July 19, 2013; Wall Street Journal

 

NPQ reported recently about the arrest of a New York mayoral candidate at a protest over the closing of Brooklyn’s Long Island College Hospital (LICH). The Wall Street Journal now reports that a major donor and longtime board member gave LICH more than $100 million in an endowment that is now gone, used primarily as guarantee for capital expansion loans as well as payments and collateral for malpractice settlements.

The political and operational issues surrounding the present conditions and future of the hospital are compelling, with a judge’s order forcing the financially troubled hospital to remain open and rumors of plans by the State University of New York (SUNY) Downstate, the current owner, to sell or develop the property with its “harbor views of the Statue of Liberty.” A press release on the SUNY Downstate web site states that the hospital is currently losing $15 million a month and has accepted voluntary resignations from a number of physicians and senior administrators. While denying there are immediate plans to close the hospital, it does not make a commitment to keep the hospital open. According to the news release, as of July 18 there were only 18 patients in the hospital, and efforts were being made to transfer them to other hospitals.

Against this backdrop, it’s easy to lose sight of the philanthropic intent of Donald and Mildred Othmer. A $50,000 investment with Warren Buffett in 1961 turned into about 14,500 shares of Berkshire Hathaway in 1969. They never sold their shares, which would be worth over $2 billion today. Mr. Othmer was a board member of the hospital for 22 years. He and his wife gave a $135 million endowment to the hospital in the 1990s, “‘to be held in perpetuity,’ according to their wills.”

Enter the leaders of Long Island College Hospital and the courts. In the years following the establishment of the endowment, the hospital secured court approval—several times—to use the endowment’s principal to cover immediate needs. Why? The court accepted the argument that the Othmers intended for the hospital to continue in operation, and using the endowment principal was necessary to avoid the hospital’s shutdown. The legal principle of “cy-près,” or “as near as possible,” is used in cases where the intent of a deceased person is weighed against the needs of others later. However, lawyers interviewed for the Wall Street Journal article note that the principle is rarely used to change the provisions of a charitable endowment.

Using this legal argument as precedent, is any philanthropic endowment safe from being converted to immediate use? Couldn’t any nonprofit’s board and executive develop situations that would provoke a crisis by overcommitting to capital expansion, failing to exercise due diligence over the nonprofit’s financial affairs, or neglecting to pursue a persistent and effective fund development strategy? There are those in Brooklyn who are asking these questions of LICH now, but it’s probably too late to find and hold anyone accountable, much less to save the hospital from closing.

We would love to hear from readers on their views about the uses of endowment principal and about endowments in general.—Michael Wyland