A Most Serious Task
| 31 December 2008
This month the Pony Tricks column isn’t about our favorite pony car. It’s about our favorite pony car club. Specifically, it’s about an annual event that your Board of Directors takes very seriously and spends a lot of time developing. It’s about the budget proposal for the upcoming year, in this case 2009. The key word is proposal because as a proposal, it doesn’t become “the budget” until the CRMC membership takes ownership by casting a majority vote in favor of it. The vote for the 2009 proposal is planned for the regular CRMC meeting on February 3, 2009. Please try to attend.
You may be asking yourself why a budget discussion warrants a place in the Pony Tricks column. And the answer would be that Pony Tricks treats any subject related to the enjoyment of our Mustang hobby. In this case, it’s the financial equation that allows each of you to do what you enjoy as a CRMC member. It boils down to the business model used by Carolina Regional Mustang Club. Yes, there’s a business model underlying what we see on the surface because CRMC is an IRS approved non-profit, tax exempt business. In that context, we want to discuss some of the business considerations so that when you vote on the budget proposal you’ll have enough information to make an informed decision or to offer constructive criticism, if you disagree with what the Board proposes. This will not be a line-item discussion. It will be a discussion about what happens behind the scenes when the Board constructs the proposal.
Before we get started, the Board wants to acknowledge its awareness that some members wondered why more money wasn’t given to charity in recent years, in light of year-end bank balances ranging between $12,000 and $15,000. And the Board understands why some eyebrows were really raised at the November meeting when it was announced that year-end 2008 should close with a $19,000 balance based on information available at the time. Year-end balance is a subject that the Board studies very closely; it’s always discussed at length when the budget proposal is prepared. The resulting recommendation is not a number selected at random. As you read through the rest of this article, it is hoped that the Board’s line of reasoning will make sense.
Let’s open the discussion with three important pieces of information. Tuck them away in the back of your mind. First, in Article I of the club bylaws, it is stated that the IRS recognizes CRMC as a non-profit civic league operating within the guidelines of section 501 (c) 4 of the Internal Revenue Code. Second, nowhere in the CRMC bylaws does it state that the club is obligated to contribute to charity nor is it obligated to finance any specific activity. Third, the dues you pay each year are designed to finance the cost of the monthly newsletter and the cost of the annual election of officers, no more, no less.
Section 501 (c) 4 is crucial to the design of the budget and even though our bylaws don’t state specific uses for club earnings, the IRS requirements point us in defined directions. If you want to read the 501 (c) 4 fine print, www.IRS.gov is a good online source. But for our discussion, suffice it to say that CRMC is exempt from income tax if it abides by the rules of 501 (c) 4.
Paraphrasing a portion of 501 (c) 4, a civic league operates exclusively for the promotion of social welfare with net earnings devoted exclusively to charitable, educational, or recreational purposes. That pretty well describes CRMC, doesn’t it? We give to charities, we educate the public through our driving school and our show, and most all of our activities have a measure of recreational value open to the public. It’s a great formula but CRMC’s active involvement in various aspects of the Mustang hobby makes it a costly formula. The formula requires identified sources of income and anticipated levels of expense. In other words, it’s a formula that requires a business model to make the budget operate in a predictable manner.
Since we’ve already defined how membership dues are spent, it becomes obvious that our other activities are financed from alternative sources. Those sources include things like raffles, sale of accessories, entry fees for our events, and sponsorships. A glance at the income/expense statement near the back of each newsletter helps to identify the costly line items. It’s clear that without the alternative sources, we couldn’t do some of the things we enjoy. And quite possibly we wouldn’t satisfy the requirements of 501 (c) 4 without asking the membership to contribute significant levels of additional dollars. And significant they could be because in recent years the annual budget has been in the $40,000 to $50,000 range with only about $7,000 to $8,000 of the income-side generated in-house.
