||| FROM ROBERT AUSTIN |||
It’s a well-known fact that we have a lot of nonprofit organizations here on Orcas, and many of us have had experience volunteering to help them with their missions. These might range from sailing to education, raising money for the library to managing our utilities. One thing they all share in common, in order to maintain their nonprofit status with the IRS, is having a Board of directors, whose job it is to hire, direct, and sometimes fire a manager, as well as to audit and approve a budget, raise funds as needed, etc.
Board members often serve for three year terms, or in some cases even longer, while the manager/director they are supposed to supervise might be on a career path, perhaps hoping to eventually retire from their position. The expertise and knowledge they have acquired over time are valued by the Board, which might prefer to maintain the status quo, even in the face of patterns of financial or other irregularities that might have emerged. Don’t make waves, let’s look to the future, and forget about the past.
The Board is also responsible for setting the salary and other compensation for the manager, while authority for determining other employee salaries is usually delegated to the manager. Board positions in smaller nonprofits are typically volunteer positions, while larger organizations (like OPALCO) pay their Board members.
Ideally, a Board should maintain friendly but careful oversight of the manager they supervise. When a Board starts to rubber stamp whatever the manager suggests, it is sometimes said that the Board has been “captured” by the manager. Because the Board holds the fiduciary responsibility to the organization, there is usually an insurance policy in place to protect them against some forms of potential liability.
I’ve recently analyzed the 990 IRS returns for the top 8 nonprofits on Orcas for the years 2015 through 2022, and noted that the salary increases for these managers/directors ranged from +38% to +165% over that timeframe, with the average being +83%. During this same period, inflation totaled roughly +20%. Annual compensation (salaries plus benefits) ranged from $84,209 to a whopping $632,145 in 2022… and these don’t factor in the spike in inflation that occurred in 2022-2023, as compensation rates presumably had been set the previous year. It would appear that running a local nonprofit is a great way to get ahead of inflation, especially with a properly friendly Board agreeing to the size of annual raises.
There is an interesting example of members of a corrupt electrical utility in Oklahoma organizing a recall of that Board’s members, with the goal of replacing their manager, who was using member funds to buy things for himself and gain over a million dollar bonus. The 16 minute film on this site is well worth watching: https://weown.it
In summary, it’s up to members and other stakeholders to elect a Board that will attend to their interests, and not their own nor to enrich the manager/directors that they hire and are supposed to supervise. But it’s also up to members to pay attention what those board members and manager are doing, and to care enough to change matters when something goes awry.
Hard to believe that a “non-profit” organization in rural Orcas Island can afford a compensation package of $632,145. That sounds like a big-city operation. Like in Seattle, for example.
Dear Robert, I am not taking a stand on this, but I do wish to point out a few relevant facts. (1) The primary responsibility of a Board in a charitable organization is to set the mission of the organization, (2) to hire an executive director and (3) fund the mission. Unlike a publicly traded business which oversees the activities of the business on behalf of shareholders (thank you Elon for that striking demonstration of how much the board cares about shareholders) the board represents the interest of the general public, which is the primary beneficiary of the work of the non-profit organization.
That said, you have picked an extremely small sample (eight, to be exact) to make the case that non-profits are over-compensating their staff here on Orcas. I have served on the boards of the Funhouse, the Orcas Choral Society and I chair the Governance Committee of the Orcas Island Chamber Music Festival. I have served as an Executive Director or non-profit board member continuously for over 50 years. I can state the Exec Directors I have worked with in my 25 years on Orcas have been the among the best I have observed, PERIOD.
So the question really is, who are you talking about? Why are you slamming all the non-profits on Orcas with a sample size of 8? Why not state the organization(s) that you think are abusing the public funds, and praise the organizations that are doing a terrific job of serving public interests?
I speak for myself, and not the organization of which I am a board member.
Hello, Roger–it was not my intent to “slam” our local nonprofit Directors by pointing out the trends in their annual compensation, but rather to draw attention to the facts. I gathered this information from 990 IRS forms from the Propublica 990 lookup site, and chose that small sample of 8 as the top-grossing nonprofits on Orcas over the period 2015-2022. There are many other smaller nonprofits, though in many cases the Board/director may receive no compensation at all.
We have excellent nonprofits here, as we all know. My granddaughter just graduated from high school here, and the generosity of our nonprofits in providing hundreds of thousands of dollars in grants to the three dozen graduating students was nothing short of breathtaking. The OICF’s recent fundraiser has once again showered largesse upon many worthwhile projects.
