Charity, Clarity and the SCRA

February 3, 2016

Ron Aiken

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prototypes_pic.000NOTE: On Monday, The Nerve looked at how South Carolina Research Authority is a state agency shrouded in secrecy that operates a business enterprise with revenues of more than $1.5B since 2010. Today, The Nerve looks at the SCRA’s status as a non-profit and what that means for an agency that for all intents and purposes operates as a for-profit concern with a bonus structure equal to (and in some cases exceeding) that of USC and Clemson’s athletic programs.

How did a small state agency with non-profit status become a major player in the high-stakes military contracting world?

For as good a question as that is, a better one is this: how can a non-profit with a public mission to help South Carolina’s citizens operate for decades seemingly as a for-profit enterprise, paying millions in bonuses to its leadership with only token public outreach and even less legislative oversight?

Like everything related to the South Carolina Research Authority, the answer is tough to find, complicated to understand and revolves around money. Lots and lots of money.

CHARITY FOR WHOM?

The SCRA is chartered as a charitable organization, a 501(c)(3) as is its research spinoff, Advanced Technologies International (formerly Advanced Technologies Institute, which changed its name in 2010 and lists SCRA CEO Bill Mahoney as its registered agent and business address as the same as SCRA, 1000 Catawba St.).

ATI is the profitable arm of the SCRA, the straw that stirs the drink. As The Nerve previously has reported, through ATI (co-branded for marketing purposes as “SCRA Applied R&D,” per SCRA spokesperson Micki MacNaughton) the SCRA has had operating revenues of $1.5 billion since 2010, including $435 million for FY2015-16, thanks to its work brokering deals (called consortium work) between the nation’s largest defense contractors and the military.

ATI and the SCRA’s consortium work has been beyond successful as its revenue and accumulated profits show ($65.5 million). Since 2010, SCRA’s operating revenues have increased nearly every fiscal year:

  • 2010: $172.1M
  • 2011: $197.2M
  • 2012: $194.6M
  • 2013: $243M
  • 2014: $284.5M
  • 2015: $399.6M
  • 2016: $435.5M

(source: SCRA executive committee presentations and information provided through the Freedom of Information Act)

The SCRA has massive earnings by state agency standards or business standards in general. Its cash reserves are substantial (net assets of $28.9 million in 2011, $44.3 in 2012 and $42.7 in 2013) as are its real estate assets (valued at $27.7M in SCRA’s latest 990 from 2013. And unlike most state agencies where bonuses are capped (no more than $3,000 per year).

The IRS does not prohibit non-profits from, well, profiting. In an online post about overcompensation for non-profit employees, non-profit expert Cynthis Jaggi of GatherWell, a 501c3 in Berkeley, Calif., says the rules are vague.

“Ultimately, a non-profit is still a Corporation – just one set up for the purposes of good, not for the purposes of profit,” Jaggi writes. As a Corporation is has the ability to have earned revenue and compensate staff as it sees fit.

“The major limiting factor is the Board of Directors which is in place to ensure oversight and appropriate and mission-directed spending.”

The IRS has does have rules, however, to prevent the inurement (think enrichment) private shareholders or individuals.

On the IRS’ website under “private benefit,” it spells out clearly what is prohibited for a 501(c)(3).

“A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.”

For the SCRA, whose public mission is supposed to be the increase of research by the state’s universities the securing of industry to South Carolina, measuring that value versus the enrichment of its personnel isn’t just difficult, it’s almost intentionally impossible.

In business, mission statements provide clarity for organizations. In the charitable world, they are your reason for being, your official excuse for tax-exempt status. In them, clarity and concision are key.

Here’s the SCRA’s official mission statement, the one it provides to the federal government on its IRS Form 990s each year justifying its tax-exempt status:

“Description of the organization’s mission in accordance with the provisions of Section 13-17-20 of the Enabling Act, and the finding of the General Assembly of the State of South Carolina in establishing the authority that the future economic viability of South Carolina can best be assured by building strong industries of advanced technology, that in order to develop better employment opportunities and improve the standard of living in South Carolina the state must aggressively pursue and encourage research and development organizations and high technology manufacturers to locate in this state, and that this state must take steps to insure (sic) that it develops its human resources by providing opportunities for its residents, the authority was organized and shall operate to enhance the research capabilities of the state’s public and private colleges and universities, to establish a continuing forum to foster greater dialogue throughout the research community within the state, and to promote the development of high technology industries and research facilities in South Carolina. In accordance with the Enabling Act, the objectives of of the authority include but are not limited to the following (1) To advance the general welfare of the people, (2) To increase the opportunities for employment of citizens of South Carolina, (3) To develop the human, economic, and productive resources of South Carolina, (4) To promote and encourage expansion of the research and development sector, with an emphasis on capital formation and investments in research and development within South Carolina, (5) To create and maintain a dialogue between the public and private research communities, (6) To enhance the potential for private support for South Carolina public and private colleges and universities, to promote cooperative research efforts between the private sector and such colleges and universities, and to strengthen the partnership among state government, higher education, and business and industry, (7) To assist South Carolina public and private colleges and universities in attracting nationally prominent academic researchers and professors and to serve as an initial linkage between the state’s outstanding existing research and the business and industrial sector, (8) To maximize the research capabilities of the public and private colleges and universities in South Carolina, and (9) To foster and advance both the capability and recognition of South Carolina as an international leader in idea generation and the development, testing, and implementation of new advances in science and technology.”

