequests, large one-time donations, naming opportunities for Columbia Association facilities, or multiple repeat donations of small sums from dedicated supporters. A related option for funding comes from employer matching programs that provide a matching gift when employees make charitable donations. Additionally, given the proximity of Columbia to several major Federal employment centers, the Friends of the CA may be eligible for the Combined Federal Campaign, which aggregates donations from Federal employees through a paycheck deduction. The second potential revenue source is grant funding through private foundations and government programs. Many grants in both categories require the recipient be recognized as a 501(c)(3) tax exempt organization. This requirement assures the grant-makers of additional oversight provided by the Internal Revenue Service and the courts in establishing that charitable organizations utilize resources according to charitable missions. Finally, there is the option for the Friends of the CA to pursue long term funding opportunities and establish endowed funds for particular or general purposes to support the CA's activities. Endowed funds invest the principal of a donation and provide continued funding, indefinitely, based upon income from the investment. Such funds could be required by individual donors (see above), or could be established independently by the Friends of the CA. Investment income is, however, unpredictable and may not be available in a given year.

Recommendation The Financial Advisory Committee recommends terminating the Friends of the CA and proceeding no further with developing a plan to collect and use tax exempt donations. The

The Friends of the Columbia Association

Committee bases this recommendation on the complexity of the political and economic environment and expects the return on investment to be lower than initially anticipated.

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