Friday, July 31, 2008 | The events of the past few weeks at Southeastern Economic Development Corp. and the problems first uncovered by voiceofsandiego serve notice that oversight and board governance are critical to the successful operation of nonprofit entities. This is especially so when the nonprofit entity works in support of the government, as do SEDC, Centre City Development Corp., the San Diego Convention Center, and the San Diego Data Processing Corporation.

Each of these organizations has served the City well, but proper nonprofit governance requires that City Hall regularly review the organizational rules and processes and take steps to assure that systems are in place for adequate oversight and accountability.

This means that the city has to go further than the announced plans. Rather than just terminate an executive officer, replace board members, or carry out performance audits, the city should use the events of the last week as an opportunity to implement systemic reforms that can help avoid future problems. Rather than be reactive, local leaders have the opportunity to proactively strengthen City Hall’s watchdog role and better ensure that small problems do not fester and spiral out of control.

First and foremost the city needs to require that the mayor and City Council yearly “receive and review” the IRS Form 990 that these four nonprofits are required to submit to the federal government if they want to maintain their tax-exempt status. On this form, nonprofits are required to list the total compensation provided to all their employees, whether or not board members have a financial relationship with the nonprofit, and the amount of money being spent on administration, fundraising and actual programs. Indeed, the SEDC’s 990 was a major basis for the story that voice broke when it compared the City’s approved SEDC budget with IRS documents. Even though nonprofits must have a copy of the organization’s Form 990 available for public review, the extra step of having the document reviewed by the City Council would help increase visibility and the transparency of the organization’s financial arrangements.

The City Council should also be reviewing the executive compensation policies of the nonprofits that it uses to carry out public functions. To maintain their tax-exempt status, nonprofits must not “pay more than reasonable compensation” to their employees. The IRS requires on the aforementioned Form 990 that the nonprofit discuss “whether the process used to determine the compensation of an organization’s top management official and other officers and key employees included a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision.”

An answer of “no” to this question should raise the largest red flag. Thus on at least a biannual basis, the city should be reviewing in detail the processes that various redevelopment agencies, the Convention Center Authority, and the San Diego Data Processing Corporation are using to set compensation levels and reach a determination that they are reasonable and based upon substantive data.

Also it is clear that the city of San Diego has a continuing problem when it comes to filling boards that carry out vital oversight functions. The terms of several members of the SEDC board had lapsed and, to be blunt, too few were from outside the community and with sufficient knowledge of nonprofit governance to ask the hard questions that needed to be asked. One reason for this problem is that the city casts a relatively small net, largely relying upon an informal and undefined process. A simple step that the city could take would be to solicit on its website applications from those citizens interested in serving San Diego.

That link should be more prominently highlighted on the front page and be regularly publicized. Such a system could create a larger critical mass of prospective volunteers to select from, allowing the city to fill slots with qualified San Diegans in a much more expeditious fashion.

Finally, the city needs to do more to avoid even the hint of a conflict of interest. It seriously erodes the public’s confidence when a board chair of a nonprofit also has a financial interest, albeit disclosed, in an enterprise that that is actively involved in major business dealings with the nonprofit. To avoid this in the future, the deputy chief operating Officer for ethics and integrity should be regularly reviewing the Statement of Economic Interests that board members of these nonprofit are required to file and the nonprofit’s agenda and minutes.

We suggest that the Office of Ethics and Integrity make yearly reports to the City Council’s audit committee certifying that they have found no discernible conflicts of interest. That extra level of oversight will identify problems much earlier and will help increase the level of confidence in the nonprofit’s mission.

San Diegans have benefited in tremendous ways from the activities of various nonprofits that work in tandem with City Hall. The nimbleness, creativity and dedication of these organizations have vastly improved the region’s economy and the quality of life San Diegans enjoy. Ensuring that they keep providing value requires that the events at SEDC are not dismissed as aberrations but as a sign that more can be done to strengthen the city’s oversight responsibility and to improve the public’s trust in these important institutions.

Steve Francis is chairman of the San Diego Institute for Policy Research. You can reach him at stevenfrancis@sandiegoinstitute.com. Or send a letter to the editor.

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