At a loss.

A contributing writer to Contemporary Long Term Care, Jim Moore is president of Moore Diversified Services, a Fort Worth-based senior housing and health care consulting firm, and author of Assisted Living 2000.

A not-for-profit faces hard facts about its balance sheet

THE BOARDROOM WAS SILENT. FINALLY, THE NEW PRESIDENT broke the ice. "Bob," he said, "how could we possibly get in such a serious financial condition? You're a talented, seasoned professional, and you've recruited an excellent staff. We have good accountants and auditors. How did these problems slip through the cracks?"

Other board members carefully avoided making eye contact with each other-but they sure focused on their executive director. Bob cleared his throat anxiously. At past board meetings, he had brought up various problems facing The Gardens at Westridge, a 25-year-old not-for-profit CCRC (the community's name and certain facts have been changed), but he had failed to communicate the relationship between them. Clearly, it was time to do that.

Bob outlined the community's ten most pressing challenges as follows:

* Excessive deaths. An earlier actuarial study had projected an average of eight deaths annually, but death rates had risen along with the average entry age. By June, the community had already experienced seven deaths this year. Four units vacated in January were proving difficult to resell, yet nearly $400,000 worth of previous residents' entry fees were due to their families within 90 days.

* Declining fundraising proceeds. Fundraising proceeds were declining steadily. What's more, the board relied heavily on this income to pay routine operating expenses and debt payments, but most donors now preferred to help fund campus improvements or other investments with tangible long-range benefits.

* Phantom income. The Gardens at Westridge amortized past entry fees into income based on the expected life of the resident (for non-refundable entry fees) or the useful life of facility (for refundable fees). This common accounting practice artificially inflated the current income statement, adding several hundred thousand dollars of "earned entry fees" that had actually been spent years earlier.

* Challenges to not-for-profit real estate tax exemptions. The Gardens at Westridge had never paid real estate taxes. But city officials with tight operating budgets and competing for-profit operators were questioning this financial windfall.

* Excessive costs. Food and beverage costs exceeded $15 per resident day, compared to the industry average of approximately $12 for similar service. Multiplied by the CCRC's 70,000 resident days, that accounted for an extra $210,000 a year. Other departments also had costs higher than industry benchmarks, but the professional staff and board had agreed not to "cut corners like some for-profits."

* A laissez-faire marketing program. Up until 1993, The Gardens at Westridge had been the only game in town. Now there was competition from six aggressive new communities, most of which offered a superior product and comparable services at competitive prices. The private-pay ratio in the CCRC's nursing home had declined from 50 to 45 percent. Yet marketing was still treated as a matter of taking orders.

* An aging physical plant. The community didn't look as appealing as its competitors, yet the board didn't allocate funds each year for maintenance and capital improvements.

* Cost creep. Aging residents required increased assistance with the activities of daily living. Staff provided this assistance without tracking costs, let alone passing them on to the residents. (For more on this problem, see the February 1999 Assisted Living column.) Twenty-five residents received an additional 20 minutes a day of uncompensated assistance, adding up to about $75,000 in additional costs each year.

* Declining third-party payments. New prospective payment systems were eroding Medicare reimbursements to the nursing home, rehabilitation program, and home health operations.

* Endangered bond covenants. Tax-exempt bond financing covenants were in danger of being violated. If these trends continued, there would not be enough net operating income next year to satisfy the CCRC's debt service coverage requirement.

The board was stunned. One member, a self-made millionaire, had been a quiet observer at meetings for over a year. Now he spoke. "I always questioned some things in the financials that were inconsistent with my business experience. I thought I just didn't understand the different world of not-for-profits," he said. "But I now realize that the difference is not that significant. Unfortunately, we envisioned our roles as board members as largely ceremonial, when we should have rolled up our sleeves and helped Bob, using our professional talents and experience.

"But let's not panic. Bob and his staff are very capable. Bob, can you come back to us in 30 days with a plan that clearly identifies strategies, tactics, and short-run and long-run expected outcomes?"

To find out what Bob and his staff came up with, look for this November's Senior Housing column.