The meeting of the Northridge Board of Directors on January 8, 1997, unexpectedly evolved into a heated discussion of what one member called a philosophical issue, namely, the role of surplus in a nonprofit organization.
Northridge was a continuing care retirement community (CCRC) located in a small college town. Its impetus came from members of a local church, who persuaded the national headquarters of that denomination to take on the project. The denomination headquarters had built other CCRCs. It supervised design and construction, arranged the initial financing, and selected and trained management personnel. Construction started in 1989, and the first residents moved in on July 1, 1991.
Construction and start-up costs were financed by two bond issues totaling $42,990,000. One issue, in the amount of $15,000,000, was redeemed on October 1, 1994. The other issue had an interest rate of 8 percent, due October 1, 2019, with annual mandatory redemption of $440,000 in FY 1997 (the year ended March 31, 1997), increasing by approximately 10 percent each year thereafter. The bonds were secured by a letter of credit, at an annual fee of 1 percent.
The 60-acre property consisted of a residential complex of 248 apartments with a health center. The apartments were studio, one bedroom, two bedrooms, and two bedrooms and den. In late 1996, there were 369 residents. The complex included a dining room, cafeteria, auditorium seating 150 people, library, indoor pool, beauty/barber shop, branch bank, gift shop, and facilities for crafts, woodworking, painting, and other activities. These apartments and facilities were in a connected group of buildings.
The health care center was in a building connected to the residential complex. There were 76 nursing beds, but one section, consisting of 20 beds, was not open in 1996. It was expected that this section would be opened in 1998 or soon thereafter. The health care center included an employee day care center, exercise and physical therapy rooms, and a clinic with medical, dental, ophthalmology, podiatry, and laboratory facilities.
Northridge residents paid an entrance fee and a monthly fee. In FY 1997 the entrance fee for single occupancy ranged from $78,800 to $267,300, median of $225,100; for double occupancy, the entrance fee was 5 percent higher. Monthly fees for single occupancy ranged from $1,581 to $2,802, median of $2,451; for double occupancy, the fee was 40 percent higher. An occupant of the health care center paid the same monthly fee as he or she paid when in an apartment. The monthly fee covered one meal per day, housekeeping, utilities (including cable TV but not telephone), and complete health care. Part of a resident’s healthcare costs was reimbursed by Medicare of Medicaid. . . .
- Is Exhibit 1 the best set of numbers to use as a basis for arriving at the fee? If not, what improvements would you suggest?
- Appraise the validity and relevance of each of the points made by the Executive Director.
- What is the desirable ultimate amount of surplus?
- As a director, what change in the FY 1997 fees do you recommend for FY 1998?