That’s two sentences, for those keeping track.

Apple computer’s mission statement under former CEO Steve Jobs, by comparison, was “To make a contribution to the world by making tools for the mind that advance humankind.”

One led to the world’s most-successful company. The other has led to a business model that, while profitable beyond argument, confuses anyone asked to describe what it does in a sentence and makes it equally challenging, as it did for the South Carolina Supreme Court, to determine what, precisely, the SCRA’s public mission is.

In its 1986 ruling, the court acknowledged the difficulty at length in Nichols v. South Carolina Research Authority.

“The term has been variously defined. Courts and legal scholars alike agree that ‘a public purpose has for its objective the promotion of the public health, morals, general welfare, security, prosperity and contentment of all the inhabitants or residents within a given political division.’ (Caldwell v. McMillan)”

After deferring to the legislative branch as to any final answer, the court eventually affirmed a four-point checklist with which to test public purpose as set forth in Byrd v. County of Florence:

The Court should first determine the ultimate goal or benefit to the public intended by the project. Second. the Court should analyze whether public or private parties will be the primary beneficiaries. Third, the speculative nature of the project must be considered. Fourth, the Court must analyze and balance the probability that the public interest will be ultimately served and to what degree.

Who, then, ultimately defines whether a group such as the SCRA or ATI have or are fulfilling the legal requirements of a charity successfully pursuing its public purpose? The IRS. The penalty for failing to meet the definition? Having a group’s status as a non-profit revoked. How often does this happen?

“I don’t think I’ve heard of it ever happening where the IRS looked into a non-profit to make sure they were meeting their public mission or not,” said Madeleine McGee, president of the South Carolina Association of Nonprofits. “They don’t have the resources to do that.

“The only way I know where there’s a revocation is if a group fails to file for a number of years.”

BONUS BONANZA

Another unusual aspect of the SCRA is its penchant for enormous bonuses for select senior staff, especially CEO Bill Mahoney.

For regular state employees, bonuses are capped at $3,000 for a calendar year. Even at public institutions where bonuses aren’t capped, enormous bonuses generally are reserved for athletic coaches. For example, in former football coach Steve Spurrier’s last full season at the University of South Carolina (2014-15), he earned $200,000 in bonus money and remained the state’s highest-paid employee until he resigned (which still did not stop him from earning millions more).

By comparison, Mahoney’s most-recent bonus package was $234,100 ($139,722 in bonuses earned, $38,274 deferred compensation and another $14,430 in nontaxable benefits), according to the group’s 2013 Form 990.

According to financial documents, Mahoney made $125,189 in bonuses in 2010 (base $253,436, total package $378,625); $296,124 in 2011 (base $222,630, total package $518,754); $197,699 in 2012 (base $228,636, total $426,355); and $234,140 in 2013 (base $247,546, total $481,686).

That’s a grand total of $1.8 million in salary and $853,152 in bonuses just from 2010-2013. Couple those figures with previous Nerve reporting and Mahoney has earned a total of $2.15 million in salary and $1.05 in bonuses since 2008. All those figures are the highest of any state agency, which the Supreme Court ruled the SCRA was, excluding athletic salaries at USC and Clemson.

Only board oversight limits what non-profit executives may earn through salaries, bonuses and other incentives. In the case of the SCRA, Mahoney’s contract is subject to approval by its Board of Trustees, which includes presidents from the state’s major colleges and universities, the top financial leaders from each legislative body (Sen. Hugh Leatherman, R-Florence, and Rep. Brian White, R-Anderson) and a host of elite private sector executives including representatives from Springs Industries, BlueCross BlueShield, the Savannah River National Laboratory, Michelin and more.

Only they can determine whether the SCRA and the compensation package is appropriate, as the IRS permits 501c3s to pay executives “fair and reasonable” compensation. From an IRS perspective, proven overcompensation of non-profit executives can result in the (however unlikely) revocation of an organization’s tax-exempt status to the imposition of fines in the form of an excise tax, which can penalize not only the executive receiving the overcompensation but also each board member who approved the contract(s).

For now, the SCRA continues to run its own show with little meaningful public oversight of a state agency that has turned a one-time $500,000 taxpayer grant, 1,400 acres of land and word-soup mission statement into a multi-million dollar global research enterprise with a bonus structure and incentive program to match. How much – or how little – that enterprise meets the definition of public mission is one that likely won’t be decided anytime soon.

Reach Aiken at 803-254-4411 or email him at ron@thenerve.org. Follow him on Twitter @RonAiken and @TheNerveSC.