But I was referring only to trends in compensation, and said nothing about the merits of the organizations themselves. My main point was that problems of financial transparency can emerge in what the Banager reports to the Board, and what the Board reports to its members. Please re-read my text with this context in mind. And thank you for taking the time to respond.
The confusion occurs because Robert did not make an important distinction between IRS 501(c)(3) charitable or educational non-profits like Orcas Island Chamber Music Festival and 501(c)(12) cooperatives such as OPALCO and the Eastsound Water Users Association (EWUA). The latter are required by the IRS to provide services like electricity and water at “least possible cost” but can charge their members (their owners, that is) for those services. These are two very different kinds of non-profit organizations, and their compensation structures reflect that difference.
If you look at the most recent IRS Form 990 for OICMF, for example, its executive compensation was only $63,576 — a tenth of the topmost figure Robert cites above. This wonderful organization, which brings so much to Orcas Island, is roughly the same size as the Friends of the San Juans, on whose Board I served for six years and whose Executive Director was paid less than $80,000 in 2022, the last year of Robert’s survey. We strived to pay living wages to the ten or so employees, but we could only do so much with the limited income from donations and grants, which was also similar to what OICMF received that year. Fortunately, I think things are better now.
501(c)(12) cooperatives are not so limited, as they can raise the rates they charge their members to accommodate increased salaries and defray other costs. That’s what the Oklahoma electric utility Robert mentions was doing, but those “other costs” involved excessive travel and other personal benefits that landed the CEO in jail. (I urge serious readers to watch the 16-minute video he provides a link to.) This is why the Boards of Directors of such cooperatives must exercise careful, thoughtful oversight of the managers they are responsible for if the are to fulfill their fiduciary responsibilities to the members.
Stewardship is top of the list of Board responsibilities. Nonprofits are by nature owned and operated by the community, funded by donations or in some cases such as utilities, through fees paid by the public, The Nonprofit Board is responsible for ensuring the financial stability and sustainability of the organization. Orcas relies on nonprofits to provide essential services- food and housing support, senior services, dental and mental health, healthcare, utilities.
The Board must ensure the organization has the human resources to accomplish the mission and services are reliable and sufficient. Traditionally, nonprofit employees have been paid wages that are a fraction of those offered in the private sector. In 2012, the year Mr Austin started his review, it was not uncommon for Executive Director’s to be paid $30,000 annually- certainly not a liveable wage on Orcas, or really anywhere. Fortunately, many organizations have worked to ensure compensation packages provide wages that are commensurate with the responsibility and skill required for the job. In order to attract and retain quality leadership and staff, they need to earn competitive compensation.
Serving on a nonprofit board is a commitment to the community. The Orcas Island Community Foundation provides Introduction to Board Service workshops to provide people with the skills to make their service successful. If you are interested in learning more about Board service, contact OICF- info@oicf.us, 360-376-6423.
Am I missing something? From what I read, Robert Austin wasn’t criticizing or dissing anyone. He did some research, took the 8 top profit-grossing nonprofits on Orcas and looked at what they offered as salary for managers, and the percentages of pay increases that managers received. The average 83 % raise for a top executive or manager dropped my jaw. It seems an excessive jump in pay. Examples given of nonprofits with very low salaries doesn’t disprove what this is about, and no one is accusing anyone or dissing them. His closing sentence says it all. A board needs to have people paying attention to what they do. In a taxing district, the taxpayers are stakeholders who can theoretically influence the boards and commissions who serve them. Without an engaged populace or membership, anything can happen.
Questions need to be asked, especially in the case of private utilities and coops selling essential services and utilities to their captive customer base. The big mistake was in allowing utilities to be privatized in the first place; water and electric specifically. Customers should have some rights to know and control where their payments go, since the utility is dependent on us to fund their projects. I think salaries should be sought through grants and other programs and not dependent on what customers pay. That system is a failure IMO, unless it calculates in incentives like lower rates for lower use – and income of customers, since may in the UGAs where water and power can only come from EWUA and OPALCO.
I didn’t see this opinion piece as ‘slamming’ Orcas nonprofits. I saw it as a bit of research and some concern about findings, with the admonishment that boards are only as good as the citizenry involved with paying attention to what’s happening.
