GLOBE SPOTLIGHT SERIES: Some officers of charities steer assets to selves
Legislation eyed to fight abuses at foundations
WASHINGTON -- Citing an array of financial abuses at charitable foundations, federal officials and the Massachusetts attorney general's office plan to push new legislation and tougher regulations designed to curtail excessive salaries, lavish spending, and conflicts of interest by some foundation directors.
US Senator Charles E. Grassley, an Iowa Republican and chairman of the Senate Finance Committee, called the improprieties at foundations detailed in a recent Globe series "wrong and outrageous," and said new laws and more stringent rules are needed to ensure that the billions of dollars in foundation assets are used for charitable purposes and not to enrich insiders.
"We all expect them to operate transparently and not abuse money," Grassley said, in an interview with the Globe. "To me, it's Midwestern common sense."
Grassley's committee oversees the Internal Revenue Service, the agency that regulates foundations. He said he is considering legislation that would boost the IRS budget for auditing foundations, increase penalties against foundation directors who fail to disclose financial information, and tighten conflict-of-interest restrictions on directors who channel foundation business to their own companies.
Meanwhile, aides to Attorney General Thomas F. Reilly have drafted state legislation that would give Reilly's office clearer authority to remove board members at foundations or charities where abuses occur, and to dissolve those organizations if necessary.
Assistant Attorney General Jamie Katz, who oversees Reilly's public charities division, said new legislation is needed because financial abuses at foundations and public charities "are growing, not abating" and because public confidence in these institutions must be restored.
"We still believe most charitable organizations are run correctly. There is a minority where there are problems," Katz said. "But the problem from our perspective is the magnitude of that minority is growing and the amount of funds at stake is not minuscule."
There are more than 60,000 active foundations in the country today, according to foundation officials, with total assets of more than $400 billion.
Foundations are typically established by wealthy individuals who are granted tax breaks with the understanding that the assets of the foundations will be used for charitable purposes.
Both Grassley and Katz, in separate interviews with the Globe, compared the financial abuses in the foundation world to the
"The core model clearly is Sarbanes-Oxley, but we've tried to customize it both for the world of charities and for Massachusetts," Katz said of the attorney general's draft legislation, which is circulating among directors and officers at state charities and foundations.
Like Grassley, Katz said the push for new restrictions was spurred in part by the recent investigation by the Globe Spotlight Team that detailed numerous financial abuses at charitable foundations. The abuses included excessive salaries paid to foundation board members, many of whom work a few hours a week to approve a handful of grants to public charities; expensive perks for foundation directors, including private jets and luxury cars; and board members who direct legal and investment management contracts to their own companies.
In one case reported by the Globe, Paul C. Cabot Jr. of Needham boosted his salary at a family foundation to $1.3 million to cover the expense of a daughter's $200,000 wedding. In another instance, the Globe reported that the Arthur S. DeMoss Foundation, in Florida, spent $36 million to buy a 12-seat jet. Reilly's office has said it is reviewing Cabot's role as managing trustee of the Paul and Virginia Cabot Charitable Trust.
To pay for reforms in the foundation world, Grassley said his committee will consider amending the pending Charity Aid Recovery and Empowerment Act, or CARE, to earmark IRS funds for more audits of private foundations, and to strengthen penalties for failing to file complete and timely tax returns.
In recent years, the IRS has audited only about 100 foundations a year, in part, the agency has said, because it lacks funding. Approximately $500 million generated each year by an excise tax on foundation income -- a tax originally envisioned to fund IRS oversight of the sector -- goes to the US Treasury. A finance committee staff member said Grassley may call for setting aside $200 million of the excise tax revenue for foundation oversight, with perhaps $25 million going to state authorities that oversee foundations and charities on a local level.
Katz, describing the proposed state legislation, which has yet to be filed, noted that several of its provisions simply spell out powers already claimed by the attorney general, such as the power to sue to close a charity or foundation that is not acting in the public interest. But Katz said the legislation will make it easier for the attorney general to persuade a judge to allow him to take that action. He also said approval of the legislation would serve as a wake-up call to foundations and charities, prompting many to rein in excesses on their own.
The benefit of aggressive enforcement at the state level was underscored last week when three directors of the Grand Marnier Foundation of Paramus, N.J., resigned and paid $250,000 each to settle a lawsuit filed by Attorney General Eliot Spitzer of New York that accused them of enriching themselves at the foundation's expense. The assets of the foundation, which was founded by the former importer of Grand Marnier orange liqueur and Absolut vodka, dropped from $11.3 million in 1990 to $6.7 million in 2001, in part because of excessive salaries paid to the directors, according to Spitzer's office.
The need for increased self-policing was also a central theme at a conference in Boston last week on accountability among foundations and public charities. At the conference, the head of a leading organization representing foundations announced the details of a two-year initiative to improve ethics and governance standards in the foundation world and to work with state and federal regulators to stop abuses.
Dorothy S. Ridings, president of the Council on Foundations, a Washington, D.C., association of 2,000 grant-making organizations, said at the conference that "the government's oversight and enforcement capacity . . . have lagged far behind the astronomical growth our sector experienced in the 1990s." As a consequence, she said, abuses have resulted, and "grant-making foundations face the threat of eroding public trust and, for the first time in 35 years, stricter government regulation."
Calling IRS enforcement activity "woefully scarce," Ridings said her organization will focus on raising ethical awareness among foundation professionals and will continue to advocate for increased funding for IRS oversight of the sector.
Roy A. Hammer, a Boston attorney who specializes in trusts and estates, echoed the importance of increasing government funding for the oversight of foundations.
But Hammer, a conference panelist, said that enforcement of existing laws should be sufficient, and cautioned that "adding new laws that will substantially burden existing charities is not the way to deal with the wayward few."
© Copyright 2006 Globe Newspaper Company.
