In the middle 1990s there was an industry consolidation of Catholic supported hospitals around the country. Hospital organizations that historically were very local began to question the economic wisdom and expense of administration, retirement and debt replacement funds, endowments, and other “overhead” items.
A number of regional consolidations took place, where multiple hospitals merged or formed loose or formal association with one another. The obvious benefits came from reducing multiple administrative teams; larger retirement plans to spread the cost of administration and compliance between a larger employee census, and the economic buying power in all areas of hospital operation.
One area in which economy of scale includes a number of variables is investment management. While it is far more viable to manage a short term cash pool of $10 million than a pool of $1mm, and the fees for investment management, custody, prime brokerage and other services are more competitive for $50mm long term investment funds than for funds of $500,000, there are a number of accounting “who owns what and what participant gets allocated the gain/loss/income…” questions that arise.
A consulting group in Atlanta had several Catholic hospital groups for which they were providing guidance on the investment management issues. The issues are really fairly straightforward – allocation of principal, income, gains, losses, and expenses.
Most accounts attempting to allocate these line items have traditionally used trust accounting – beginning balance +/- transactions equals ending balance, on a monthly basis. The problem with this approach is that each item is calculated using a percentage, and any items that occur during the month require recalculation of all percentages. Most trust accounting systems are not designed to be anything other than the rough calculation that occurs.
When there are political issues between merging organizations, each legacy organization has a tendency, especially in the beginning, to be concerned with ‘fairness”. Any time a calculation is anything less than 100% accurate some entity will be unfairly advantaged and another unfairly disadvantaged. “Close approximation” is acceptable only in horseshoes.
The most accurate means of allocation principal, income, gains and losses is to unitize a portfolio and for each line item to carry a value/unit. This type of accounting is what Unit Investment Trusts and mutual funds traditionally use. There are specific GAAP standards for the daily computation (or periodic if less than daily) of an investment portfolio.
Nottingham was asked to develop, in essence, private unitized accounts for several Catholic hospital organizations (the same process has since been used for Catholic and Episcopal Dioceses, a national church organization, community foundations, utility cooperative, university system collective endowment pools, and several government investment pools including one of the largest state treasuries on the east coast).
Each legacy entity became a “shareholder” in the consolidated merged investment account. Multiple investment accounts were formed to reflect the nature of the assets (retirement plan, debt retirement/bond reserve, endowment, general operating cash fund, etc.). In many cases the entities had multiple layers of shareholder recordkeeping. For example:
By tracking each investment at the account, sub-account, sub-account of sub-account levels etc., the CFO of the hospital can review her entire investment account, the Endowment Fund as a separate report, the portion of the Endowment attributable to the Cancer Center, and the individual gifts constituting the Cancer Center Endowments.
This degree of detail and accuracy can be especially helpful (and necessary) if a charitable organization accepts Charitable Remainder Trusts and is required to distribute certain percentages of income and/or corpus within time certain periods in order to maintain compliance of the individual CRT and the Endowment overall.
There are many tangential issues involved, but the above should provide an overview. Additional questions or scenarios are invited.