A recent member survey conducted by Member Zone, revealed some interesting statistics. Of the 1,070 associations surveyed, 58% reported membership levels remained flat or declined. Here are the top five reasons members gave for not renewing a membership:
The most common renewal method was email, which 68% of Associations used. The top tactics for new member recruitment were word of mouth, events & meetings, email, trade shows & conferences, and social media. Perhaps individual phone calls to non-renewing members would have been better for retention efforts.
The top three enticing factors for new members were networking, education, and advocacy. For Associations, their main challenges revolved around recruiting and retaining members, attracting younger members, and effectively communicating their value proposition.
With the availability of information, prospective members may not believe they need an Association to serve as their industry information filter. Most successful organizations have excellent educational programs for their members that are industry-specific and not available elsewhere, they foster member-to-member relationships that are reinforced at meetings & events, and their legislative or advocacy programs are seen as effective.
Membership attraction and retention will remain important as businesses become more cost conscious of where they receive value.
Societal and political trends are important to donor and member recruitment activities for nonprofits and associations. Without question, the political divide is probably at its highest level since the Vietnam War. A recent article by David Wasserman highlights the extent of the current divide. In the article, Wasserman shares some eye-opening statistics related to our recent Presidential election, many of which are geographically based.
Wasserman notes that younger generations will be more polarized than ever as they enter voting age and will have rarely encountered opposing viewpoints depending on where they live. Perhaps the dynamics at Middlebury College is a harbinger of things to come.
Additional disclosures in the annual Form 990 and possible taxable implications — Many associations are investing in alternatives due to the ongoing economic recovery and low rate of returns from traditional investments. Endowment and board designated funds need to achieve investment targets, which can be near impossible to make with the average returns from mutual funds and managed accounts. Alternative investments provide the allure of increased returns, albeit at an increased risk. Many associations have been successful at hitting higher returns through alternative investments. These investments do come with added oversight and considerations for additional disclosures to the government in certain ownership situations or because of certain transactions.
Typical alternative investments are hedge funds, private equity funds, commodities, and private investment funds. When you dig a little deeper into the investment vehicle these alternatives utilize, you find partnerships and Limited Liability Companies (LLC). Most, with the exception of a select few, are not publicly traded on an open market. These investment types require careful analysis to value and record under Generally Accepted Accounting Principles (GAAP), as well as tax review for issues involving special disclosure options. Here are some of the main considerations an association’s financial officer should review annually with regard to alternative investment activity.
If invested in a LLC or partnership, it should be reviewed to understand the origin, whether foreign or domestic. Investment holdings of more than $100,000 in foreign sourced investments require disclosure in Schedule F of the annual Federal Form 990. Additionally, certain activity such as a current investment of $100,000 or more could require additional forms for completion and submission with Form 990. Potential forms can include Form 926 for foreign corporations, and Form 8865 for foreign partnerships. Form 8621 is necessary if the association is a shareholder in a Passive Foreign Investment Company (PFIC) or a qualified electing fund. Identifying these entities and determining the forms to complete may require assistance from an international tax specialist.
Partnerships and LLCs provide K-1s at year-end summarizing the taxable information for the recipient. An association could be subject to unrelated business income from debt-financed property reported on the K-1. Investment managers report details of nonprofit unrelated activity in a special place on a K-1 as footnotes or additional disclosures behind the printed form. This can require the association to file Federal Form 990-T. State taxable income can be disclosed in the K-1 nonprofit section, reporting the states that have nexus by location, requiring one or more state income tax returns in addition to Form 990-T.
According to a recent Wall Street Journal article by Andrea Fuller, nonprofits are becoming increasingly generous in their executive compensation. A searchable IRS database containing 2014 data, showed more than 2,700 executives received over $1 million in total compensation for that year.
The highest total compensation shown was over $17 million. Most of the top earners were a combination of doctors in various nonprofit hospital systems, and collegiate athletic coaches at private universities such as Duke and Baylor; or, coaches at public universities paid out of a separate auxiliary nonprofit such as Florida. The amounts included both base compensation and total compensation. It’s important to note, that the data could be misleading in a year where an executive retired or took a large deferred compensation payment during that one-year period.
In any regard, pay for executives at both nonprofit charities such as 501(c)(3)s, which was the subject of the article and associations largely 501(c)(6) organizations, is clearly trending upward for top level employees. Many of these organizations are large complex entities and pay must be competitive to attract the talent necessary to operate them. Whether the IRS or contributing public would regard the amounts as excessive is an open question. Any organization would be wise to establish safeguards around CEO pay such as using compensation consultants, comparing their packages against peer organizations, CEO review by independent Board members, and specific performance evaluation criteria for CEOs.
For more information or questions, please contact Craig Stevens at 301.231.6200.