Financial disclosure 

The Humane Society of Indianapolis opens its books

The Humane Society of Indianapolis opens its books
The Humane Society of Indianapolis hopes to move on from controversy over alleged mismanagement and a devastating financial freefall. In late 2001, it first faced questions regarding poor animal care while its finances reached a historical peak. More recently, HSI faced allegations of financial mismanagement as assets plummeted and questions about the organization’s viability surfaced. In addition, questions lingered about how effectively HSI spent its money to help animals in the city.
Executive director Martha Boden in the Humane Society of Indianapolis’ Wellness Center
In January, Move to Act, a group concerned about the Humane Society’s management practices, approached it with requests for financial disclosure. Move to Act wanted to see audited financial statements, disclosure of actual trust investment losses and documented proof that all HSI funds used for employee personal expenses have been repaid. In an effort to address these questions and communicate a clearer picture of its financial situation, HSI approached NUVO, agreeing to release all pertinent financial documents. These included audited financial statements, trust investment statements, internal budget reports and a 1992 report highlighting credit card expenditures made by former Executive Director Marsha Spring. Three main factors highlight the change in HSI’s financial situation from 1998 to present: a drop in trust assets, an increase in expenses and a decline in donations and bequests.
Trust assets
HSI assets have experienced a marked decline since the beginning of 1999, when its assets had swelled to nearly $15 million, of which $12 million was held in restricted charitable trusts. Most of the remainder was in buildings, equipment and cash. At that time, HSI was reported to be in the top 3 percent of the richest animal-related charities in the country, according to information obtained from National Center for Charitable Statistics. Preliminary information places the year-end 2003 asset levels at approximately $8 million, of which $5 million are trust assets, again the remainder in buildings and equipment. The trust assets are held in three restricted trusts. The Board Designated Charitable Trust was established by the board in 1982 to accommodate large donations and bequests. The Donor Restricted Stokes Endowment Fund was established in 1991 from a $1.3 million bequest by Julia Jean Nelson Stokes. It remained at $1,336,662 as of Dec. 31, 2002. The Mary Powell Crume Trust has been active since 1940. It had a balance of $2,289,379 as of Dec. 31, 1992, and remained at $3,152,815 as of Dec. 31, 2002. Of the three trusts, the Board Designated Charitable Trust is the largest discretionary fund available for withdrawals. Only a unanimous board resolution is required to make distributions. From 1998 through the end of 2002, $3.7 million was withdrawn from the Board Charitable Trust. The two largest distributions from the Board Charitable Trust were in 1999 and 2002. In both years, the board decided to make distributions of $1.3 million. From 1998 through 2002, audited financial statements show that the Mary Crume Trust provided an average annual distribution of $125,000 to HSI. Both the Stokes and Mary Crume trusts have provisions that the initial principal investment must be maintained. Though the individual provisions are trust specific, both trusts state that HSI would need to return to probate court in order to invade the principal investment in the trusts.
Portfolio decline
In 2000, HSI’s trust investment portfolios experienced first-ever losses. The Board Charitable Trust dropped by 5.2 percent, the Stokes trust by 6 percent land the Crume Trust by 0.4 percent. In 2000, the S&P 500 Index fell 9.1 percent, and the Dow Jones Industrial Average fell 6.2 percent. In addition, a total of $450,000 was distributed for HSI needs that year. The spiral would continue as increasing investment losses and trust distributions continued. In 2001, the trusts experienced a 22 percent drop in value to just over $8 million. That year investment losses would reach double digits as the Board Charitable Trust experienced a 14.4 percent loss, the Stokes trust experienced a 13.8 percent loss and the Crume Trust experienced a 7 percent loss. In comparison that year, the S&P 500 fell 11.9 percent and the Dow Jones Industrial Average fell 5.4 percent. Also, trust distributions in 2001 doubled from the previous year to $916,000. In 2002, another $1.3 million would be withdrawn from the Board Charitable Trust, bringing total trust assets to just over $5.5 million, a drop of 31 percent from the year before.
