Nonprofits are largely exempt from taxes, but they are required to pay taxes in the United States on certain types of investment income. It is legal for nonprofits to have investments in tax-free parts of the globe, but they have to annually declare in public tax documents whether they have off-shore investments.
Territories known as tax havens, such as the Cayman Islands and Bermuda, have low or no corporate tax rate and are often used by firms and wealthy citizens of other countries to shelter their money. Overseas tax havens have a reputation as places where the rich hide their money, but they are commonly used by large nonprofits with hedge fund investments as part of their portfolios, such as universities and hospitals..
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Defenders of the investments say it helps give nonprofit organizations a better return in order to fund their work. Given the current tax code, it should be no surprise when nonprofits take legal steps, including investing in offshore accounts, in order to have the most money they can for their charitable causes, said Rea S. Hederman Jr., vice president of policy at The Buckeye Institute, a free market think tank in Columbus.
“The Buckeye Institute supports a tax policy that is simple with the lowest possible rates so that all taxpayers can benefit and not just those with the ability to invest abroad,” he said.
|Off-shore investments|| || |
|Local hospitals and their affiliates had $432.6 million off shore for the latest years data was available.|| || |
|Dayton Children's Hospital*||2015||2016|
|Dayton Children's Hospital|| ||$90.9 million|
|Dayton Children's Hospital Foundation||$62.7 million|| |
|Premier Health|| || |
|Upper Valley Medical Center|| ||$15.3 million|
|UVMC (Holding corp.) || ||$25.6 million|
|Good Samaritan Foundation|| ||$2.2 million|
|Good Samaritan Hospital & Health Center|| ||$17.3 million|
|Miami Valley Hospital|| ||$182.6 million|
|Miami Valley Hospital Foundation|| ||$11.9 million|
|Atrium Medical Center Foundation|| ||$4.4 million|
|Atrium Medical Center|| ||$14.6 million|
|Kettering Health Network|| || |
|Grandview Foundation|| ||$5.1 million|
|Other Kettering Health affiliates|| ||0|
|*Uses fiscal years from July to June|| || |
| || |
Focusing on finances
Organizations are given nonprofit status, and are exempt from certain taxes, because they demonstrate they serve a public purpose and exist for reasons other than generating a profit. That’s why Charlie Eaton, an assistant professor at the University of California- Merced who’s researched and written extensively about the use of hedge funds and off-shore accounts, criticizes the investments.
Though the investments are legal, they’ve caused universities and hospitals to focus more on the financial side of their operations and “really blurs the line between profit and nonprofit,” Eaton said.
Eaton claims when colleges and hospitals keep money in off-shore accounts they are “cheating taxpayers” and “departing from their core mission.”
“It might be legal for a college to use off-shore tax havens or to engage in hedge funds and investment activity but its morally questionable,” Eaton said. “Essentially what the college (or hospital) is doing is saying we’re not going to contribute our fair share to society and government from which we benefit.”
Kettering Health Network Middletown opened in August. Saying they “do not fear competition,” Premier Health and Atrium Medical Center officials are again opposing the proposed rezoning of two parcels requested by Kettering Health Network to expand operations to include overnight stays at the Middletown facility.
Andy Horner, UD executive VP for business and administrative services, said in order to maintain a fully diversified portfolio, UD participates in a variety of investment vehicles, including some located in the Caribbean and Central America.
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“In the investment industry, these are part of an asset class known as alternative investments and include the University’s hedge fund portfolio. These investments are legal, commonplace and part of our well-diversified investment and asset allocation strategy, which is guided by Catholic values,” he said.
The less money a school or hospital has invested in a hedge fund, the more risky those investments can be, Eaton said. A university like Harvard, which has a $35-billion endowment, has more money to weather the ups and downs of hedge fund investments. An institution with only a few million invested in hedge funds is taking a bigger risk, Eaton said.
In 1950, Congress attempted to close a tax loophole by passing a bill that forced non-profit entities to pay taxes on income unrelated to their charitable missions. It came in the wake of a case in which New York University received a donation of all the stock of the Mueller Macaroni Company. Until the law was passed, the for-profit pasta manufacturer had a tax advantage over its pasta-making competitors that was seen by Congress as unfair.
|Off-shore investments|| || || |
|The largest local universities had $327.8 million in off-shore investments the latest fiscal year data is available || || || |
|Universities||July 2016- June 2017|| || |
|University of Dayton||$146 million|| || |
|Wright State Foundation||$9.5 million|| || |
|Miami University Foundation||$172.4 million|| || |
|Central State University||None reported|| ||0|
|Wittenburg University||None reported|| || |
|Cedarville University||None reported|| || |
| || || |
But this tax on unrelated business income grew to be a tax on the income that nonprofits make from debt-financed investments. So traditional investments, like stocks, are not taxed.
Investments in hedge funds can be funded with borrowed money, and the returns from that investment would be taxed. So hedge funds commonly funnel investmentsthrough "blocker" corporations, which are businesses registered in tax havens. After the money is funneled through these companies, it becomes profits from dividends, which nonprofits don't pay taxes on.
Steven M. Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, said he is not concerned about whether hospitals invest off shore and tax laws should allow businesses to directly do whatever they are able to indirectly do.
The better question, he said, is whether nonprofits are getting their money’s worth on hedge fund investments, which come with large management fees, are more complicated to evaluate and are more suited for expert investors. He thinks hospitals and universities would typically be better off with safer investments that charge less overhead, such as index funds.
“The investment managers charge such large fees that often times it’s not a great investment for such an unsophisticated investor who may not have the expertise to properly evaluate the risk and reward,” Rosenthal said.
Tax code needs fixed
While some have said this is a loophole that needs to be closed to capture lost tax revenue, others have said the law was not originally intended to tax charities for their investments and the tax should be ended.
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Local hospitals and universities emphasized that the practice is common, legal and is a way to prudently maximize the amount of money they have to support their nonprofit missions.
Local hospital executives would not discuss the practice with the Dayton Daily News.
The Greater Dayton Area Hospital Association said in a statement on behalf of local hospitals that nonprofit hospitals have a responsibility to the local community to use revenue for the on-going work of the institutions and their missions.
“Periodically, this includes the standard practice of using an investment and allocation strategy that mirrors the same options available to many consumers – indexed funds and tradeable stocks that include domestic and international companies,” the hospital association stated. Some nonprofits, including hospitals and health networks, have alternative investments in their portfolios “to diversify the investment portfolio and create a steadier stream of investment earnings to support mission-driven work.”
The Wright State University Foundation had $9.5 million invested in a Cayman hedge fund in 2016. These investments are less than 10 percent of the foundation’s “well-diversified portfolios,” Wright State spokesman Seth Bauguess said.
“While there has been recent press around universities and endowments creating offshore entities to invest in direct private equity transactions or establishing dedicated special purpose vehicles in foreign jurisdictions, this hedge fund investment is not a strategy implementation of that type but rather a traditional hedge fund investment vehicle commonly used by investors seeking exposure to this asset class,” he said.
Miami University sees its overseas investment as its responsibility to “keep taxes down” and that’s one reason why the school’s foundation has chosen to invest in offshore, according to spokeswoman Claire Wagner.
“We are always looking for diversity in investments and lowest costs possible to maximize income in those investments,” Wagner said.