Watchdog’s criticism of foundation is long overdue, as 1969 Tax Reform Act shows.
Somebody once described a foundation as a pile of money surrounded by people who want some.
The Otto Bremer Foundation, and its three trustees, may be a shocking case in point for that cynicism, if the report of the National Committee for Responsive Philanthropy is on target (“Charity watchdog questions Bremer,” July 1). Unfortunately, Bremer is not the first Minnesota foundation to come under this kind of scrutiny.
At Bremer, the criticisms include excessive trustee compensation of more than half a million dollars annually (after a 1,000-percent increase over 9 years); concentrating the roles of CEO, chairman and treasurer with the trustees; and firing the foundation’s executive director to justify the increased salaries.
NCRP’s credentials as a nationally recognized “watchdog” on behalf of the public interest are impeccable. It has served this role for 40 years and is headed by Aaron Dorfman, a professional and principled Minnesotan with deep roots in our philanthropic tradition and standards. His sharp criticisms of Bremer’s trustee conduct boil down to excessive compensation and avoiding the primary regulations of the Tax Reform Act.
Foundations exist at the pleasure of the U.S. government to serve a charitable purpose. While “charity” is a wide-ranging concept, the Tax Reform Act of 1969 spelled out clear rules for foundations. Before TRA, many (not all!) foundations were tax dodges, set up by clever lawyers.
The most egregious was the Ford Foundation. The Ford family had put all of the voting stock of Ford Motor Company into its foundation, thereby allowing the family to run the company free from stockholder input and estate taxes. It also got a tax credit for making the “donation” of highly appreciated stock. Sweet, as the kids might say today.
Here in Minnesota, many decades ago, partners at the Oppenheimer Donnelly Wolf and Shepard law firm devised a similar structure for two corporations — Blandin (a paper company) and Bremer (a bank) to perpetuate family control long after the deaths of Mssrs. Blandin and Bremer. In each case a trust was created to control all of the for-profit company’s stock. Two or three “trustees” would command all company decisions. The “charitable trust” could perpetuate the company forever. And the lifetime trustees could set their own compensation and also name their children as successors — hence the three descendants running Bremer today.
The Tax Reform Act had required foundations to sell controlling interests in private corporations. Ford complied. Bremer sought an exemption, and for reasons that remain a mystery was allowed to continue by selling just 8 percent of the stock to employees.
At Blandin, the two trustees were ordered to sell the paper company, which they did in 1977, for about $80 million. Before that time, the foundation was distributing less than 1 percent of its endowment each year in charitable gifts. The IRS required at least 7 percent.
Even after the sale, the Blandin trustees’ behavior remained deeply flawed. One was the “individual trustee,” Jim Oppenheimer, now deceased, and the other was the “corporate trustee,” Norwest Bank.
The individual trustee was dishing himself an exorbitant annual fee — in today’s dollars, about $250,000. When called to defend it, he could provide work records of only a few hours. Like the trustees today at Bremer, he wore “four hats” — trustee, board chair, legal counsel and foundation president, which gave him the power to veto any action by the foundation board and dismiss anyone who dared to vote against him. (And he did.)
Meanwhile, the corporate trustee put all the proceeds of the paper company sale under its own investment management services, buying its own stock. Despite subpar returns, the corporate trustee netted a tidy fee in the millions.
Is this starting to sound like the Bremer Foundation? Frankly, it’s out of the same playbook of self-interest dressed up as charity. The lawyers who wrote the playbook in each case were from the same law firm.
Is there any watchdog on guard duty? Who is looking out for the public interest?
The Ramsey County District Court reviews the compensation of trustees; the attorney general also has purview over charitable entities. If they are watching, it must be with a blind eye — or maybe just a wink and a nod.
Whether the two guardians of the public interest are overlooking illegal or unethical standards must be answered. Former Attorney General Mike Hatch was quoted in a news story scoffing at any attempt to curtail Bremer compensation, saying they would have to prove theft. But how about self-dealing? The Tax Reform Act is replete with such prohibitions. Take a look.
If a third party set the Bremer trustees’ compensation, using reasonable comparisons, it might rebut any inurement/self-dealing accusation. But unless performance goals were in place before the 1,000 percent increase, it is impossible to see justification.
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