Increasing expenses
For some time before 1999, the HSI board had considered building a Wellness Center that would improve the care provided to animals and facilitate a plan to provide in-house spay-neuter services. In 1999, with the society perceived to be in good financial position, the board decided that $1.3 million was to be withdrawn from the Board Designated Charitable Trust for construction of the center. But in the year 2000, a downward spiral began with respect to the good financial fortunes HSI had experienced in recent years. According to the current executive director, Martha Boden, the community has misunderstood much about what has happened because of media reports and communications by Move to Act. She said most of the blame was inaccurately attributed to singular sources, such as investment losses or a drop in fund-raising. “My frustration is that we did not say, ‘It was all investment losses,’ nor did we say, ‘Our fund-raising dropped,’ but that’s what they’re saying,” Boden said. In 1998 and 1999, HSI had total expenses in each year of approximately $2 million. In 2000 with the addition of the Wellness Center, and a marked increase in the number of animals received, its expenses increased over 25 percent to just over $2.6 million. In addition to the withdrawal from the Charitable Trust in 1999 for the Wellness Center addition, a total of $450,000 was withdrawn from the Charitable and Stokes trusts in 2000 to help fund ongoing operations. In 2001, the trust withdrawals from the Charitable and Stokes trusts totaled over $916,000. These withdrawals were made to help fund additional operating costs attributable to increased animal intake, the Wellness Center as well as attempts to expand services such as providing spay-neuter services and micro chipping. These new expenses likely came in response to controversy over HSI sitting on what was perceived as a large amount of trust money while still providing very few services.
Lagging donations
In 2001, with expenses on the rise and investment returns still lagging, controversy came to the Humane Society. On Oct. 14, the “Destined to Die” series appeared in The Indianapolis Star. The series cited high animal euthanasia rates in comparison to animal shelters in other cities, questioned the absence of high-volume, low-cost spay-neuter programs as well as the educational programs utilized, and publicized the substantial assets held by HSI. In possible reaction to the negative coverage and ensuing controversy, HSI experienced its largest percentage decrease in contributions by 30 percent from almost $1 million in 2000 to below $700,000 in 2001. The decrease would continue through 2002 with contributions dropping to just over $500,000. With faith in the mission of the Humane Society waning, one more blow was to come. In early 2002, allegations arose that Marsha Spring, executive director since 1988, had used HSI funds for personal purchases such as furniture and vacations. The allegations would continue until she offered her resignation in March. Shortly before her resignation, the HSI board ordered the Ness & Company — an accounting firm that also prepares HSI’s audited financial statements — to perform a review of “specific credit card transactions prepared by an outside party.” According to Jeff Terp, who assists with HSI development, “We did not spend the money on a full forensic audit, because that would have cost thousands of dollars. So we said, [to Ness] go and look at all the credit card receipts and checks that Marsha had and balance those against her payroll deductions.” A Ness report dated Feb. 28, 2002, identified $22,110.36 in expenses between November 1995 and August of 2000. Of those expenditures, Ness identified $18,290.59 as business related, and $3,572.36 as personal charges made by Spring. The report noted that amounts withheld from Spring’s payroll exceeded the total amounts charged by $351.28. The over-withholdings were attributed to possible purchases she made through payroll deduction at the Humane Society Pet Shop. The report also stated that much of the supporting documents for the credit card transactions, such as invoices, receipts or notes, had been stored off-site and were not very well organized, which made them difficult to find. HSI staff indicated that some of the credit card bills had been removed from the appropriate files at the time of a break-in at the accounting office. And, Ness said, it was possible that the missing support was lost or removed. Even though gaps existed in the supporting documentation reviewed by Ness, it found that the charges in question had been paid back. This information was communicated to the HSI board by Ness, and the board decided not to pursue a full forensic audit of HSI finances. According to Ness, these transactions, which were paid back in a timely fashion, did not negatively affect the cash flow of the organization. It was also at that time when HSI adopted internal spending policies to address personal expenditures.
