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Nonprofits' fiscal issues investigated by state Attorney General Kane

| Monday, Dec. 2, 2013, 12:03 a.m.

Two Western Pennsylvania nonprofits are tangled up in court, where tax delinquencies and alleged mismanagement of millions of dollars have volunteer board members under Attorney General Kathleen Kane's scrutiny.

Kane aims to oust trustees at Conneaut Lake Park in Crawford County, which failed to pay taxes and keep fire insurance on its Diamond Ballroom, destroyed in a fire in 2007.

In Pittsburgh, the August Wilson Center for African American Culture fell behind on mortgage payments for a $40 million building constructed without a clear revenue plan, ending up in foreclosure.

Joe Peters, spokesman for Kane, said the office has a responsibility to hold board members to their fiduciary duties under the Commonwealth Attorneys Act.

“When someone takes a position on a board, they knowingly take on that fiduciary obligation,” Peters said.

Pennsylvania has no shortage of nonprofits, with board members managing billions of dollars.

Pennsylvania has about 68,500 nonprofit organizations. Collectively, the industry generates $96.8 billion in annual revenue, employs about 13.3 percent of the state's workforce and holds $208 billion in assets, according to Independent Sector, a nonprofit advocacy group.

In the past 11 years, Tish Mogan has trained more than 3,000 board members on the financial workings of nonprofits.

“Board members get on boards mostly because they're committed to the mission, or somebody asks them,” she said. “But there hasn't been a lot of emphasis on this legal fiduciary role.”

Mogan runs the Standards of Excellence Program at the Pennsylvania Association of Nonprofit Organizations, offering financial and legal education useful for navigating boardroom discussions and votes. Basic financial literacy is a main component. Board members, Mogan said, should not gloss over statements from administrators.

“That is a big mistake,” she said. “It could be the people looking at the numbers are the ones trying to hide something.”

The state's nonprofit corporation law spells out that directors have a responsibility to make decisions based on the best interests of the nonprofit and to stay informed about the nonprofit's affairs. Kevin Kearns, a professor of nonprofit management at University of Pittsburgh, said when board members are held legally responsible for their actions, at issue is often whether they've lived up to their “duty of loyalty” or “duty of care.”

In the Conneaut Lake case, Kane's office argues the court should remove the trustees for breaching “their fiduciary duties of loyalty, care and good faith by failing to maintain fire insurance on the Conneaut Lake Park property.”

Crawford County President Judge Anthony Vardaro ordered the board to turn over its financial records and a list of members to Kane.

In the past 10 to 15 years, serving on boards has become much more than what was traditionally an honorific role, Kearns said. Scandals at large national nonprofits such as the American Red Cross have caused smaller organizations to pay more attention to detail, he said.

“People began to ask where the board was, why wasn't the board more deeply involved in those decisions,” Kearns said. “Since then, there's been a lot of progress in improving board members' preparation, and I think members are increasingly aware and cognizant of their responsibilities, professionally and ethically.”

Those responsibilities don't mean you have to be a CPA or understand all the inner workings of a hospital to sit on its board of directors. Rather, the legal standard is often what “an ordinary, prudent person” would take from the situation, Kearns said.

Most nonprofits' boards are made up of volunteers.

“They're not being paid for this,” Kearns said.

Melissa Daniels is a staff writer for Trib Total Media. She can be reached at 412-380-8511 or mdaniels@tribweb.com.

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