The National Rifle Association’s political spending fell during the 2018 midterm elections. There’s talk of ending small perks like free coffee at its offices and even employee layoffs.

These and other trends indicate that at a time when the NRA’s clout may seem stronger than ever, its financial power may be faltering.

As a researcher who studies and tracks the finances of nonprofits, I have followed the NRA’s financial disclosures for years. Here’s what I’ve observed lately.

A negative nest egg

The best reflection of an organization’s financial cushion is its unrestricted net assets — an accounting measure of how much money it has available to spend.

The NRA had negative $31.8 million on hand at the end of 2017, according to the form all nonprofits must file with the IRS. The group, which spent an average of $278.3 million a year, had a negative balance at the end of six of the previous 10 years.

In the 2017 financial statements, I’m seeing signs that the problem could be more serious.

This is very different from how two other prominent organizations operate. Consider the financial health of the American Civil Liberties Union, a civil rights group, and the AARP, which advocates on behalf of people who are 50 and older. Like the NRA’s main arm, they are 501(c)(4) social welfare groups that have a national reach and name recognition, and that engage in public policy advocacy.

The ACLU — although its budget is only a third of the NRA’s — had unrestricted net assets worth $140.2 million when 2017 came to a close, according to its tax form. And the AARP — whose annual budget is nearly five times that of the NRA — finished with a balance over $1.3 billion.

The NRA’s circumstances stand out by comparison not just with its peers but with all nonprofits. IRS data, including for fledgling startups, indicate fewer than 7% of American nonprofits ended 2017 with a negative balance.

How it happened

Despite years of thin finances, 2017’s negative $31.8 million balance in unrestricted net assets is notable as the organization’s 10-year low.

Given the growing push for gun control measures on the heels of more frequent and more deadly mass shootings, you might guess that declining membership dues could be to blame. But that’s not the full story.

The NRA does not release membership data. But it does by law have to make its cash flow a matter of public record. The group’s revenue has grown, but by about 0.7% a year over the past decade, not enough to keep up with annual inflation, which ranged between 1% and 2.3% over the past 10 years.

As a result, it looks like the organization got into this bind by spending beyond its means. Despite this relatively stagnant income, NRA expenditures have been growing by an average of 6.4% a year, maxing out at $412.7 million in 2016.

And all nonprofits, just like families and companies, run into trouble when they fail to live within their means.

No imminent demise

The financial struggles have even led the organization itself to warn that it could possibly collapse in court filings.

Despite this drama, however, the organization has a robust revenue stream due to a large member base, loyal contributors and the revenue it still gets from ads that run in its print publications and commercials that air on its video channel, NRA TV – even amid a successful boycott led by gun control advocates.

That means cutting back on spending can work wonders. Early signs, such as reduced election spending and job cuts, indicate such parsimony is getting underway.

Though it owes more money to others than it has freely available to pay them back, the NRA isn’t in immediate danger.

Much of what the NRA owes won’t come due for a while. Its two prominent liabilities are services it owes to members who have prepaid their dues for multiple years and what it owes its retirees — its pension fund is underfunded by $49.7 million.

Getting out of trouble

Despite signs of a more frugal path forward, there are three reasons why the NRA’s financial situation could get worse instead of better.

1) It relies heavily on telemarketers

The use of for-profit telemarketing and donation processing companies to solicit from supporters is often an ineffective way for nonprofits to raise money.

But the NRA is a big fan of these contractors. It reportedly paid one company, Akron-based Infocision $24.3 million in 2017 in exchange for telemarketing and donation processing services. Infocision is no stranger to controversy — the company agreed to pay a $250,000 settlement in January 2018 after a federal agency accused it of lying to donors, although it said it did nothing wrong.

The NRA has become so fixated on bringing in new members that its Infocision contracts permit the company to keep 100% of credit-card payments collected from new and lapsed members. As a result, increasing its membership may no longer boost the NRA’s bottom line, at least not right away since some of their new members’ initial dues will not make it to their coffers.

2) It borrows money from the NRA Foundation

The NRA is a 501(c)(4) membership organization but is also closely affiliated with a political action committee and several public charities. The affiliated charities, including the NRA Foundation, don’t face the financial issues that the NRA itself does.

Charity spending rules preclude the affiliated charities from just giving money to the NRA to shore up its funds. But, if the NRA runs out of options for cash, it can borrow from its affiliated foundation. This is precisely what the gun group did in 2017, suggesting that outside cash options were running thin and future options for getting cash may be even thinner.

3) It needs more cash for underfunded pension obligations

Despite the NRA’s pension fund already being underfunded, the organization indicated in 2017 that it had no plans to infuse it with cash that year. Instead, it promised to make a cash contribution of $7.8 million in 2018.

Providing the needed support for an underfunded pension may be wise, but it will force the NRA to scrape up an extra $7.8 million of cash in a time when cash is already in short supply.

Throwing away its shot?

Another revenue source — fees earned from insurance products NRA members buy — is being threatened due to efforts by New York state to block the group from marketing firearm liability coverage. These fees, which accounted for more than $14 million in revenue in 2017, would be hard to replace.

In sum, though the NRA’s financial situation does not strike me as immediately dire based on the information available, it is far from healthy.

And while details about the NRA’s wobbly balance sheet are surely less salacious than other news about the gun group, such as allegations and reports that it may have been a conduit for Russia to influence the Republican Party, a weak financial footing may ultimately be what saps its political power.

Brian Mittendorf is the Fisher Designated Professor of Accounting and the chair of the Department of Accounting & Management Information Systems (MIS) at The Ohio State University. This was first published on The Conversation — “The NRA’s financial weakness, explained”.