A Review of the Lopez Clinic Status

A Review of the Lopez Clinic Status

As one of the founders of the clinic I was invited to attend the announcement of the book by Lori Harrison about medical care on Lopez Island . I found the book quite a surprise, but more on that later. It did motivate me to a more detailed interest in the clinic. Like a good many others on Lopez Island the years are catching up with me and I rely more on the clinic. So I have taken some time in the past two years to look into the status of the clinic board and its activities. The recent notification by Island Hospital that they are terminating their contract to operate the clinic makes it ever more necessary to see what needs to be done to be prepared to work with a new partner.
The first thing I noticed was that the board has been increased from the original five members to nine, although there are only eight at the moment, yet their workload appears to have decreased. With Island Hospital responsible for the actual operation of the clinic the board’s main responsibilities were raising funds and using the funds for maintenance of the building and equipment. These days donors have been generous enough to meet all expenses with quite a bit left over. There has been no need for the board members themselves to personally solicit donations. With a comfortable margin the board has been able to hire out the bookkeeping, newsletters, the web site and a few other tasks. There seems to be no need for the additional members when there is little work to do.

The next step is to make the clinic’s tax returns, IRS Form 990, available to the donors and public so they know what the clinic’s financial situation is. For years the board has acted as if the net worth and the expenditures were secrets to be kept from everyone but the board. This is not the board’s option. Openness is a legal requirement. The Internal Revenue Code (section 601.4.d) requires all tax exempt charities to make their financial situation public by providing anyone who asks with copies of the three most recent Forms 990 which is their tax return. If a charity posts those three returns on their web site there is no need provide the copies. IRS regulations require that every board member must have a copy of the current Form 990. If the board members would read the report they should know that it is available to the public since printed near the top of the very first page is the notice OPEN FOR PUBLIC INSPECTION. And in the form itself the person who signs the form must state that he has provided the board with copies and then must say how he notifies people the information is available. The law on tax free public charities is based on the belief that if both donor and charity are to pay no tax the charity has an obligation to let the donor know how his money is being spent.

I discussed this two years ago with Bob Myhr and Ron Shively yet nothing appears to have been done then and still has not been done. It took two very unpleasant meetings with the clinic treasurer for me to get the copies for 2013 and 2014. The return for 2015 hasn’t been done yet. Violations of this portion of the IRC Code could become the basis for revoking the clinic’s exempt status. There probably is little possibility of that happening but it is possible the clinic could be fined. The board would be wise to follow the rule “integrity is doing what is correct even when no one is watching.”

In addition to the 990 forms the clinic is also required to make available the corporate charter, the by-laws, and other important policy papers. The web site would be a good place for them to be displayed. Being up-to-date and in conformance with all regulations may be important in finding a new partner to operate the clinic. The new partner might like to know you can hold up your share.

Just what the clinic board can do and cannot do is worth reviewing. As a public charity the board is tightly regulated. It is worthwhile to review all those regulations. It may well be another item of importance in joining up with a new partner. The review should start with the basic question: What is the purpose of the clinic?

In one place on the clinic web site the purpose of the organization is: To provide quality primary care services in a courteous and efficient manner to the Lopez Island community and visitors in the sensitive and supportive tradition of Island life. In another place the purpose is stated as: To facilitate the primary medical care needs of the Lopez Island community through support of the Lopez Island Medical Clinic. The corporate charter, which is the real legal authorization for the clinic to act, says: The Association may erect, own and maintain a clinic facility and make the same available to the medical profession through any form of agreement which is fair and equitable to any and all, but not for the purpose of making a profit for the Association.” .

Washington law limits non-profits to spending for just those things authorized in the charter, but doesn’t consider them invalid unless someone complains. The funding of an intern and publication of the book are two examples as is the Sikstrom Fund. It may be possible that board members could be held liable for such expenditures. Legal advice is needed. A change in the charter is necessary to legitimize the Sikstrom Fund. It should also be modified to widen the scope of what the organization can do allow the board to enter into a workable arrangement including, if necessary actual operation of the clinic. In any case you need the advice of an experienced attorney.

Along with amending the corporate charter it is important to review the bylaws to see if there is anything in them that would impede an arrangement with a new partner. Of particular importance is the need to lengthen the terms of board members. With just a short three year term and substantial turnover it would be possible for the clinic to lose some management continuity. Without some continuity it is difficult to stay focused on the basic mission. In any well run organization each board member should be provided with a file or notebook with all the governing regulations, by-laws and other current instructions or agreements. This should be done along with the review of all governing documents so that the board is prepared to deal with the new partner, or with their own solution. Here are some of the things with which all board members should be thoroughly acquainted and which would quickly bring them up to date:

Form 990 Return of Organization Exempt from Income Tax
Instructions for Form 990
Form 1023 Application for Recognition of Exemption
Publication 557 Tax-Exempt Status for Your Organization
Washington Nonprofit Corporations Act
Charitable Contributions Act,
Corporate Charter of the association
By laws of the association
Any agreements or contracts with other organizations
A summary of recent actions and decisions

And, as a subtle reminder that the not all charities adhere closely to the various regulations and may lose their exempt status the IRS has published a little guidebook entitled – How to Stay Exempt. It should be part of your required reading.

