Magazine article The Nation

MacArthur Foundation - III; the Gold Plated Charity Machine

Magazine article The Nation

MacArthur Foundation - III; the Gold Plated Charity Machine

Article excerpt


The Gold-plated Charity Machine

Foundations are supposed to give away money, and their directors have a duty to see that this is done in an orderly fashion and in sufficient quantity to avoid the severe Federal tax imposed on charities that fail to distribute at least 5 percent of the value of their assets. Given its track record of paying board members fees that would make General Motors' directors blush, and of allowing the value of its primary asset--Bankers Life and Casualty Company--to drop by $200 million, it's not surprising that the John D. and Catherine T. MacArthur Foundation failed to give away enough money.

The reason for the fund's miserliness is clear in retrospect. Because it opened its doors in 1978 with no liquid assets and subsequently delayed the sale of Bankers Life until 1984, it had no cash to dispense for several years. Obliged to meet the Federal distribution requirement nonetheless, the foundation board was forced to borrow money from the insurance company during the first five years. That was an unfortunate arrangement. Bankers Life's funds were limited (especially when it started to lose money); the foundation paid interest, on which the company was taxed; and problems with insurance regulators could be expected once the sale got under way.

A charitable foundation's annual minimum outlay is based on a yearly computation of its assets. From the start the MacArthur Foundation undervalued. Beginning in 1978 it used two sets of figures, a high one and a low one. The low set, prepared by investment advisers Warburg, Paribus, Becker, was for the Internal Revenue Service. The higher set, produced by the same firm for Bankers Life, was an accurate estimate of the company's fair market value. It was used for purposes of the sale of the company and, on at least one occasion, for computing bonuses for company officers, some of whom served as directors of the foundation.

Thus, in 1982 the foundation reported its value to the I.R.S. as $950 million. For that same year it used a figure of at least $1.2 billion to set bonuses for Bankers Life president Robert Ewing and others at the company. From 1978 to 1982, the discrepancies between the foundation's value as reported to the I.R.S. and its actual worth, as reported to the foundation by its financial advisers, were as follows:

Based on the 5 percent distribution requirement and allowing for numerous accounting adjustments, the foundation dispensed between $44 million and $53 million less than it would have if it had used the true valuation over the fiveyear period.

In a recent interview, foundation president John Corbally defended the dual sets of figures, saying that those for the I.R.S. were based on the market value of the Bankers Life stock, the foundation's primary asset. The stock was worth less than the company's assets, he explained, because of the company's varied holdings: "[One investor] might like insurance and hate rental properties. And you might like rental properties but hate insurance. [The stock is] worth less to you than the sum of its parts.' It is difficult to credit Corbally's reasoning, especially when one considers that the foundation in several instances refused offers for the stock that were hundreds of millions of dollars higher than the valuation given to the I.R.S. Moreover, to get the most money for the properties, the foundation had to sell them separately, which is what it eventually did.

While understating the value of assets it owned, the foundation, on at least one occasion, grossly overstated the value of an asset it gave away. The fund paid $250,000 for the foundering Harper's magazine in 1980, and assumed liabilities of $1.189 million. During the twenty months that the foundation owned it, the monthly lost $3,722,824. The foundation duly reported the losses as charitable contributions. Then, in 1982, when it transferred Harper's to the newly formed Harper's Foundation (along with $1,986,812 in liabilities), it estimated that the magazine was worth an astounding $9. …

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