When Loans Go Bad: The Sacramento Regional Sports Education Foundation Fiasco

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May 10, 2012; Source: Sacramento Press

It is no fun to report on nonprofits facing financial difficulties, but recently we have seen a rash of cases involving nonprofits taking loans against the projected income to be generated by some future event that didn’t work out as planned. Melissa Corker of the Sacramento Press reports that the Sacramento Regional Sports Education Foundation borrowed $400,000 from the city of Sacramento to put on a track and field event called the World Masters Athletic Championships.  The Foundation estimated that it would generate some $600,000, enough to pay off the loan and then some. However, rather than generating six hundred grand, the event somehow lost $300,000.

The Foundation has announced that it is unable to repay the loan, not a good thing for the City of Sacramento, which is facing a $15.7 million budget gap. The director of Sacramento’s Convention, Culture and Leisure Department contends that the foundation actually spent $250,000 of the loan on unrelated operations and other activities not connected to the track and field games and that the loan was supposed to have been deposited in a segregated account, which allegedly didn’t happen, according to department director Barbara Bonebrake. Bonebrake suggests that the loan might have been used to “balance the (foundation’s) operating budget” due to her claim that it has been short for a couple of years. Our analysis of the foundation’s Form 990s for Fiscal Years 2009 and 2010 show operating deficits of $163,067 and $215,186, respectively. John McCasey, the head of the Sacramento Sports Commission, which oversees the foundation, said that the loan wasn’t used to cover any operating deficit, and that the money was used for the games, but he admitted that the foundation’s record-keeping wasn’t quite up to snuff.

As in other recent instances of loans gone bad, the headline seems to focus on the “nonprofit” or “foundation,” but scratch a little in this instance, and it looks like some public or quasi-public agencies—the Leisure Department and the Sports Commission—had some oversight functions which they were supposed to carry out. Now an audit (scheduled to be finished by late summer) will be needed to get to the bottom of the controversy. If there is a nonprofit in trouble here, there may also be public sector partners that might have to look at themselves for their own potential culpabilities.—Rick Cohen

  • Kate Barr

    IYes, whenever a loan becomes a problem the lender has to look in the mirror and ask whether they contributed to the problem. Problems with loans can usually be traced back to: a poor loan decision; an inappropriate loan structure; or an external or management problem that arose after the loan had been made. I work for an nonprofit loan fund that makes loans to nonprofits for working capital and facilities. Whenever we have a loan in serious trouble we look back and hope that the problem wasn’t caused by our own process, judgment, or oversight. Most of the time the problems are due to later events, economics, or external factors – but community development lenders have an obligation to avoid adding to problems when they have the option of saying No when they should.

    As a side note, ALL business and nonprofit working capital loans involve “taking loans against the projected income to be generated by some future event”.


  • rick cohen

    Yes Kate, but i was making the point that the loan was against one event as opposed to some other existing, predictable income stream. So the $900,000 difference in the return from the games (they expected to make $600k, they actually found themselves losing $300k on the event) is a little different than the risk of assuming that a current income stream will continue or grow to cover the organization’s assumption of the loan. Without knowing the details of what happened or didn’t happen in Sacramento, this loan did sound a little like the finances of the sports institute in Rhode Island that also encountered difficulty when a special event–games–apparently failed to generate the return expected. The one-big-event piece is riskier than a better known regular income stream, even if that income stream is pretty speculative as well. Like in Rhode Island, however, it strikes me that there are some lender oversight questions here as well as questions about the loan recipient’s use of the funds. Thanks for the note, Kate.


  • Kate Barr

    Absolutely, Rick. There is a useful warning in this story for public agencies and foundations that make a loan every now and then without sufficient skills and experience. They are probably better off involving or contracting with community development lenders who have that capacity. I’ve seen instances, though, when the city, county, or foundation leaders didn’t want to hear “No”.