The most complete source of legal information on nonprofit’s in Washington is the Washington Nonprofit Handbook. It was put together as a volunteer contribution by a group of young lawyers. It is published by the Secretary of State and is an excellent resource and guide. At least some of the members of the board should be familiar with this handbook. It has some very fine advice based on the experience of many nonprofits. It is available to download, about 260pages, at:
https://www.sos.wa.gov/_assets/charities/Washington%20Nonprofit%20Handbook.pdf

This is a good time to review the financial condition of the clinic. In the years since we started an endowment fund and a depreciation reserve the total liquid assets of the association have grown to $2,558,933. But there appears to be no particular plan for the use of that money other than increasing it to the point where investment income meets all needs and donations are no longer needed. However that would make a significant change in the clinic’s tax status. To remain a 501(3)c charity one third of the yearly income must be from public donations.

I have obtained the tax returns of the clinic for 2010 through 2014 and used the figures to create an operating statement and balance sheet so you can see how the money was collected and see how it was generally spent, or saved.(The figures are on the last page of this report since they fit better on a separate page.) Unfortunately the return for 2015 has not been completed. The clinic boards have followed the practice of putting off the return until the last possible moment, one of the practices that should be changed.

In Washington all counties, schools, fire departments and other taxing districts are subject to an annual audit or review. The clinic, one of our most important local entities, has not had an audit or review in the forty four years it has been in existence. It needs one, even an outside review.

The returns show that over the five year period the total revenue has exceeded the total expense by a substantial margin which has added to the endowment fund. Investment income for that period totaled $246,766. The investment management costs totaled $81,060 reducing the return considerably. It might be more profitable to invest in a more standard fund and do without the investment management committee. Other expense items on the returns show some unnecessary spending. The Better Business Bureau and the Charity Navigator, two organizations that monitor charities, say that no more than 35% of the yearly revenue should be spent on fund raising and general overhead. That figure is what a major charity which must be professionally managed might have but is much too high for a small charity like the clinic managed entirely by volunteers. The clinic’s ratio has varied between 30% and 41% except for year 2014. A close look at the books might show it even higher. That certainly indicates some unnecessary spending such as paying for an intern, awarding a scholarship and paying for the “book,” all of them functions not authorized in the corporate charter. The cost of the newsletters could be substantially reduced if one or two board members could, themselves, put the newsletter together rather than paying someone to write it. The same could be said about the book. Surely among the eight board members there are one or more with writing experience if only writing a term paper.

The shortcomings of the “book” are especially egregious because of its bizarre layout, its inclusion of irrelevant stories, erroneous information and the omission of essential material but most of all the stunning cost. The cost of the book must be part of the “public relations” expense of $23,037 and $22,728 in 2012 and 2013 since the those are twice any of the previous years. The omission of the Scripps/Woods family’s contribution was perhaps the worst example of its shortcomings. The Scripps family was very supportive of the clinic and made a generous donations which went a long way toward giving it a good start. Responsible for most of the Scripps interest was Mrs. Scripps whose father was Doctor R. B. Bates, a sportsman flyer and the owner of Charles Island. Dr. Bates agreed to fly in on Fridays and treat patients if they would build him an airstrip. They did. It can be seen on the hill above the Parsonage. It is grown up in trees now but you can see it clearly from the air. We planted two trees beside the clinic building in recognition of their participation. The one in back was cut down at some point. I hope the one in front will remain.

The announcement by Island Hospital that their contract to operate the clinic will terminate in June of next year was a surprise although it should not have been. The hospital did the same thing to the Orcas clinic several years ago, then took it over again and are now terminating their contract again. Island Hospital has been making a modest profit from operating the Lopez Clinic. The new federal record keeping standards has undoubtedly increased the load on the hospital and made the profit not worth the additional work.

It will be a challenge to find an arrangement that will keep Dr. Wilson and his staff carrying on just as they are now. It is also an opportunity and perhaps a necessity to correct some of the things I have discussed so it will look like a well run organization and one that can hold up its part of a new partnership. Year before last I suggested to Bob Myhr and Ron Shively that such an all around review should be conducted. Neither were much interested. But it might let the supporting donors know that they are taking good care of their money and will have their support for any solution selected.

In considering a new partnership it would also be very worthwhile to consider a new form for the clinic by looking into the possibilities of a hospital district. You don’t have to have a hospital to form a hospital district and the district itself does not need to operate the facility. It appears from the dues that only one out of every five or six families contribute to the clinic. Putting the clinic on the tax rolls would put it on a broader and more equitable basis. An organization like the clinic that is available to everyone should be supported by everyone

So, as a summary of work to be done in addition to seeking another partner, these are the things that need attention:

1. Review and change corporate charter and by-laws to provide more flexibility in a new partnership
2. Insure complete compliance with IRS rules by posting tax returns, by-laws, and so on the web site.
3. Prepare a notebook for each director with all the rules, regulations and policies.
4. Change bookkeeping categories to those in the Form 990 so subsequent years can be compared.
5. Turn newsletter, web site, and similar tasks over to individual board members.
6. Review the need for more than five members on the board.
7. Find members of the board who are willing to take some of the jobs now done by paid help.

The table below is a summary of the Form 990 returns for the years 2012 through2014. The amounts shown are the same amounts extracted from the returns.

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