By Richard Williamson

In 2002, the Bielfeldt Foundation of Peoria, Ill., reportedly paid family members and their businesses $3 million in management fees and commissions while handing out a third as much to charity.

Do those payouts -- 23 percent of foundation assets -- to wealthy Bielfeldt family members appear, according to phrasing of the Internal Revenue Service (IRS) "necessary, reasonable and not excessive?"

Who's to say?

Despite fierce debates and national controversy concerning use of charitable funds to pay foundation trustees and executives, the definition of "excessive" remains a judgment call that sometimes involves family feuds, teams of attorneys and, on occasion, agents from the IRS.

"Since there's no specific criteria, foundations are left to their own versions of what is necessary, reasonable and not excessive," said Pablo Eisenberg, senior fellow at the Center for Public and Nonprofit Leadership at the Georgetown Public Policy Institute in Washington, D.C. "Millions and millions of dollars that could go to nonprofits starving for money are instead going to what are, without exception, the wealthiest folks in the world."

Indeed, Eisenberg and his associates Christine Ahn and Channapha Khamvongsa, found that 238 foundations surveyed nationwide collectively spent nearly $45 million on trustees in a single year. The practice was widespread, with 64 percent of large foundations and 79 percent of small foundations paying their trustees some kind of fee.

The findings in the Georgetown report Foundation Trustee Fees: Use and Abuse were based on a survey of 176 of the largest private foundations in the United States and 62 smaller foundations. The data was developed from Form 990-PF federal tax returns for the years 1998-99 and from telephone interviews with foundation representatives.

In an unprecedented year for financial scandals involving private foundations, the report confirmed suspicions that sizable charitable outlays sometimes go to people least in need. In addition to revelations that the Bielfeldt Foundation paid family members $21 million during the past 17 years (compared to $25 million for charitable causes), reports of wealthy trustees drawing income from charitable assets have made front pages from coast to coast.

In Needham, Mass., Paul C. Cabot Jr., son of the founder of the Paul and Virginia Cabot Charitable Trust, paid himself $5.2 million from 1998 to 2002, according to The Boston Globe. During that same time period, Cabot donated an annual average of $400,000 to charity. He also took $200,000 to pay for his daughter's wedding at the family compound in Boca Grande, Fla., the Globe reported. Cabot denied breaking any laws, which is an assertion undergoing further scrutiny.In California, the James Irvine Foundation lost a quarter of its $1.6 billion in assets, laid off 20 percent of its staff and cut grants by $20 million but still found the resources to spend millions of dollars on its longtime president, Dennis Collins, according to the San Jose Mercury News.

In Fort Worth, Texas, the Kimbell Art Foundation that operates the famed museum of the same name, paid the wealthy directors Ben and Kay Fortson $750,000 for their services as foundation officers. The policy was abruptly halted in 2000 after localnews reports about the payments.

"This is a philosophical debate about whether private foundations or museums should or should not compensate officers for their services, and we do not wish to endanger the well deserved reputation of the Kimbell Art Museum by continuing this debate," Kay Fortson said in announcing the new policy.

Brenda Cline, chief financial officer of the Kimbell, pointed out that the Fortsons were paid $750,000 for their work as officers of the foundation, not trustees. Kay Fortson, niece of founder Kay Kimbell, is the president and chair of the foundation's board. Her husband, oilman Ben Fortson, is vice president of the board and chief investment officer. The couple were paid $250,000 per year for their work during three years, Cline said.

"The foundation does not pay trustee fees and never has," Cline said.

"The main point about that (Georgetown) study is that there are CEOs whose salaries were counted as trustee fees. It's very common for a CEO to serve on the board."

In a letter to Eisenberg, Cline complained that the report's classification of the salaries as trustee fees was misleading. Eisenberg apologized for the confusion, but pointed out that distinguishing salaries from fees on the Form 990s is virtually impossible. And, he held his ground on the larger issue of allowing family members to dip into foundation assets for any position or service.

"The problem is that regardless of whether that is a trustee fee, it is outrageous that the family that was wealthy enough to start the foundation that built the Kimbell Art Museum should take any money," he said.

Not everyone shares that view, of course.

The Peoria-Area Chamber of Commerce honored Gary and Carlotta Bielfeldt with a special award for their service to the community even after news reports of questionable financial practices at their foundation. In 2002, the foundation gave $1.2 million to 70 central Illinois nonprofits with missions including animals, the arts, churches and colleges.

In 2002, the foundation paid more than $3 million to its founder, Gary Bielfeldt, his futures trading firm and his son, according to tax records. Bielfeldt's wife, Carlotta, earned $120,000 as the foundation's president.

The average investment expense for family foundations the size of the Bielfeldt Foundation is 0.6 percent of assets, according to the Council on Foundations in Washington, D.C. A survey of members of the Bethesda, Md. - based Association of Small Foundations (ASF) found the average investment expense for foundations that size to be 0.46 percent of assets. The council, which is designed as an educational resource for foundations, noted that Bielfeldt is not among its members.

The Georgetown study found that the amount of fees paid to foundation trustees varied greatly and did not appear to depend on the size of the foundation. Most foundations appeared to give their trustees a flat fee that covered work at both board and committee meetings. A small number of foundations gave their trustees discretionary funds to distribute to their favorite nonprofit organizations without requiring board action.

Some foundations, such as the Duke Endowment, gave trustees a percentage of the endowment's investment returns. In 2000, the endowment gave each of its 15 trustees $150,000.