I am glad Michael Riordan made the distinction between types of nonprofits- and I still think these questions need to be asked and answered – especially as concerns private utilities and essential services nonprofits.
In a perfect world, there would be the understanding that the board has the final word, and that (respectful, we hope) oversight is part of the job they are expected to do when they run for a board position or are appointed to one.
I think some things need to be changed, especially as concerns essential utilities and services. The users/customers – the captured paying audience – should not be paying for executive salaries over $200 K a year, and even that seems excessive when you compare those kinds of salaries with other management of nonprofits, as stated by the examples provided. Can’t some other ways be sought to raise monies for huge salary increases, other than out of the pockets of the captive payers for these services? How else can money be raised to pay salaries? I’m interested to hear from the boards themselves on these questions – especially from the top 8.
Thank you Mr. Austin for putting in the time and effort required to write and research this.
The cost of living here is very high, and some would argue that attracting and retaining “qualified” leadership requires substantial compensation. But I can’t understand how any island nonprofit could justify a compensation package worth $632,145 for one year of work. That’s a lot of money that could have gone towards serving the beneficiaries of the nonprofit instead.
As of the 2020 Census, San Juan County has a per capita income of $52,881. Does the unnamed recipient of this compensation package do the work of 12 people? Call me skeptical.
I could probably look up the stats on ProPublica myself, but I would like to see a follow-up piece that puts names to the numbers.
What is a 501(c)(12) non-profit?
In general: here is the IRS Internal Revenue Code explanation:
7.25.12.5 (08-09-2006) Requirements for Mutual Ditch, Irrigation, Cooperative Telephone or Electric Companies, and “Like Organizations”
1. Ditch and irrigation companies, telephone companies, electric companies, and “like organizations” that seek exemption under IRC 501(c)(12) must be organized and operated as mutual or cooperative organizations. The terms “mutual” and “cooperative” have no legal distinction for purposes of section 501(c)(12). The U.S. Tax Court defined “cooperative” as follows: “A cooperative is an organization established by individuals to provide themselves with goods and services or to produce and dispose of the products of their labor. The means of production and distribution are those owned in common and the earnings revert to the members, not on the basis of their investment in the enterprise, but in proportion to their patronage or personal participation in it.” Puget Sound Plywood, Inc. v. Commissioner , 44 T.C. 305 (1966), acq. 1966-2 C.B. 6.
2. The court described the organizational and operational cooperative principles as follows:
A. Democratic Control. The organization must periodically hold democratically conducted meetings with members. Election of officers must be on a one member, one vote basis. Meetings must have a quorum of members in attendance or voting by proxy.
B. Operation at Cost. The organization must allocate all excess operating revenues (excess of revenue over expenses) among the members.
C. Subordination of Capital. The organization must ensure that those who contribute capital neither control the operations nor receive most of the pecuniary benefits. The organization will meet this requirement by ensuring that the members control and own the savings or monetary benefits rather than the shareholders or equity investors.
3. The Service sets out additional organizational and operational cooperative requirements that an organization must meet for exemption under IRC 501(c)(12). Rev. Rul. 72-36, 1972-1 C.B. 151. These requirements are:
A. The organization must keep adequate records of each member’s rights and interests in its assets.
B. The organization must distribute any savings to members in proportion to the amount of business done with them based on the “operation at cost” principle.
C. The organization must not retain more funds than it needs to meet current losses and expenses.
D. The organization cannot forfeit a member’s right and interest in the organization upon termination of membership.
E. Upon dissolution, the organization must distribute the gains from the sale of any appreciated assets to all persons who were members during the period that the organization owned the assets, in proportion to the amount of business done by the members during that period.
Robert, I have looked at Form 990 filings for Orcas nonprofits (including 501(c)(12)s) on Propublica, but was unable to find a 2022 filing showing total annual compensation equal to even a third of $632,145. In my opinion, the credibility of that shockingly high figure depends on also identifying the entity to which it relates. Doing so should not be a problem, as information included a Form 990 it is already public.
Also, you have provided the lowest and highest compensation amounts for the “top 8” Orcas nonprofits, but give no indication of where the other six fall within that range. The significance of another four, for example, being $300,000-$400,000 would be quite different than if all or most of the others are under $150,000. You make important points, and the facts on which they rely should not be left to the imagination.
Apparently, it’s the GM of Orcas Power and Light that made $632,145 in total compensation last year: https://projects.propublica.org/nonprofits/organizations/910348358