June 08, 2015

How to Understand the Clinton Foundation

Michael Loccisano, Getty Images

Former U.S. Secretary of State Hillary Clinton, former U.S. President Bill Clinton, and their daughter, Chelsea Clinton, vice chair of the Clinton Foundation, at the Clinton Global Initiative’s 10th Annual Meeting in 2014.

It seems like a new media story about the financial entanglements of the Clinton Foundation arrives on a daily basis. And with Hillary Clinton’s presidential campaign now in full swing, this trend seems unlikely to end in the near future.

The proliferation of reports about the organization’s finances makes it increasingly difficult to determine which stories carry real weight and which are better viewed as partisan posturing. I offer three tips for sorting it out.

Do not expect the Clinton Foundation to behave like a private foundation.

Although it has "foundation" in its name, the Clinton Foundation is actually a public charity. In practical terms, this means both that it relies heavily on donations from the public and that it achieves its mission primarily by using those donations to conduct direct charitable activities, as opposed to providing grants from an endowment.

Failure to understand the difference led to the widespread claim (covered by the New York Post, Rush Limbaugh, Fox News, and others) that only a small portion of Clinton Foundation spending goes toward charity. While measuring charitable endeavors by the amount of grants awarded may be appropriate for many private foundations, it is not for an organization that acts as a direct service provider like the Clinton Foundation.

Pay attention to the foundation’s audited financial statements, not its Form 990.

This is important because audited financials reflect the consolidated activities of all related entities, as required by Generally Accepted Accounting Principles. The Clinton Foundation’s most recent audited financials report on the combined activities of the foundation and its affiliated charity, the Clinton Health Access Initiative. By contrast, the Form 990 tax filings follow each entity separately. The Clinton Foundation’s legal composition has changed over time ­— for example, the Clinton Global Initiative was spun off during the years Hillary Clinton was secretary of state.

Thus the activities covered by the foundation’s stand-alone tax filings are inherently different across the years, whereas the consolidated entity, which continued to include the Clinton Global Initiative even when it filed separate tax forms, has remained stable.

Some news reports reflect a misunderstanding about this difference, as was the case when the Federalist reported that the Clinton Foundation’s claim of spending 88 percent of its expenses on programs was "demonstrably false" since its tax forms showed that figure was only 80 percent. But the 80 percent reflects spending by the parent entity in isolation, while the 88 percent reflects spending by all of the related groups.

The confusion worsens when reporting relies on a mix of tax forms and consolidated financials. The Federalist also claimed the Clinton Foundation devoted substantial resources to distributing pharmaceuticals in 2008 and 2009, but those activities became "virtually nonexistent" by 2011.

This conclusion mixed apples and oranges, however, because it relied on data from consolidated activities in 2008 and 2009 but from tax forms for 2011 through 2013. Since the Clinton Health Access Initiative is the source of most such pharmaceutical distribution but files a separate tax form, finding this contrast was entirely predictable. A more appropriate apples-to-apples comparison using consolidated financials throughout reveals that pharmaceutical distribution has indeed waned but not to the extent alleged by the Federalist.

Compare financial information to a peer organization for context.

Looking at the Clinton Foundation’s financial activities in a vacuum makes it difficult to develop a sense of what is ordinary and what is truly unusual. A comparison to peer organizations provides important context. Though the Clinton Foundation is clearly unique, with a former president as its public face, aggressive worldwide fundraising, and a global agenda of public-private partnerships, this shouldn’t stop people from making this effort. In my book, the best point of comparison is the Carter Center, founded by President Jimmy Carter. The similarities both in terms of the founder’s public persona and the organization’s worldwide reach make it a natural benchmark.

A look at the Carter Center not only shows why criticizing the Clinton Foundation’s low grant payouts is problematic but it also can give a sense of how reasonable other expenses are. Such a comparison reveals that it is not grant behavior that sticks out but rather the rise in the Clinton Foundation’s payroll costs in recent years.

These suggestions apply to the Clinton Foundation’s defenders as well as its critics. Take, for example, an opinion piece in Forbes calling the foundation a trailblazer because it decided to voluntarily disclose its donors. While it is true that the foundation is among a small group of public charities that have taken this step, it is also not a typical public charity. Again, appropriate benchmarking is in order. While the Clinton Foundation first began disclosing donors in 2008 (after years of pressure), the Carter Center has long had this policy.

These three tips are not guaranteed to fully separate the wheat from the chaff in reports about Clinton Foundation finances. But an ability to spot these pitfalls can help us have a more nuanced view of the organization upon which to judge the propriety of both the foundation and the family that runs it.

Brian Mittendorf is a professor of accounting at Ohio State University’s Fisher College of Business.