While nonprofits are somewhat restricted when it comes to investing, they can basically act like any hedge fund or corporation. In the past, this leeway allowed nonprofits to grow their assets enormously, but right now it’s causing them some financial headaches.

• For a while now, nonprofits have been actively making risky investment decisions and racking up debt. This high-risk, high-return investing style allowed many colleges, museums, and nonprofits to expand rapidly.
• A large portion of the debt is from tax-exempt bonds that nonprofits were allowed to issue – cheap debt, with potentially high returns. After the financial crisis, nonprofits’ assets plummeted in value, yet they still had huge debt obligations.
• Without an increase in revenues (through donations or property sales), many charities are going to end up bankrupt!

Facts & Figures

• According to the IRS, the value of tax-exempt bonds issued by nonprofits rose from $98 billion in 1993 to $311 billion in 2006.
• Brandeis University has $208 million in tax-exempt bond debt and is selling its art collection to pay for it.
• Copia, a culinary institution in California, went bankrupt because of $78 million in bond debt.

Best Quote

“[O]ver the next several years nonprofits across the country will have to renegotiate bond covenants, reduce services, cut staff or actually default and face foreclosures, repossessions, and in some cases, even bankruptcy.” – Norman I. Silber, Law Professor at Hofstra University

Tags: bankruptcy, debt, financial crisis, nonprofits