Nonprofits that gambled with bond money now paying the price

Posted on: September 25, 2009

In Thursday’s (9/24) New York Times, Stephanie Strom writes, “Homeowners and businesses were not alone in taking on piles of debt over the last decade. Nonprofits of all sizes did the same, and now they, too, are paying the price. Far from being conservative stewards of their assets, many nonprofits engaged in what some experts call risky financial behavior. ‘They did auction-rate securities, interest-rate arbitrage, complex swaps — which backfired on them the same way it would backfire on any hedge fund or asset manager,’ said Clara Miller, chief executive of the Nonprofit Finance Fund, which has experienced a huge increase in organizations turning to it for assistance with soured bonds. … Those struggling now include the full range of nonprofits, including museums, colleges, orchestras and small local social service providers. … Much of the nonprofits’ debt is in the form of tax-exempt bonds. The number of charities issuing such bonds more than doubled from 1993 to 2006, according to figures compiled by the Internal Revenue Service, and the amount of debt linked to those bonds rose to $311 billion from $98 billion (adjusted for inflation to 2006 dollars). In many cases, charities used the money from bonds to buy real estate and build facilities. … These nonprofits gambled that income from donations and investments would more than cover their debt service. But the recession turned that logic inside out.”

Posted September 25, 2009