Among large foundations, 27 paid trustee fees that amounted to 2 percent or more of grants awarded in 1998. Two of the foundations provided fees that came to more than 100 percent of their grants, while three paid fees that were more than 20 percent of grants.

"There are a lot of boondoggles out there," Eisenberg said. "What clearly we pointed to, and what the news media has pointed to, is that there is not effective oversight. The states' attorneys general and the IRS do not have the resources or staff to do much at all. There are lots of states that don't even have a tax-exempt unit in the AG's office. Only the big states like New York have units and they are way understaffed."

As the number of grant-making foundations grew by 73 percent during the past decade, to 62,000 with nearly $500 billion in assets, the IRS struggled to keep up, with audits averaging about 120 per year.

Between 1992 and 2002, the IRS division that oversees tax-exempt organizations has fallen from 960 employees to about 800, while the number of applications for tax-exempt status has increased from about 60,000 a year to more than 90,000. The division is responsible for monitoring more than 900,000 charities and nearly 690,000 other tax-exempt groups.

"While the public's trust with our field depends on government oversight, we have practically no oversight," said Dorothy S. Ridings, president of the Council on Foundations, an organization that must balance demands for further scrutiny with the interests of its members. The excise tax that the IRS levies on excessive compensation was originally designed to fund enforcement of nonprofit foundation rules. Instead, the tax revenue has been routinely diverted to other government programs since its inception in 1969.

"It's been an absolute farce to say that the excise tax has anything to do with oversight of the industry," Ridings said.

In 1996, Congress passed the "intermediate sanction" rules that enable the IRS to apply similar penalties for excessive compensation paid by public charities. But, it took nearly five years for rules to be promulgated.

In response to the new regulatory maneuvers, the board of directors of the Council on Foundations in Washington revised guidelines for appropriate levels of compensation.

"The board of directors of the Council is firmly opposed to excessive or unreasonable compensation," the council said in a policy statement. "Even the public perception of excessive compensation can be damaging to the whole field of philanthropy."

Unless Congress passes new rules under the CARE Act or H.R. 7 now pending in the House and Senate, there remain no specific guidelines on what foundations should pay their board members, other than "reasonable compensation under the circumstances," IRS officials say.

Under H.R. 7, which passed in the House and is now awaiting resolution with the CARE Act in a House-Senate conference committee, trustee compensation is limited to $100,000, an amount that critics say will work against foundations that currently pay their boards nothing.

"Rather than saying this is a practice that is not to be supported, they said you can count $100,000 per trustee as a charitable expenditure," said Rick Cohen executive director of the National Committee for Responsive Philanthropy in Washington, D.C. "Unfortunately, the remedies are getting weaker rather than stronger."

When the states crack down on alleged abuses of foundation tax-exemptions, the news makes a big splash. But only foundations led by prominent local figures tend to draw the media's attention.
In Massachusetts, Attorney General Thomas F. Reilly recently launched an inquiry into the Cabot Charitable Trust on the heels of the Globe investigation.

In New York, Attorney General Eliot Spitzer's office is reviewing the compensation records of the William T. Morris and Gerda Lissner foundations.

In California Attorney General Bill Lockyer's charities division is reviewing news reports that the presidents of Franklin Holding Corp. of Walnut Creek, Calif., and the Hocker Foundation of Rancho Santa Fe, Calif., took personal loans from the foundations they run. Lockyer's charitable enforcement division has only 20 attorneys to deal with 85,000 organizations in the state.

In Texas, Carl Yeckel stepped down as chief executive and trustee of the Carl B. and Florence E. King Foundation last February after the attorney general's office threatened to seize control at the urging of Yeckel's sister Toady Yeckel. The AG's office accused Carl Yeckel of taking excessive compensation, peaking at $1 million in 2000.

While compensation is readily identifiable on Form 990-PFs filed on Web sites such as GuideStar, pay for services to companies connected to trustees or their family members is much more difficult to spot, Cohen said.

"Often, payments are going to trustees not as compensation for services, but for professional services rendered," Cohen said. "And in every nonprofit I work with that is called self-dealing."

Cohen says nonprofits that depend on grants from private foundations are often amazed at the liberties afforded foundation trustees.

"I can't imagine any nonprofit submitting a grant proposal to a foundation and saying: 'We're going to use part of the grant to pay our trustees,' and the foundation not saying: 'Then, you're not getting the grant,' '' Cohen said. "Foundations are generally averse to supporting that kind of behavior on the nonprofit side, so why do they do it themselves?"

Cohen said he would support trustee fees if they were used to recruit minority or average-income board members to broaden the foundation's perspective. But that is virtually never the case, he said.

Despite the widespread scandals, private foundations actually face stricter regulations on self-dealing issues than public charitable nonprofit organizations, said Marc Owens, attorney for the Washington, D.C., law firm Caplin & Drysdale and former director of the IRS Exempt Organizations Division.

"Private foundations can only pay a trustee for work as a trustee," Owens said. "If you were a trustee and you had a catering business in town, you would not be able to receive pay for catering a foundation event, whereas if you were a director of a public charity you would be able to charge for that service as long as it was reasonable."

Even though nonprofits may not share the attitudes of private foundations that pay their trustees, they might experience guilt by association in the minds of the public, said Emmett D. Carson, chief executive of the Minneapolis Foundation.

"We must understand that the public does not distinguish between grant-seeking nonprofit organizations and grant-making foundations," Carson said Oct. 9 in a speech to the North Carolina Center for Nonprofits. "Nearly every day seems to bring a new media story questioning the integrity of our sector."

Richard Williamson is a reporter for the Dallas News Bureau.