Debt, Debt Everywhere, and Not a Drop to Drink — Unless You’re Nonprofit?

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MoneyAndrew Taylor, who runs a great blog called the Artful Manager, posted a piece the other day on the relationship that nonprofit organizations should have — or can usefully have — to debt. It made me squeamish. True, I’ve never run a nonprofit, except for two small theater groups I founded in the early and mid 1990s, both of which couldn’t sustain themselves because I hated raising money and had zero interest (and even less skill) in doing so. That’s why there are arts administrators who specialize in these things. That’s why they do what they do and I do what I do.

But Taylor’s piece still gave me pause. The primary reason the world economy took such a tumble last year, and the reason why, for the foreseeable future, the world economy will likely be anemic at best, is debt: mortgage debt was the culprit, first and foremost. It’s not news to anyone that the world was punch-drunk on the intoxicating fizz of the real estate bubble; when it popped, the good times vanished. Yet even as colossal as our current economic moment might be, the mortgage-debt-induced hangover is but a symptom of the problem: the U.S. national debt fairly defies English in terms of accurate descriptors. The online national debt clock (which isn’t to be confused with the debt clock at 1133 Sixth Ave. on Manhattan) puts the figure, as of 4:20pm, Oct. 7, 2009, at $11,927,498,804,541.88. To paraphrase a line from the musical Gypsy, “You ain’t getting more than 88 cents outta me, America.”

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Yet have we any choice? I believe President Obama had no option but to push through the $787 billion stimulus plan passed earlier this year by Congress; most people of intelligence — meaning they’re unclouded by partisan wrangling and looking at the nation’s problems squarely — understand why about 60% of that sum is to be disbursed next year: it’s a two-year, trickle-down strategy. As for the total bill, though, it’s also terrifying. Look at the Mt. Olympus of debt we’re running up, mostly financed by the Chinese, and to realize that it’s necessary? Awful. But again, necessary.

So with this tossing and turning in my head, I come to Taylor’s essay with a heavy heart. Nonprofits are suffering in this Great Recession — and that’s really an understatement, given the volumes of information that have been cranked out across the blogosphere for the last two years. And Taylor’s point is to offer them a sense of options, of hope, that some debt — debt that is sensible, managed well — can be a good thing for nonprofits. He writes:

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One of the things for-profit businesses do is use debt to advance their profits. If it’s cheaper to get capital by borrowing the money, they borrow. If it’s cheaper to get capital by buying, they buy. Over the past decades, major nonprofits discovered this new terrain, and started using it to leverage their resources (instead of spending those donations, let’s use them as collateral against low-interest bonds, and we can pay the interest with the investment returns)…

…No doubt, many businesses on the commercial and nonprofit side underestimated their risk in using debt, as this New York Times article suggests about nonprofits. And I’m not about to step to the general defense of nonprofits that over-extended themselves on the prospect of ever-increasing investment returns. However, in the thoughtful pursuit of mission, a nonprofit is charged with exploring any resource it can bring to bear — ever balanced against the risk of using that resource. And tax-exempt debt is one of those resources.

Unfortunately, in my view, Taylor’s essay, being relatively short, doesn’t really examine how a nonprofit knows it’s about to overextend. It doesn’t address the board governance — and I mean the really involved, really drilling-down and really sustained board governance — required to make sure a little debt doesn’t become a lot of debt in the blink of an eye. It’s one thing, for example, to choose not to spend donations but to use them instead “as collateral against low-interest bonds,” but how wise is that when personal giving is so unstable? Are there different rules or best practices for health-oriented nonprofits that might choose to use debt as opposed to arts-oriented nonprofits? In a way, isn’t it in all ways better to live within one’s means?

When it comes to the nonprofit arts world, I can’t help but to think that it was over-reliance on debt that was indeed a part of the real estate and infrastructure boom in the sector that led so many organizations off a cliff. Citizens Bank is now the owner of North Shore Music Theater, for example, because the organization, age 54, died an untimely death a few months ago, the victim of another mountain of debt.

If we all accept that the acquisition of debt cannot be allowed to turn a nonprofit into a hideous over-extended being, who decides what constitutes the first leg of the slippery slope?