Spending its way out of trouble
After Spring’s resignation in March of 2002, the board appointed interim director Lu Hamilton. Under Hamilton’s leadership, HSI continued to increase services and initiate new programs, despite the impending financial crisis. “We were really doing a lot of optimistic things in 2002,” Boden said. Some of the programs included a billboard campaign for spay and neutering, the Kindness Camp, a children’s summer day camp, as well as other education programs for the general public. None of these programs were financially self-supporting. For example, the billboard campaign encouraging spaying and neutering cost HSI $30,000. Each session of the Kindness Camp, even though there was a fee charged to participants, cost HSI $40,000 more than the revenue generated — even if the sessions were full. According to Boden, approximately 250 children took advantage of the camp, and most sessions were full. “The billboard campaign was a great thing to do. It helps the community, and helps everybody understand the importance of the message,” Boden said. “Does it do something here, long term? Probably. Because if we can get people to spay and neuter, theoretically at some point our intake numbers will drop.” But Boden, who wasn’t in charge at that time, added, “Is that a great use of our expenses when we’re dealing with financial challenges? I could argue that I’d rather put money into the care of animals that are here than putting billboards up in the community if I had to choose.” The financial information received for this period substantiates those statements as expenses increased to almost $3 million, and expenses specifically for public relations and education rose by over $100,000 to $450,000. The 2002 total for expenses, specifically education, was the most spent by HSI in the past six years. With respect to the increase in these expenses, Boden said, “Part of what was happening in 2002 was that everybody was pretty stung after 2001.” With all of the questions regarding HSI assets, employee expenditures and poor animal care, “they were trying to figure out how to address all of these things at once. I think in their minds it justified even more the expansion of programs.”
A new approach
When Boden took over in early 2003, she inherited a non-profit organization in turmoil. HSI needed to tow the line on expenses, attempt to find a new investment manager and, according to auditors, implement more stringent accounting practices. Boden implemented a plan to do all those things. According to investment statements, HSI replaced its investment manager of many years and its accounting software — all while cutting expenses, according to preliminary reports, to pre-2002 levels. To cut expenses, HSI eliminated 12 staff positions, lowered education spending by $60,000 and streamlined operations “to provide managers the information they need to make operations decisions,” according to Boden. One example of cost cutting comes in how flea treatments are administered to the animals. HSI was purchasing pre-measured flea treatments based on the weight of the animals to make the applications simple for the staff. The decision was made to buy the treatments in bulk and train staffers how to measure and administer them in the correct amounts. According to Boden, HSI saved $17,000 on this initiative. Though steps have been taken to address operations issues and to lower expenses, some lingering questions remain. In 2003, HSI approached the probate court to request permission to use the Stokes trust as collateral to secure a $2.3 million line of credit. Move to Act has questioned the wisdom of HSI utilizing a restricted trust as collateral for securing a line of credit. According to Boden, this move was made to avoid requesting a withdrawal directly from the trust, while at the same time giving HSI the opportunity to have funds available for ongoing operations. Preliminary information states that as of Dec. 31, 2003, $250,000 of the available $2.3 million has been used. Boden stated it is using less of the credit line than it had originally budgeted so far in 2004. According to Boden, HSI’s goal is to use as little of the credit line as possible and rely more on fund-raising efforts to fund operating expenses. When asked how to address those questioning HSI’s history and the current administration, Boden said the goal is to “get the actual information out there.” And Boden encouraged those concerned to “come and get information and learn about what we’re doing. If people are interested or concerned about what’s happening here they should come and talk to us.”
By the numbers According to audited financial statements, the Humane Society of Indianapolis experienced mostly steady expense increases from 1998 through the end of 2002. According to statements provided by HSI, many factors caused the increases, including: steady growth in the intake of animals, added services and the addition of a Wellness Center. In 1998 and 1999, HSI had total yearly expenses of approximately $2 million, rising 5.4 percent from 1998 to 1999. In 2000, HSI expenses increased over 26.8 percent to just over $2.6 million. This marked increase came a year after building the Wellness Center and coincided with a 12.5 percent increase in the animals received. That number jumped to 14,696 in 1999 from 13,053 the year before. In 2001, expenses rose at a more modest pace of 9.4 percent. In 1998, HSI received over $1 million in bequests and donations. With investment gains still positive, the outlook for the future financial health of HSI was very positive. From 1998 to 1999, these contributions dropped over 28 percent to $771,000. Contributions rose 28 percent in 2000 back to $989,000, then experienced declines of 30 percent and 25 percent in 2001 and 2002 respectively, falling to $520,000. At the end of 1998, the Humane Society held $12 million in restricted charitable trusts. At the end of 1999, these assets dropped 5.7 percent to $11.3 million, after taking a $1.3 million distribution that year from the Board Charitable Trust for construction of a Wellness Center. It was in 2000 that a reversal of fortunes would start to take shape for HSI trust assets. That year, trust assets experienced a decline of 8.6 percent to $10.3 million. —TB

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