Nonprofit community “Type A” contracts require the organization to offer extensive life care services. This may include a refundable portion of the entrance fee to the resident’s estate in exchange for guaranteed lifetime occupancy. A financial assessment of prospective residents is needed to determine if they are a candidate for a Type A contract.
The organization is obligated to understand its Future Service Obligation (FSO-90-8 of the IRS code) used to calculate the organization’s ability to meet the contractual obligation to current residents. Many CFOs are concerned about FSO rules. Most residents and communities have seen their investment portfolios decline, negating the interest rate and inflation assumptions made in their financial models. The residents’ need for financial assistance is dependent on the same assets used to calculate the FSO.
“We have a stewardship obligation to residents to be sure our community understands the potential financial need and to plan appropriately for that,” notes Teresa Kenton, CFO at Northcrest Community in Ames, IA. Do CFOs understand the potential liability of current and future financial assistance? How can the CFO be assured of this unless he or she is regularly reviewing a resident’s financials? What is the organization doing to plan for this potential draw on assets, and how might that impact the FSO under the Type A contract? Ms. Kenton sees this area as critical to helping keep the organization strong.
“Organizations that fail to plan for this potential future need may put their organization in jeopardy of having an unexpected drain on resources,” she says.
This is also where the idea of “charity” arises. The CFO should be doing a financial obligation calculation. Otherwise, liabilities need to be booked and financial liquidity becomes more important. The future financial responsibility belongs to the organization, regardless of the resident’s ability to pay.