That brings us to the annual balancing act that the Board goes through as it develops the budget proposal. There’s always an elephant in the room because our two main income generators (our show and our driving school) are held outdoors where weather can influence success or failure. The risk of financial loss is significant and must be acknowledged. To complicate matters this year, the elephant brought a friend in the form of a crisis in the economy, a crisis that had the potential to further increase our financial risk.
In “normal” times and assuming good weather, attendance at our events has been quite predictable, making income from entry fees relatively predictable. Would the crisis have a negative impact on attendance? If so, by how much?
In “normal” times, sponsorship has been available and also fairly predictable Would the crisis influence the ability of past sponsors to step up again? If they did find a way to continue their sponsorship, would they be willing and able to spend the same number of dollars? Would it be possible to find new sponsors if past sponsors couldn’t contribute?
In their own good time, the questions will be answered but without more substantive information during development of the 2009 budget proposal, the Board had to make some assumptions. The assumptions were conservative with respect to sponsorships. There was a collective concern that in 2009, sponsorships could fall by as much as 50% compared with 2008. On the subject of attendance, assumptions were less conservative because there is some evidence to indicate that even in these difficult times, people are willing to redirect part of their discretionary spending to the continued enjoyment of their hobby. If that trend continues, income from attendance should be fairly stable.
Keep the elephants in mind and go back a few paragraphs to the definition of 501 (c) 4 where our status as a non-profit business depended on charitable giving, educational exercises, or recreational purposes. Notice the word or. The definition is an either/or requirement, not a directive to do all three. Nevertheless, CRMC tries its best to satisfy all of them and historically, we’ve had a fair measure of success meeting that goal. The swing category, however, is charity. The reason it’s a swing category is because it doesn’t generate any income for the club. It’s not one of the alternative sources that was mentioned earlier. And without income, the club couldn’t make charitable contributions at any level, let alone pursue its other activities.
The Board assumes that the usual annual activities will take place and then it projects income, expenses, and its best estimate of the unknown; i.e., the risk factors. When the numbers are assimilated and assigned to their respective line items, there is typically an excess; call it a remainder. The remainder is recommended for charitable giving and placed on that line item. The end result is the budget proposal.
The risk factors equal the year-end bank balance. Taken out of context, the balance might suggest that more money could be allocated to charity. But taken in the overall context of what CRMC does annually, the balance represents the Board’s assessment of what it will require to keep CRMC solvent if the risks stack up against the club during the upcoming year. It’s the operating money that would carry us through bad times, if they occur. It’s the money that would enable CRMC to satisfy the requirements of 501 (c) 4 under adverse conditions, without asking members to finance a shortfall.
That’s the business model. It can most surely be revised but the Board wants to emphasize that no one component of the model operates in a vacuum. Change one thing and something else has to change in a offsetting manner. Either the money allocations would need to move around or some portion of our activities would need to be removed or limited. That’s not necessarily bad but it is realistic. So we invite all members to review the budget proposal and to question it, if they feel the need. And we invite your criticism if our answers don’t satisfy your questions. But please present any criticism in a constructive fashion, including the offsets that you would recommend. And bear in mind that the final lineup of our activities must comply with the guidelines of 501 (c) 4. If we can’t satisfy that part of the Internal Revenue Code., approval under a different designation would be required along with a revised business model.
You all have ideas about how you want the club to operate. If the Board misunderstands or misinterprets or is unaware of your ideas, bring them to our attention for an open discussion. And remember that when you approve a budget proposal, it can be revised during the year if conditions or visions change. Viable changes require a budget recalculation and another vote by the membership. So this is truly your budget.
Those of you who’ve been members of CRMC for a number of years may recall that at one time the club was approved by the IRS as a social club qualified for tax exemption under 501 (c) 7 of the Internal Revenue Code. If you wonder why our classification changed, it’s because we’ve expanded our interests and grown our activities to a point where most of our income comes from sources external to the club. Organizations approved under 501 (c) 7 must derive at least 65% of their gross income internally from membership fees, dues, and assessments. CRMC operates far below the 65% threshold.