Finding 2022-002: Compliance with USDA Loan Requirements, USDA Rural Development, Community Facilities Loans and Grants, Award Listing 10.766 When the mortgage was obtained in 2011, the books and budget of the non-profit were developed and jointly maintained by school personnel. While there has alw...
Finding 2022-002: Compliance with USDA Loan Requirements, USDA Rural Development, Community Facilities Loans and Grants, Award Listing 10.766 When the mortgage was obtained in 2011, the books and budget of the non-profit were developed and jointly maintained by school personnel. While there has always been non-profit board approval of its budget, the basis of the budget level was to minimize its costs and support the school, which at the time was in its start-up phase. A decision was made by previous board members of both the non-profit and the school to minimize the school?s annual lease amount so it could direct as many resources as possible to building the school?s educational program and operational capacity. As a partner-entity, the non-profit?s budget was therefore designed to ?break even? with the lowest possible level of expenses needed to pay the mortgage and maintain the property; the reserve could not be immediately established due to operational costs. The current board?s understanding is that this arrangement was always intended by that initial board to be temporary, and that school lease payments would slowly increase over time as the school moved out of its initial start-up phase into a more stable financial pattern. Then a reserve could be established. Five years ago, in fact, the school had indeed achieved financial stability, filling out grade K-8 classrooms with a student body of over 230 students. The school was generally running an annual surplus by year 7 of its existence. While the school had previously agreed to small rent increases leading up to 2018, newly hired school leadership that year did not understand nor maintain the partner-entity status and refused additional rent increases that would have allowed the reserve to be established. Subsequent school leaders and boards have similarly refused even $1 of rent increase. During the pandemic, the school board even took the non-profit to arbitration to prevent any rent increases; the arbitrator chose not to award any rent increase despite the fragile nature of the non-profit?s finances. Costs, particularly insurance, bookkeeping, and auditing, have gone up each year, while revenue has stayed largely flat. A volunteer organization, the non-profit was not designed to be a fundraising organization, merely a landowner. It doesn?t operate programs and has no other passive income streams. The bulk of its small budget comes from school rent, while resident rent comprises only a small portion of the budget. There are no discretionary expenses to cut that would allow the organization to both maintain its property, pay the fixed costs of existing as a non-profit organization, and also fulfill the mortgage reserve requirement. Without any support from the school, last year the organization secured a discretionary grant that enabled it to initiate subdivision proceedings regarding the property with Hawaii County. An appraisal had been conducted a few years ago, so upon subdivision approval, we will sell the campus parcel. This is anticipated to occur in 2023, at which time the plan is to pay off the mortgage in full, release this obligation, complete kitchen construction, and develop operational reserves. Responsible person contact information: Michael Kramer, President, mkramer@hawaii.rr.com